It starts with risk
Lenders borrow money themselves and need to cover their funding costs, running costs and the chance that some loans are not repaid. The rate you are offered is, in part, the lender’s estimate of how risky your particular loan looks.
The main factors
| Factor | Why it matters |
|---|---|
| Security | A loan secured against an asset the lender can claim if you default is usually lower risk than an unsecured one. |
| Credit history | A record of repaying on time suggests lower risk. Defaults and many recent applications can suggest higher risk. |
| Deposit or equity | The more of your own money in the purchase, the less the lender has at stake. |
| Asset age and type | Newer assets that hold value better can be viewed more favourably than older ones. |
| Loan size and term | Longer terms leave more time for circumstances to change. |
| Income and expenses | Lenders must assess whether you can afford the repayments. |
| Market conditions | Funding costs and the cash rate set the baseline all lenders work from. |
What a few points cost
On a $20,000 loan over 5 years, the monthly repayment is $396.02 at 7%, $415.17 at 9% and $434.85 at 11%. Interest over the term is $3,761.44, $4,910.03 and $6,090.91 respectively. So the borrower offered 11% pays about $2,329 more in interest than the borrower offered 7%, for exactly the same loan.
These are illustrative rates, not predictions of what you would be offered.
What you can influence
- Borrow less, for example by putting in a deposit or selling an item you no longer need.
- Check your credit report for errors before applying. See MoneySmart for how.
- Avoid multiple applications in a short period without knowing why.
- Compare more than one quote, using comparison rates and fee schedules.
Quick questions
Does applying for a quote affect my credit score?
It depends on the type of enquiry. A full credit application is normally recorded on your credit file. Ask the lender what kind of check they run before you proceed.
Can I get a better rate by borrowing less?
It can help, as a smaller loan and a larger deposit reduce risk for the lender. It is not guaranteed.
Illustrative only. Every figure on this page is a worked example, not an offer or a quote. Use the repayment calculator to test your own numbers, then compare real quotes in writing.
Ready to see what is actually available to you? You can start a finance enquiry here.