How are personal loan interest rates set?
Last updated 13 February 2015
Variable Rate loans:
The Reserve Bank of Australia (RBA) sets the 'cash rate' as the targeted rate banks pay to borrow money in the money market on an overnight basis. 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.
Fixed Rate loans:
Fixed rate loans have additional costs to variable rate loans. The price of our fixed rate loans is based on the price wholesale funds providers charge us and depend on the fixed rate period. The price wholesale funds providers charge changes every day, often independently of RBA cash rate movements, and usually in response to speculation around future cash rate changes (i.e. 'pricing them in') and future supply of money in the market. Like other major banks, we review our fixed rates regularly and adjust the rates for new loans depending on changes in the cost of funding and competitor activity - and not necessarily in sync with RBA cash rate movements.