Where Are Car Loan Rates Heading?

Car loan interest rates reflect the broader economy. Interest rates are at an all-time low following a spate of rate cuts by the Reserve Bank of Australia – the the official cash rate set by the Reserve Bank currently at a record low of 1.50%.

Current car loan interest rates

Interest rates on car loans on the CANSTAR database currently range from a minimum of 5.29% p.a. (comparison rate 5.41%) up to 15.99% p.a. (comparison rate 16.29%). The average interest rate is 10.30% p.a. as of our November 2016 star ratings.

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Why are interest rates so low?

The theory behind rates and the economy is simple enough: the Reserve Bank cuts rates to stimulate investment and drive the economy to growth by making finance easier to get. Cheaper finance means more investment, means greater economic activity. In other words, cutting rates is a tactic to keep economic downturns at bay.

It’s great news if you want to buy a car, or property.

But the Reserve Bank in some ways is effectively trapped between a rock and a hard place. On one hand, the great many rate cuts of recent history have failed to deliver the levels of economic growth targeted by the RBA. The current inflation rate is just 1.50% against a  target band of 2-3%.

What’s causing the economic slump?

Despite the prevarications of various spin doctors, it’s quite clear the economy remains sluggish.

Overseas demand for resources like coal and iron ore to fuel the steel mills and manufacturing sector in China continues to slow. Investment in resources here is chilling as rapidly than predicted, and signs of a transition to other sectors, away from resources-dependent growth are get to be as encouraging as hoped.

In other words, the mining boom is fading away. Nothing has yet replaced it.

Then there’s the housing market. There’s no doubt any further cut in the base rate would fuel the property boom further, and possibly fail to provide all that much stimulus to the underlying economy.

About the only card left for Reserve Bank Governor Glenn Stevens to play is that of “jaw boning” the currency: applying persuasive pressure to drop the value of the dollar in an attempt to boost the mining, manufacturing and agribusiness sectors, which have long suffered in terms of export potential thanks to the underlying strength of the Aussie dollar against the Greenback (US Dollar). This has been successful to an extent, with the AUD now sitting at approximately $0.76 USD.

What does this mean for my car loan?

Perhaps the best thing for car buyers to consider is that most car finance agreements are made at fixed interest rates. With terms of 3 to 7 years, this effectively becomes a hedge against future rate rises for significant periods into the future.

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