Personal loan interest rates remain static despite plunging cash rate - SMH -  John Collett  Sept. 8, 2019  jcollett@smh.com.au 

Those turning to the big banks for personal loans to help make ends meet as their savings are depleted could be paying much more in interest than if they used alternative lenders.

The gap between the official cash interest rate set by the Reserve Bank of Australia (RBA) and the interest rate on variable-rate personal loans has almost doubled since 2006.

Personal loan interest rates of mainstream lenders remain high despite falls in the cash rate

Figures from comparison site RateCity, using RBA data, show the typical rate on unsecured variable-rate personal loans is about 14.4 per cent, while the cash rate is at a record low of just 1 per cent.

In January 2006, the average personal loan rate was 12.2 per cent, with a cash rate at 5.5 per cent. That's a gap increase from 6.7 percentage points in 2006 to 13.4 percentage points last month.

The figures show how personal-loan interest rates tend to stay the same, even when the cash rate falls, but rise when the cash rate is on its way up.

There's the same pattern with fixed-interest rates on personal loans, though these rates have come down about one percentage point over the past two years.

The RBA uses the data on personal loans from the biggest lenders, which means the changes in the average personal loan rates are mostly reflective of loans made by the major banks.

Sally Tindall, research director at RateCity, said while the rates can be as high as 14 per cent on unsecured personal loans, there are other alternatives, such as peer-to-peer lenders (P2P), that can charge as little as half of that amount of interest.

P2P lenders charge lower rates to those with good, established credit records. Tindall said the advertised rates on their websites are likely to be available to those with good credit scores, reliable incomes and steady jobs.

A good credit score can demonstrate to a lender your capacity to repay a loan, whereas a bad one can show you might be a higher risk and could result in extra interest charges or having your application refused.

A potential trap of shopping around to get a better deal on a personal loan is that if an application is rejected by a credit provider, it can negatively affect a credit score, as multiple applications can look as if the consumer is desperate for cash, Tindall said.

However, some lenders are now conducting "soft" credit checks, where an application for credit is pre-qualified, before a formal application is made, Tindall said.

A spokesperson for the Australian Banking Association said banks take into account a number of factors when pricing the interest on personal loans.

Changes to capital requirements required by the regulator since the global financial crisis have increased the amount of money banks need to hold against personal loans, compared to mortgage loans, the spokesperson said.

"There are thousands of personal loans on the market and it's important for consumers to shop around to get the best deal possible," the spokesperson said.