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 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.

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.

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.

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 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.

What interest rates are charged for personal loans?

Lenders aren’t allowed to charge interest on loans of $2,000 and under. Instead, they make their money by charging a one-off establishment fee of up to 20 per cent and a monthly account-keeping fee of up to four per cent. Lenders might also ask you to pay a government fee.

For loans between $2,001 and $5,000, lenders can make their money in only two ways: a one-off fee of $400 and annual interest rates of up to 48 per cent.

For loans of $5,001 and above, or for loans that have terms longer than two years, lenders can charge annual interest rates of up to 48 per cent.

Those fee caps don’t apply to loans offered by authorised deposit-taking institutions such as banks, building societies or credit unions, although such institutions are highly unlikely to charge interest rates of anywhere near 48 per cent.

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 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 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.

How long does it take to get a bad credit personal loan?

In the best-case scenario, an application for a bad credit personal loan can be made within minutes and then be approved within 24 hours. However, if a lender needs more information or needs more time to verify the provided documents, the application process may take longer.