Do RBA Rates Affect Car Loans?
The Reserve Bank of Australia has left the interest rates at 1.5% for a record 17 months, but how has this affected rates for car loans?
How do RBA rates affect my car loan?
Interest rates on car loans are generally proportional to the Reserve Bank interest rate. This means that when the RBA rate is high, car loan interest rates will be higher. At the moment, the RBA rate is low, so car loans have low rates too.
Unfortunately, because the RBA rate is an indicator of the economy as a whole, your wage is probably set at the moment too. Most Australian's haven't had a pay increase in quite a while, so it's just as well that loans are still affordable.
So while low-interest rates sound like a great thing, they are really just a small part of a much broader picture that describes the health of the Australian economy as a whole.
How do RBA rates work?
Interest rates are how the government stimulates investment in the economy. When RBA rates are low, obtaining finance is less expensive. The Reserve Bank of Australia will decrease rates in order to encourage investment in the economy, preventing a recession.
As the economy improves, the interest rates will rise.
The Australian economy hasn't been growing lately, which is part of the reason why the Reserve Bank has kept interest rates fixed at 1.5% for so long.
Interest rates will most likely remain on hold until Australia's economy is jump-started by a new source of income - improving scientific development is probably our best bet.
As the mining industry wound down in Australia, nothing has sprung up to take its place. In order to move our economy forward, Australia needs to generate something that the world wants, whether that's technological innovation, education or cultural resources, or a hub for new scientific discoveries.
When will interest rates rise?
The Reserve Bank of Australia's central forecast for the Australian economy is for GDP growth to increase at a rate of about 3% over the next three years. There has been growth in public infrastructure, but while household incomes move slowly and debt levels are high, household consumption is likely to remain stagnant.
Strong competition in retail and slow growth in labour costs will keep inflation low, with an increase to over 2% anticipated in 2018 as the economy strengthens. As unemployment decreases, the interest rates will slowly increase. Any interest rate rise will be slow and gradual to match the expansion of the economy at sustainable growth levels.
Banks don't always raise their rates in sync with the Reserve Bank of Australia.
As we've seen in the home loan market this year, the banks don't always wait for a Reserve Bank Interest rate increase to raise their own rates for home loans and car loans.
What will happen to my car loan interest rate?
When you take out a car loan, it will usually have a fixed interest rate for the period of your loan term. This means that you'll pay the same interest rate for the length of your loan, regardless of any changes to RBA rates.
If you haven't yet taken out your car loan, or you are looking to refinance your car loan, this is where a change in the RBA rate will affect your car loan rate.
For new car loans, the interest rate may go up when the RBA rate eventually increases. Depending on your current needs, credit profile and purchase timeframe, it might be wise to lock in a low rate car loan while they are still widely available.
When should I take out a car loan?
If you've been planning to upgrade or to purchase a car using a car loan, then the first half of 2018 is probably a good time to put your plans in motion.
If you've got a car loan now with a higher interest rate, it'll pay to check if you can refinance to a lower rate this year too.
As we've seen with home loans in 2017, the banks might not wait for an increase in the official RBA rates to increase their current rates for car loans.
This is why it pays to use a broker who has their finger on the pulse of the market and can match you to a lender who's offering the lowest rate on the loan that you need.
Do you want to find out what your car loan rate would be right now? Get a quick quote, and get the knowledge of an experienced loan administrator when you arrange your car loan.