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.