What can personal loan statistics tell Australians about borrowing?

What can personal loan statistics tell Australians about borrowing?

If you were asked for advice about borrowing money to buy a home, you’d probably suggest applying for a home loan but not for a credit card. But would you think of redrawing on your outstanding mortgage to secure a personal loan? Seems that’s what Aussie borrowers are doing according to the latest personal loan statistics from Australian states and territories. The latest numbers released by the RBA suggest that you’ll likely get an interest rate with a personal loan that’s much higher than the average interest rate for a home loan. And that’s just one of the insights you can draw from the data.

Personal loan debt is down, but interest rates are steady

Per RBA data, Aussies currently have personal loan debt totalling $144.7 billion as of October 2020. This is down from previous years and fell further due to the economic squeeze due to the 2020 pandemic. A year ago, the total personal loan debt was $166.9 billion, and this amount has been falling since then. However, the last time the total was this low was just over five years ago in September 2015. The total debt amount reached a peak in July 2019 when it was $170.4 billion.

The average interest rates for both fixed-rate and variable-rate loans have remained relatively constant during this period. They have not been changed since February 2020. According to the RBA, the average fixed interest rate is currently at 12.46 per cent compared to 12.42 per cent in October 2019, and 14.05 per cent in September 2015. The corresponding variable interest rate numbers are 14.41 per cent, 14.41 per cent, and 14.49 per cent. Again, the RBA’s insights suggest that this may have much to do with fewer people taking out personal credit products, including personal loans as well as credit cards.

This trend may have more to do with falling mortgage rates and tighter credit card regulations than with the availability of personal loans or their interest rates. Plus the interest rate you’re offered on a personal loan can be significantly different depending on your income, credit score, and your ability to provide security for the loan. For instance, some lenders may offer you rates as low as 7 per cent if you have an excellent credit score even without security, as long as you have a steady income to repay the loan.

Personal loans may cost you more than home loans, but less than credit cards

Lenders are usually more comfortable lending to borrowers who offer either some security or a guarantor for their loan. Secured personal loans taken out for buying a car will have the car itself as security, just as your home is the security for a mortgage. However,  many Aussies have chosen to use a mortgage offset or redraw facility to get some extra cash when needed in recent times.

A redraw facility allows you to utilise the equity you’ve built in your home loan through repayments. This means the interest rate you’ll pay on these funds is the same as your mortgage, which may be in the range of 2 to 4 per cent at present. In comparison, credit card companies can charge you somewhere around 16 to 17 per cent in interest after the interest-free period. Since the interest is a significant part of your debt repayment, a lower interest rate is obviously preferable. Secured personal loans can cost you less than credit cards, but they are still often higher than mortgage rates. Another advantage of mortgage offset accounts, particularly over personal loans, is that you may withdraw from them using a debit card which can be quite convenient.

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Learn more about personal loans

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.

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.

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.

Is a personal loan a variable or fixed-rate loan?

Depending on the personal loan lender, you may be able to choose between a fixed and a variable interest rate. But, there are a few distinct differences between the two, so it’s important to weigh up the pros and cons before deciding on what’s right for you.

A fixed interest rate loan gets you the convenience of knowing exactly how much you need to repay each fortnight or month. On the other hand, you generally won’t be able to make lump sum or advanced payments to close your personal loan early - or at least not without a penalty.

With a variable interest rate personal loan, you may be able to get a longer loan repayment term, with the option of paying off the loan early. You typically won’t need to pay any additional charges for an early full repayment either. The potential disadvantage with an interest rate that can change is that your repayment is not entirely predictable, as it can fluctuate with the market. However, you’ll likely have more options as more lenders offer a variable interest rate personal loan.

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.

What do credit scores have to do with personal loan interest rates?

There is a strong link between credit scores and personal loan interest rates because many lenders use credit scores to help decide what interest rates to offer to potential borrowers.

If you have a higher credit score, lenders will probably classify you as a lower-risk borrower. That means they’ll be keen to win your business, so they may offer you a lower interest rate if you apply for a personal loan.

If you have a lower credit score, lenders will probably classify you as a higher-risk borrower. That means they might be concerned about you defaulting on the loan and costing them money. As a result, they might protect themselves by charging you a higher interest rate.

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.

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.

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.

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.

Does refinancing a personal loan hurt your credit score?

Personal loan refinancing means taking out a new loan with more desirable terms in order to access a more competitive interest rate, longer loan term, better features, or even to consolidate debts.

In some situations, refinancing a personal loan can improve your credit score, while in others, it may have a negative impact. If you refinance multiple loans by consolidating these into one loan, it could improve your credit score as you’ll have only one outstanding debt liability. Your credit may also improve if you consistently pay the instalments on time.

However, applying to refinance with multiple lenders could negatively affect your credit if your applications are rejected. Also, if you delay or default the repayment, your credit score reduces.

What is an unsecured bad credit personal loan?

A bad credit personal loan is ‘unsecured’ when the borrower doesn’t offer up an asset, such as a car or jewellery, as collateral or security. Lenders generally charge higher interest rates on unsecured loans than secured loans.

Are there alternatives to $2000 loans?

If you need to borrow $2000 or less, alternatives to getting a personal loan or payday loan include using a credit card or the redraw facility of your home, car or personal loan.

Before you borrow $2000 on a credit card, remember that interest will continue being charged on what you owe until you clear your credit card balance. To minimise your interest, consider prioritising paying off your credit card.

Before you draw down $2000 in extra repayments from your home, car or personal loan using a redraw facility, note that fees and charges may apply, and drawing money from your loan may mean your loan will take longer to repay, costing you more in total interest.

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.