How are interest rates for different loans calculated?

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Credit finance whether it be credit cards, store cards, personal loans, car loans or home loans, have become a normal part of many Australian's lives. 

Have you ever wondered why they each come with very different interest rates? According to Canstar, in April 2015, the average credit card interest rate was 17.01%, which is a huge jump from the average standard variable home loan interest rate of 5.13% (Canstar). The difference all comes down to the risk involved. 

Some of the lowest interest rates are charged for secured loans – whether it be a home loan or a car, boat or caravan loan. A secured loan is when the lender holds an interest in an asset that is security for the loan. It protects them in case you default or do not repay the loan, in that they can sell it to recover the loss. 

For example, a home loan is a secured loan as a lender holds the title to the property until you have repaid the loan. While a secured loan may seem beneficial to a lender, it can also be beneficial for the borrower too. 

The risk to the lender is minimal so the interest rates charged will be the lowest which is great for home loan borrowers. Residential property is considered a stable asset that tends to increase in value over time thus making an ideal security for a loan. A car on the other hand tends to decrease in value and is mobile so secured car loans will attract higher interest rates.  

If you have plenty of equity and borrow less than 80% of the value of the property, it is very low risk as there is plenty of scope to recover any losses if everything turns sour. Even with home loans there are times when risk increases so the interest rate will be higher. This may include if you are borrowing more than 80% of the value of the property, the type of property (eg zoned commercial or rural or is income producing), if the borrower has defaults or poor repayment history or self-employed and doesn’t have two years tax returns to verify income.

On the other hand an unsecured loan means that the lender has nothing to sell to recover the loss if you don’t repay the debt. The risk therefore is entirely taken on by the lender and they will charge a higher rate of interest to compensate them for taking on this risk, and also limit their exposure per borrower with the credit limit. Credit cards and personal loans tend to be unsecured and fall into this category.

An unsecured loan may sound like a pretty good deal for the borrower, but if you default on any credit account, it can have a major impact on your credit report. Having defaults on your credit record can affect your chances of being approved for loans and credit cards in the future. Before applying for any credit, work out a contingency plan so that you can keep up the repayments no matter what circumstances arise. This may mean taking out insurances like life, income protection and car and home contents insurance. It could also involve having an emergency fund that can be used if the unexpected happens.

State Custodians has some of the most competitive home loan products on the market and an expert lending team ready to help you. There are also options for borrowers who don’t quite fit the normal lending criteria. If you would like to discuss your options one on one with a Lending Specialist, give our team a call on 13 72 62 or leave your details here and they will contact you.

Whether you are looking to buy your first home, move home, refinance, or invest in property, a mortgage broker can help. Access loans from all the major lenders, get help with paperwork – plus there is no charge for this service. Get help from a local mortgage broker

Anouska Linz

Anouska Linz is Manager, Online Sales at State Custodians and has over 10 years’ experience in financial services, both in broking and banking. Holding a bachelors degree in accounting, Anouska quickly discovered a love for mortgage lending and assisting people to achieve their home ownership goals. She leads a team of highly experienced lending specialists who are passionate about finding lending solutions which result in real wins for the customer. She is also a massive netball fan.

For more information on our home loans, visit or call 13 72 62.

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