How do interest rate hikes affect personal loans?

Since May of 2022, the Reserve Bank of Australia has lifted the cash rate twelve times. While there hasn’t been a rate hike since June 2023, an increase is predicted at November’s meeting. 

While most of the chatter about the cash rate tends to be around home loans, did you know that it can also affect personal loans?

How the cash rate can impact interest rates for personal loans

The cash rate mirrors the market interest rate on ‘overnight’ funds, which is the money that banks lend to one another to meet their daily cash requirements.

It’s also used as a benchmark rate by lenders on their own financial products, including home loans, savings accounts and personal loans. 

Whenever the cash rate is changed by the Reserve Bank then, many activities in the economy start to see the effects, including consumer spending, general investment, employment and inflation. For example, a cash rate hike or series of hikes can have a notable impact, usually discouraging too much spending. 

Right now, we live in an economy where the cost of living keeps rising, which is why the RBA had increased the cash rate so aggressively in the first half of the year to curtail spending and therefore combat inflation. 

Lenders typically increase variable interest rates on their credit products - such as home loans - in line with the cash rate increasing. This usually makes it more difficult and expensive for people to borrow money. (Of course, if banks increase savings rates too, it can make it easier to save!) 

Personal loans don’t get much of a mention amid all this, though some rates have increased. In fact, according to Mozo’s database, the average unsecured personal loan interest rate is 10.47% at the time of writing. For comparison, it was 10.13% in November 2022 - that’s a 0.34% increase!

How to get an affordable personal loan

There are many factors to consider when looking for a personal loan, like the amount you’re looking to borrow, which features the loan might offer and certainly, its interest rate. 

Based on the interest charged, a shorter term loan will typically be more affordable than a longer loan. For instance, if you were looking to borrow $5,000 over a period of 3 years and at an interest rate of 10.47% p.a., you could be looking at paying a total of $848 in interest. But if you were to borrow at this same rate and amount over 7 years, you’ll have to pay about $2,075 in interest over the life of your loan - that’s about a $1,227 difference! Something to think about when shopping around for a personal loan.

It’s also worth considering any fees or terms and conditions of the personal loan contract. Research is the key!

To get started with personal loans, why not check out some of the top available options below, or browse Mozo's best personal loans hub to compare rates and fees further.