Will the RBA cash rate cut affect your personal loan?

Elizabeth Barry 3 May 2016 NEWS

Find out if you'll be able to benefit from today's RBA announcement of an interest rate drop.

Today, the Reserve Bank of Australia announced a rate cut of 0.25%, bringing the cash rate to a historical low of 1.75%. While many with variable rate home loans were tentatively celebrating and waiting to hear the news of whether their banks would pass on the cut, those without mortgages or with other debt such as personal loans may be wondering how the announcement would affect them.

What is the cash rate?

The official cash rate is the interest which is charged to commercial banks by the central bank on overnight loans. The cash rate is one of the main tools to manage monetary policy, inflation and the economy.

Are personal loans affected by the cash rate?

Technically, variable rate personal loans can be changed at any time during your loan term. As the cost of funding the loan is tied directly to the cash rate, your variable rate personal loan may change with the cash rate, but this doesn't happen regularly.

The interest rate of a fixed rate personal loan does not change during the loan term, so you won't see a change on those loans regardless.

The details CommBank provides to its customers on its websites provides some insights into the banks' thinking behind the cash rate and personal loans:

"In reality, banks borrow money for a range of terms, not just overnight funds. Funds providers also charge premiums both for risk and for locking the money away for a period of time. As a result, the cost to fund loans is tied in part to the cash rate and in part to the premiums charged by funds providers. To reflect this, we price our variable rate products (both deposits and loans) off the sum of the RBA cash rate and the premiums for risk and locking away the money."

So while variable rate home loans are expected to change with the cash rate, it is an entirely different story with variable rate personal loans. Comparing loans to identify the most affordable before you commit remains the best strategy.

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