Personal debt levels soar

Personal debt levels soar
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The use of personal loans is on the increase according to a recent report from the Australian Bureau of Statistics figures.

The government’s statistician says that personal finance commitments rose 12.7 percent to $8.16 billion over the twelve months to April 2013.

Effie Zahos, editor of Australia’s leading personal finance publication Money, questions whether the growing popularity of personal loans could be attributed to Generation Next taking their first baby steps into debt.

“The growing popularity of personal credit could be a sign that younger people, and those without a mortgage to draw on are prepared to take on more debt, whether it’s to finance a set of wheels, buy whitegoods or go on a holiday.” said Zahos.

“Using a personal loan is also a nice way for young people to establish some credit history.”

Personal loans also offer other points of appeal, which could explain their growing popularity.

“Lenders have worked hard to make personal loans more flexible, so that now borrowers can make extra repayments and even pay the debts off in full early without the fear of penalty,” she said.

Personal loans come with a fixed term that caps the amount of interest a consumer will pay over the life of the loan, which makes them appealing according to Paul Clitheroe, founding director of financial planning firm ipac and chairman of the Australia Government Financial Literacy Board. 

“Capped rates also make it easier for households to budget for the repayments,” he said.

The lower interest rates attached to many personal loans can also make them a cheaper option than credit card rates, which can be as high as 22.99 percent. Right now it's possible to get a secured personal loan under 10 percent, according to RateCity.

That's not to say personal loans don't have downsides. In addition to application fees, there is the potential for an exit charge for paying off a loan early.

Alex Parsons, chief executive of RateCity said it is fees such as this, which emphasise the importance of doing your homework and shopping around for the most suitable personal loan from the outset.

“It also pays to shop around for a low interest rate on your personal loan; the difference of 4 percent against a $20,000 loan translates to about $40 per month or almost $1400 more over three years,” he said. 

“Personal loans may be more suited to borrowers who have the capacity to pay off the loan within a few years, so make sure your repayments consistently eat away at the principal, so you don’t end up paying more over the term than you should.”

“To ensure that borrowers get the most suitable personal loan, I’d urge them to take the time to compare the best offers in the market, and lock in a deal that won’t blow out their budgets.”

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