Aussies win gold at Debt Olympics

Aussies win gold at Debt Olympics

By Andrew Willink
12 August 2008

As the intensive weight training kicks in, fed by high employment figures, Australia’s economy is in better shape than ever to defeat arch rivals, America and the UK in the race for gold at the Debt Olympics.

Over the last 10 years households in Australia have borrowed an additional $770bn. Of this, 90% was used to buy assets. $420bn for houses to live in, $240bn for houses to rent and $40bn for shares. If borrowing was an Olympic sport, we would have to be a big chance for gold at the Debt Olympics.

In the glamour event, the Debt Olympics marathon, the Australian economy is gaining ground, thanks to a great start off the blocks. Our level of debt is still increasing and running on very strongly. Unfortunately for them, the USA dropped out of the race with a severe case of mortgage stress fracture. Team America blames their running shoes for being sub prime and causing this major default in the marathon.

The Debt Relay has seen business pass the baton to households which are now shouldering the lion’s share of monies owing. The ratio of personal debt to income in Australia is one of the highest in the world – higher even than America and the UK. For every $100 we earn, we owe $130. Credit and charge cards account for $26 billion of the debt.

Households have become more financially astute and have learnt how to utilise their most important asset, cashflow as well as mange the tax system, by using negative gearing.

Where has the debt gone?

While some are saying we are living beyond our means and the “we want it now” generation suggests that debt has gone into consumer spending like plasma TV’s, cars, holidays etc – this isn’t the case, says Deputy Reserve Bank Governor, Ric Battellino. A wider range of debt options such as home equity borrowing, credit cards, personal loans, margin loans has allowed households easier access to debt. Additionally competition from non-bank lenders has opened up the market even further.

This is in stark contrast to the 1960s when the level of household debt was very conservative at 5%. It may be difficult to imagine now but in years gone by people actually owned 95% of their household assets outright. Admittedly, a large number of households have NO debt but the ability to borrow is higher at present.

The borrowing isn’t spread evenly across the population with most of the debt accumulated by those who can afford it. In other words it’s not young couples with the large level of borrowings – it’s middle aged and higher income households. These households are trading to better quality housing, buying investment properties or buying shares. They have identified that using cashflow to buy assets is better than paying tax.

More than 80% of the households in the top half of the income distribution have debt, as opposed 30% in lowest decile. Thus it would be a mistake to conclude that a rising ratio of debt to income is necessarily a sign of financial stress among households.

Despite the rise in the level of debt, the debt servicing level for those in the top half of income distribution (who are taking on most of the debt) is less than 20 percent of gross income. This has only marginally increased over the last decade and it’s lower than the bottom half of the income distribution which average 30 percent of gross income in debt payments.

Commentators at the Debt Olympics have forecast that rising household debt is likely to continue as higher income groups still have room to fund more debt. The factors that assisted with the credit growth, being strong economic conditions and deregulated financial system are still in place.

Much recent debt has been created by people borrowing to invest. Normally, in Australia, people borrowing to invest account for 25 percent to 30 percent of debt. However, encouraged by the lower interest rates and increasing property prices of the last property boom, borrowings to purchase residential property rose dramatically.

It’s looking like Australia is well and truly on its way to smashing world records to grab the gold for team debt at the Debt Olympics. What remains to be seen is which countries stand either side at the gold medal presentation.

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Learn more about personal loans

What is debt consolidation?

Debt consolidation is the process of rolling several old debts into one new debt, usually to save money or for the sake of convenience.

How do I consolidate my debt if I have bad credit?

The worse your credit history, the harder you will find it to consolidate your debts, because lenders will be less willing to lend you money and will charge you higher interest rates.

However, people with bad credit histories can make debt consolidation work by following this three-step process:

  1. First, find a lender willing to give you a bad credit personal loan. This process will be simplified if you go through a finance broker or use a comparison website like RateCity.
  2. Second, make sure the interest repayments on your new loan are less than the repayments on the loans being replaced.
  3. Third, instead of spending those savings, use them to pay off the new loan.

What are the pros and cons of debt consolidation?

In some instances, debt consolidation can help borrowers reduce their repayments or simplify them. For example, someone might take out a $7,000 personal loan at an interest rate of 8 per cent so they can repay an existing $4,000 personal loan at 10 per cent and a $3,000 credit card loan at 20 per cent.

However, debt consolidation can backfire if the borrower spends the extra money instead of using it to repay the new loan.

Can I get a no credit check personal loan?

Personal loans with no credit checks are available and called ‘payday loans’. These are sometimes used as short-term solutions for cash-strapped Australians. They often carry higher interest rates and fees than regular personal loans, and individuals risk putting themselves into a worsened cycle of debt.

What can I use a bad credit personal loan for?

Generally, bad credit personal loans can be used for the following purposes:

  • Debt consolidation
  • Paying bills
  • Buying vehicles
  • Moving expenses
  • Holidays
  • Weddings
  • Education

Some lenders restrict how their bad credit personal loans can be used as part of their commitment to responsible lending – be sure to check before applying.

What are the pros and cons of bad credit personal loans?

In some instances, bad credit personal loans can help people with bad credit history to consolidate their debts, which can help make it easier for them to clear those debts. This is because the borrower might be able to consolidate several debts with higher interest rates (such as credit card loans) into one single debt with a lower interest rate and potentially fewer fees.

However, this strategy can backfire if the borrower spends the loaned funds instead of using it to repay the new loan. Another disadvantage of bad credit personal loans is that they have higher interest rates than regular personal loans.

What are the pros and cons of personal loans?

The advantages of personal loans are that they’re easier to obtain than mortgages and usually have lower interest rates than credit cards.

One disadvantage with personal loans is that you have to go through a formal application process, unlike when you borrow money on your credit card. Another disadvantage is that you’ll be charged a higher interest rate than if you borrowed the money as part of a mortgage.

How can I improve my credit rating/score?

Your credit score will improve if you demonstrate that you’ve become more credit-worthy. You can do that by minimising loan applications, clearing up defaults and paying bills on time.

Another tip is to get the one free credit report you’re entitled to each year – that way, you’ll be able to identify and fix any errors.

If you want to fix an error, the first thing you should do is speak with the credit reporting body, which may take care of the problem or contact credit providers on your behalf.

The next step would be to contact your credit provider. If that doesn’t work, you can refer the matter to the credit provider’s independent dispute resolution scheme, which would be the Australian Financial Complaints Authority (AFCA).

AFCA provides consumers and small businesses with fair, free and independent dispute resolution for financial complaints.

If that doesn’t work, your final options are to contact the Privacy Commissioner and then the Office of the Information Commissioner.

Can I get a personal loan if I receive Centrelink payments?

It is hard, but not impossible, to qualify for a personal loan if you receive Centrelink payments.

Some lenders won’t lend money to people who are on welfare. However, other lenders will simply consider Centrelink payments as another factor to weigh up when they assess a person’s capacity to repay a loan. You should check with any prospective lender about their criteria before making a personal loan application.

Can I get guaranteed approval for a bad credit personal loan?

Few, if any, lenders would be willing to give guaranteed approval for a bad credit personal loan. Borrowers with bad credit histories can have more complicated financial circumstances than other borrowers, so lenders will want time to study your application. 

It’s all about risk. When someone applies for a personal loan, the lender evaluates how likely that borrower would be to repay the money. Lenders are more willing to give personal loans to borrowers with good credit than bad credit because there’s a higher likelihood that the personal loan will be repaid. 

So a borrower with good credit is more likely to have a loan approved and to be approved faster, while a borrower with bad credit is less likely to have a loan approved and, if they are approved, may be approved slower.

Which lenders offer bad credit personal loans?

Several dozen lenders offer bad credit personal loans in Australia. These are generally smaller lenders that aren’t household names.

How are credit ratings/scores calculated?

Different credit reporting bodies may use different formulas to calculate credit scores. However, they use the same type of information: credit history and demographic profile.

They’re likely to look at how many credit applications you’ve made, which lender the applications were for, what purpose they were for, how much they were for and your repayment record. They’ll also look at your age and postcode. They’ll also look to see if you’ve had any bankruptcies or other relevant legal judgements against you.

Your score can change if your demographic profile changes or new information is added to your file (such as a new loan application) or existing information is removed from your file (i.e. because it has reached its expiry date).

What is bad credit?

A person is deemed to have ‘bad credit’ when they have a poor history of managing credit and repaying debts.

Can I get an easy/instant personal loan?

Some lenders are able to approve applications with little documentation and within minutes. However, there is a catch. People who take out easy/instant loans generally pay higher interest rates and are restricted to lower amounts than people who follow a traditional borrowing process.