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The Top 10 Questions to Ask Your Broker as Interest Rate Rises

Chris Hopkins
Oct 17, 2022 4:23:25 PM

No one likes to hear that interest rates are going up again. After years of record low-interest rates of 0.1%, many Australians are shocked by the sudden rate hikes. However, with rising inflation, many have expected interest rates to increase. While inevitable, it doesn’t bode well for car buyers. So, how exactly will interest rates impact your financing options?

Whether buying a car or home or taking out a personal loan, you should ask your broker to explain the interest rate rise. Here are ten questions to quiz your finance broker.

Current Interest Rates

At the beginning of September 2022, the RBA announced the latest cash rate rise. After more than a year of low-interest rates, the cash rate is now at 2.35%. It’s the sharpest interest rise we’ve seen in nearly 30 years. Moreover, the RBA has warned that interest rates will continue to rise.

In normal circumstances, interest rates tend to stay between 2 - 5%. However, we’ve seen record-low interest rates due to the pandemic. With rates as low as 0.1%, many Aussies jumped at the chance to buy a new car, house, or other assets on finance. Don’t worry; your chance isn’t over. While interest rates are rising, you can still find highly competitive rates for your loan.

Questions to Ask About Interest Rate Rises

If you’re considering taking out a loan to buy a new car, caravan, or other assets, ask your broker the following questions about the recent interest rate rises.

1.  Why Are Interest Rates Rising?

Fluctuating interest rates are a normal part of a healthy economy. But what is causing the steep upwards shift now? The RBA acknowledged that the very low rates of the last two years were an emergency response to the global pandemic. To encourage spending in a time when shops shut, and people stayed at home, low-interest rates were necessary.

However, inflation has rocketed as the country returns to normal and other world events take place—for instance, Russia’s invasion of Ukraine and natural disasters. To counteract inflation, the RBA raised the cash rate to limit spending.

Ask your broker why lenders’ rates are increasing and how the cash rate impacts financing rates.

2.  What Happens When Interest Rates Rise?

When interest rates go up, borrowing money becomes more expensive. If you borrow money to buy a car, you need to pay interest on the amount. Interest increases of 0.5% can significantly affect large sums of money.

That said, rising interest rates aren’t all bad. Your savings account, for instance, will see the benefits of rising rates.

You should ask your asset broker about what will happen to your loan product when rates rise. They can explain how much you will pay in interest over the loan’s lifetime. You might wish to reconsider how much you borrow, boost your credit score, or switch lenders to get better rates.

3.  What Interest Rates Can I Get?

Lenders use the RBA’s cash rate to inform their own rates. However, it’s not always as simple as increasing rates by 0.5% each month when the cash rate goes up. Lenders base their rates on various factors, including your borrowing power.

It’s worth asking your broker what the available interest rates are from various lenders. Also, try using our loan calculators to determine how much interest you will pay on your loan. It’s a good idea to check whether you can afford your monthly repayments if rates go up further.

4.  Should I Apply for Variable or Fixed Rate Interest?

There are pros and cons to variable and fixed-rate loans. Variable interest rates fluctuate according to the cash rate. Some months will be cheaper than other months. On the other hand, fixed-rate interest stays the same every month. Some months you will pay more than the cash rate, and others, you will pay less.

On larger loans, like mortgages, you can only get fixed rates for up to five years. However, you can refinance to enjoy fixed rates for longer. On smaller loans, like car loans or personal loans, you can apply for a fixed rate to last the loan’s entire lifetime.

When interest rates rise, as they are now, fixed-rate loans might offer more stability and surety. You will know exactly how much to pay each month and won’t need to worry about rising rates. Ask your broker whether you should lock in a fixed-rate loan before rates increase again.

5.  Will an Interest-Only Loan Help Tackle Rate Rises?

Interest-only loans help people make smaller payments at the beginning of the loan. Instead of paying back the principal and interest, borrowers only repay the interest. Unless you need to make smaller payments, interest-only loans cost more overall.

Leaving the principal unpaid means more interest will build up—meaning you pay more overall. When interest rates go up, you will pay even more on your outstanding principal amount.

Speak to your broker about whether applying for an interest-only loan is a good idea for your situation. There are plenty of loan options to help borrowers repay their loans. Your lender can advise you on the best options available.

6.  How Can I Limit the Impact of Rising Interest Rates?

Rising interest rates can significantly hurt many people’s finances. Buying a car in times of economic difficulty might seem like a hard decision to make. However, you don’t need to put off buying your new vehicle while interest rates go up. There are plenty of steps to take to limit the impact of rising rates.

For instance, you could boost your credit score or put down a deposit to increase your borrowing power. The less risky you are as a borrower, your personalised interest rates are lower. Ask your broker how you can protect yourself against rising interest rates.

Moreover, applying for your new asset loan sooner rather than later is a good idea. With rates forecast to keep rising, you might want to lock in relatively low rates now. Speak to your broker about the best time to apply for financing.

7.  Will Interest Rates Go Up or Down?

While no one can concretely say whether interest rates will continue to rise or not, the RBA has said it’s likely rates will go up further. As inflation continues to soar, interest rates will go up too. It’s worth asking your broker how much lenders’ interest rates will increase, whether they will continue to go up, and the likelihood of rates going down.

Your broker will know how lenders determine their rates and advise you on the best time to apply for your new loan.

8.  How Can I Find Competitive Interest Rates?

Shopping around for a new loan product might seem like a thankless task. How do you know where to start with so many lenders offering different interest and comparison rates?

Ausloans are industry experts with a large panel of lenders. We help people of all finance profiles. By simply completing a no-obligation, no-impact on your credit score, application we can quickly advise you on the best lender for your situation and help you find competitive interest rates. 

 While rising interest might be your primary concern, don’t forget about comparison rates. Check the overall cost of the loan product before signing on the dotted line.

9.   How Much More Money Will I Pay With Rising Interest Rates?

Hearing about interest rates rising might seem intimidating. But, how much does a 0.5% increase mean in real terms? How much extra money will you pay? This all depends on the size of your loan and the loan term.

For instance, a 7.5% interest rate on a $30,000 three-year car loan means you pay $3,594.72 in interest on top of the principal. Your weekly payments would be $215.35. Increasing interest rates to 10% will push interest payments to $4,848.56, with weekly repayments of $223.39.

Ask your broker how much interest you will pay throughout the loan’s lifetime.

10.   Is Now the Best Time to Apply for a Loan?

Timing your loan application to get the best interest rates is a challenge. Applying for a loan before interest rates go up might save you a lot of money down the line. Rising interest rates could affect your repayments dramatically. With predictions suggesting that interest rates will go up again, you might regret waiting to apply for your loan.

It’s worth asking your broker whether it’s a good idea to lock in a fixed-rate loan before rates increase further.

Rising Interest Rates on Your Car Loan

Interest rates will inevitably go up. However, you don’t have to let rising interest rates stop you from buying a new car, caravan, or other assets. Speak to your asset broker about the best rates available for your situation and how you can limit the impact on your loan product. With interest rates rising, consider locking in a competitive loan before it’s too late. 

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