Personal debt levels soar

Personal debt levels soar

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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Learn more about personal loans

Can you refinance a $5000 personal loan?

Much like home loans, many personal loans can be refinanced. This is where you replace your current personal loan with another personal loan, often from another lender and at a lower interest rate. Switching personal loans may let you enjoy more affordable repayments, or useful features and benefits.

If you have a $5000 personal loan as well as other debts, you may be able to use a debt consolidations personal loan to combine these debts into one, potentially saving you money and simplifying your repayments.

What is a bad credit personal loan?

A bad credit personal loan is a personal loan designed for somebody with a bad credit history. This type of personal loan has higher interest rates than regular personal loans as well as higher fees.

How much can you borrow with a bad credit personal loan?

Borrowers who take out bad credit personal loans don’t just pay higher interest rates than on regular personal loans, they also get loaned less money. Each lender has its own policies and loan limits, but you’ll find it hard to get approved for a bad credit personal loan above $50,000.

Should I get a fixed or variable personal loan?

Fixed personal loans keep your interest rate the same for the full loan term, while interest rates on variable personal loans may be raised or lowered during your loan term.

A fixed rate personal loan keeps your repayments consistent, which can help keep your budgeting consistent. You won't have to worry about higher repayments if your rates were to rise. However, on a fixed loan you’ll also potentially miss out on more affordable repayments if variable rates were to fall.

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.

What is a personal loan?

A personal loan sits somewhere between a home loan and a credit card loan. Unlike with a credit card, you need to sign a formal contract to access a personal loan. However, the process is easier and faster than taking out a mortgage.

Loan sizes typically range from several hundred dollars to tens of thousands of dollars, while loan terms usually run from one to five years. Personal loans are generally used to consolidate debts, pay emergency bills or fund one-off expenses like holidays.

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.

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 is the average interest rate on personal loans for single parents?

Like other types of personal loans, the average interest rate for personal loans for single parents changes regularly, as lenders add, remove, and vary their loan offers. The interest rate you’ll receive may depend on a range of different factors, including your loan amount, loan term, security, income, and credit score.

Can unemployed single parents get personal loans?

It can be more difficult for unemployed borrowers to successfully apply for a personal loan. Most lenders require borrowers to have a regular income available to cover the cost of loan repayments.

If you’re self-employed, or if less than half of your income comes from Centrelink, you may not be eligible for some personal loan options. Consider contacting the lender before applying.

How long does it take to get a student personal loan?

Completing an online personal loan application can often take anywhere from 10 minutes to 1 hour. Depending on your lender, processing your personal loan application may take anywhere between 1 and 24 hours. If your personal loan application is approved, you may receive the money in your bank account the following business day, or, in some cases, the same day.

Can I repay a $3000 personal loan early?

If you receive a financial windfall (e.g. tax refund, inheritance, bonus), using some of this money to make extra repayments onto your personal loan or medium amount loan could help reduce the total interest you’re charged on your loan, or help clear your debt ahead of schedule.

Check your loan’s terms and conditions before paying extra onto your loan, as some lenders charge fees for making extra repayments, or early exit fees for clearing your debt ahead of the agreed term.

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.

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.