New personal loans see the biggest fall in nearly 20 years

New personal loans see the biggest fall in nearly 20 years

New personal lending nosedived by about 25 per cent in April, the biggest recorded monthly fall by the Australian Bureau of Statistics (ABS) in nearly 20 years.

New personal loan commitments totalled $1.25 billion in April, falling from $1.66 billion the month prior. A lender-approved loan which has been accepted by the borrower is considered a loan commitment by the ABS.

Long-term declines in personal lending is also beginning to crystallise, with the value of new personal loans plunging by 23.9 per cent in the 12 months to April 2020.

ABS chief economist Bruce Hockman attributed the drop to a significant decline in vehicle loans.

“This was the largest fall in the history of the series, which started in July 2002, and was driven by a 37.8 per cent fall (in April) in the value of loan commitments for road vehicles,” he said.

“Lending institutions reported that COVID-19 impacts were being seen through both reduced demand from borrowers and tighter lending criteria.”

What people borrow money for during COVID-19

Road vehicle loans declined by about 39 per cent to $625 million in the 12 months to April 2020.

Meanwhile, loans for travel and holidays plummeted by 95 per cent to just $2.2 million in the same period. While COVID-19 restrictions have eased for some regional travel, overall travel has been limited with some state borders yet to open and unnecessary overseas travel remaining banned.

The only category of personal lending that saw a spike was loans for personal investment other than housing, which may include shares and physical commodities like gold.

Loans for personal investment recorded a monthly growth of 54 per cent to $250 million in April while surging by 75 per cent in the 12 months to April 2020.

The data comes as a new Australian Securities and Investments Commission (ASIC) paper showed new mum-and-dad investors have been flooding the share market during the COVID-19 period. The rate of new account creations ballooned by 3.4 times in that period, compared with the six months to February 21, the beginning of the volatile period, according to ASIC.

Notably, more than one in five of all active accounts during the volatile period were new accounts. In the previous six-month period, new accounts comprised 3.65 per cent of all active accounts.

  Mar 2020 ($) Apr 2020 ($) Mar-Apr 20 change (%) Apr 19-Apr 20 change (%)
Total personal loans (excluding refinancing) $1.66 billion $1.25 billion -24.8% -23.9%
Road vehicle loans $1 billion $625 million -37.5% -39%
Travel and holidays $20 million $2.2 million -89% -95%
Personal investment (excluding housing) $162 million $250 million 54% 75%

Source: ABS.

Aussies sort out their debts during the lockdown

Overall personal credit, which includes personal loans and credit cards, dropped by 3 per cent in April to $159 billion, according to data from the Reserve Bank of Australia (RBA). The decline over the year was more than 9 per cent.

This aligns with a new Westpac-Melbourne Institute survey showing Australians are becoming more risk-averse and prioritising safe options when choosing where to park their money. Two thirds of consumers opted to put their savings in deposits, superannuation or to pay down their debt, the survey showed.

Despite the aversion to risk, consumer confidence in the country has almost restored to pre-COVID levels. The Westpac-Melbourne Institute Index of Consumer Sentiment increased by 6.3 per cent to 93.7 in June, clawing back the “extreme” 20 per cent drop during the peak of the pandemic in March and April.

“Confidence has clearly been buoyed by Australia’s continued success in bringing the coronavirus under control, which has in turn allowed for a further easing in social restrictions over the last month,” Westpac chief economist Bill Evans wrote.

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Learn more about personal loans

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.

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.

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.

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 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.

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.

How can I improve my credit rating/score?

Your credit score will improve if you demonstrate that you’ve become more credit-worthy. You can do that by minimising loan applications, clearing up defaults and paying bills on time.

Another tip is to get the one free credit report you’re entitled to each year – that way, you’ll be able to identify and fix any errors.

If you want to fix an error, the first thing you should do is speak with the credit reporting body, which may take care of the problem or contact credit providers on your behalf.

The next step would be to contact your credit provider. If that doesn’t work, you can refer the matter to the credit provider’s independent dispute resolution scheme, which would be the Australian Financial Complaints Authority (AFCA).

AFCA provides consumers and small businesses with fair, free and independent dispute resolution for financial complaints.

If that doesn’t work, your final options are to contact the Privacy Commissioner and then the Office of the Information Commissioner.

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.

Which lenders offer bad credit personal loans?

Several dozen lenders offer bad credit personal loans in Australia. These are generally smaller lenders that aren’t household names.

How are credit ratings/scores calculated?

Different credit reporting bodies may use different formulas to calculate credit scores. However, they use the same type of information: credit history and demographic profile.

They’re likely to look at how many credit applications you’ve made, which lender the applications were for, what purpose they were for, how much they were for and your repayment record. They’ll also look at your age and postcode. They’ll also look to see if you’ve had any bankruptcies or other relevant legal judgements against you.

Your score can change if your demographic profile changes or new information is added to your file (such as a new loan application) or existing information is removed from your file (i.e. because it has reached its expiry date).

What is bad credit?

A person is deemed to have ‘bad credit’ when they have a poor history of managing credit and repaying debts.

Can I get an easy/instant personal loan?

Some lenders are able to approve applications with little documentation and within minutes. However, there is a catch. People who take out easy/instant loans generally pay higher interest rates and are restricted to lower amounts than people who follow a traditional borrowing process.