What is loan interest?

Loan interest in Australia is the cost of borrowing money, charged by the lender as a percentage of the outstanding loan balance. Interest rates on loans depend on the type of loan, the lender, the loan term, the size of any deposit, the borrower's credit history, and the broader interest rate environment set by the Reserve Bank of Australia (RBA).

The RBA cash rate is the principal driver of Australian loan interest rates. The cash rate is set by the RBA Monetary Policy Board, which meets eight times a year (changed from eleven times following the 2024 RBA reforms) to decide on monetary policy. The cash rate influences the rates banks charge each other for overnight lending, which flows through to the rates banks offer customers. The RBA raised the cash rate from 0.1 per cent in April 2022 to a peak of 4.35 per cent in November 2023, before holding and then cutting as inflation moderated.

Home loans typically come in two interest structures. Variable rate loans rise and fall with the lender's variable rate, which broadly tracks the RBA cash rate over time. Fixed rate loans lock in a rate for a set period (usually one to five years), giving certainty about repayments but typically without the ability to make extra repayments without break costs. Many borrowers take a split loan with part fixed and part variable. Other features include offset accounts (linked transaction accounts where the balance reduces interest charged), redraw facilities (allowing access to extra repayments made), and packaged loans with annual fees in exchange for rate discounts.

Personal loans, car loans, and credit cards carry higher interest rates than home loans because they are unsecured or secured against depreciating assets. Personal loan rates typically range from 8 to 18 per cent, secured car loan rates from 6 to 12 per cent, and credit card purchase rates from 14 to 23 per cent. The Comparison Rate, required to be displayed alongside any advertised rate under the National Consumer Credit Protection Act, includes most fees and charges to give a more accurate measure of total cost. Money Smart at moneysmart.gov.au offers a free loan calculator that lets borrowers test different rates, terms, and extra repayment scenarios.