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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.

Can I get a fast loan with bad credit?

Some lenders offer fast loans to borrowers with bad credit. Providers of small payday loans of up to $2000 or medium amount loans of up to $5000 may have no credit checks, though these lenders will usually want to confirm you can afford its loans on your income.

How long does it take to get a $5000 loan?

Depending on the lender, personal loans and medium-amount loans for $5000 can sometimes be approved in under an hour, and give you access to the money the same day. Other loans may take 24 hours or longer to assess your application, and you may not get the money for a few days.

Can students with no credit history get loans?

It is possible for students with no available history of borrowing or managing money to get a personal loan, though it may be more difficult as well as expensive than for borrowers with a good credit history.

Having no credit history means having no credit score. While many lenders may consider having no credit score to be better than having a bad credit score, they may still consider it riskier to lend to an unknown borrower and may charge higher interest rates or fees than to borrowers with good credit scores.

How can I get a $3000 loan approved?

Responsible lenders don’t have guaranteed approval for personal loans and medium amount loans, as the lender will want to check that you can afford the loan repayments on your current income without ending up in financial hardship.

Having a good credit score can increase the likelihood of your personal loan application being approved. Bad credit borrowers who opt for a medium amount loan with no credit checks may need to prove they can afford the repayments on their current income. Centrelink payments may not count, so you should check with the lender prior to making an application.

Are there emergency loans with no credit checks?

While many personal loans require a credit check as part of the application process, some personal loans and payday loans have no credit checks, which may appeal to some borrowers with a bad credit score.

Keep in mind that even if a loan is available with no credit check, the lender will likely want to confirm that you can afford the repayments on your current income.

Can I merge my personal loan with my home loan?

Yes, you can refinance your home loan and, in the process, merge or consolidate your personal loan and home loan. By doing so, you can lower the number of debts you have, and you may also reduce the total interest you have to pay.

However, you should consult a financial advisor or a mortgage broker to confirm that you are decreasing your total outstanding debt, including interest payments. The repayment term for a home loan can be much longer than that for a personal loan, and by merging the two, you could be repaying a higher amount over the full term.

Do student personal loans require security?

While some personal loans can be secured by the value of an asset, such as a car or equity in a property, student personal loans are often unsecured, which typically have higher interest rates.

Some lenders also offer guarantor personal loans to students. These loans have lower interest rates, as a guarantor (usually a relative of the borrower with good credit) will fully or partially guarantee the loan, taking on the financial responsibility if the borrower defaults.

Can single mothers get personal loans online?

Many lenders offer online applications for personal loans, which can be convenient for borrowers who have busy lives. If you’re not confident your personal loan application will be approved, you may want to consider contacting the lender by email, live chat, phone, or by visiting a branch, to discuss your situation before applying.