Debt at its highest in Australian history, is cash the answer?

Debt at its highest in Australian history, is cash the answer?

It may seem like cash is but a distant memory. Shiny plastic notes traded for shiny plastic cards, and transactions that used to take minutes now taking seconds.

The speedy spending brought about by the contactless payment revolution however, could be having a wider impact upon our spending and saving habits.

Household debt to income ratio – the highest in Australian history

According to recent statistics released by the Reserve Bank of Australia (RBA), the average Australian household debt as of March 2019 is now 189.7 times the average household’s disposable income – the highest level on record.

One could assume that this shocking figure is attributed to the rising household costs, stagnant wage growth and larger mortgages that come as part and parcel of the expensive housing markets in major Australian cities.

However, this assumption ignores the complex nature of the debt problem Australia, overlooking the technological changes to payment systems and spending habits, which could be fuelling this rapid growth in consumer debt.

Cash is still king

The psychological sting that parting with cash has upon consumers has been sedated by the arrival of financial technology that encourages absent-minded spending. This, in behavioural economics, is known as the “pain of paying” and spotlights how humans are loss adverse, and how physically handing over cash can be tormenting.

“Paying with contactless payment further reduces the friction and anaesthetises the psychological pain that accompanies payment, seducing us into splashing out even more on those pricey purchases,” said Niro Sivanathan, Associate Professor of Organisational Behaviour at the London Business School.

This is why some Australians have chosen to switch to a cash-budgeting system, instead of relying solely on their debit or credit cards.

By physically withdrawing a set amount of cash and allocating this cash to a certain period of time, it is easier to recall what is spent. In the month of May, Australians withdrew $10.6 billion cash from ATMs via debit cards, so whilst contactless payments may be taking precedence, cash is still very much in use.

Whilst cash can be inconvenient at times, the tangible sacrifice of handing over money, which humans have an emotional attachment to, could be the key to helping undisciplined spenders get out of debt.

Australians reducing credit card debt, using personal loans to consolidate


What is interesting to note, is that recent statistics released by the RBA and Australian Bureau of Statistics (ABS) on personal finance and household debt, show a drop in overall credit card debt. They also show a significant increase in the value of fixed personal loans for debt consolidation.

Between April and May 2019, fixed loans for debt consolidation increased by $11.9 million, after already rising by $30.3 million between January and February 2019. In contrast, credit card debt decreased by $131 million between April and May 2019, and $278million between January and February 2019.


Data accurate as of 31 July 2019.
Source: ABS, Lending to households and businesses, Australia May 2019

Second only to personal fixed loans for motor vehicles, debt consolidation is now higher in total loan value than personal loans for assets and experiences including household goods, renovations and travel.


Data accurate as of 31 July 2019.
Source: RBA, Credit and Charge Cards 12 July 2019

Followed closely by fixed loans for refinancing, the increasing size of debt consolidation loans in this analysis indicates that Australians are becoming actively involved in trying to reduce their financial liabilities.

The analysis also suggests that instead of borrowing for an asset or investment, many Australians are taking out loans with a focus on consolidating financial liabilities.

Debt Consolidation: consider your options carefully

Personal loans for debt consolidation typically boast lower interest rates than credit cards. However, they do tend to have higher interest rates than secured personal loans, where an asset is used as security on the borrowed amount.

For example, while personal loans for motor vehicles allow lenders to recoup the cost of the loan via the motor vehicle if repayments are not met, personal loans for debt consolidation remain unsecured and therefore interest rates can be quite high.

If you are in debt, make sure you compare your loan options and your ability to make repayments before signing anything.

Living with debt may cause significant problems not only with your mental health, but also your credit rating, and could therefore affect your ability to get a home loan in the future.

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Fact Checked -

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.



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Learn more about personal loans

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.

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 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.

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.

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 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.

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 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.

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.

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.

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 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 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.