Personal loan discounts drive people to make big purchases again

Personal loan discounts drive people to make big purchases again

Dozens of lenders have slashed rates on personal loans after commitments tumbled, luring new customers and likely contributing to car sales climbing for the first time in two-and-a-half years.

Immediately after the pandemic, in the months of March and April, personal loan commitments plummeted by 33 per cent, according to the Australian Bureau of Statistics (ABS).

But since then, a RateCity analysis has found more than 30 lenders have cut over 100 personal loans by an average of 0.78 per cent, helping commitments mostly recover to pre-pandemic levels.

The analysis found the average personal loan has an interest rate starting from 11.33 per cent in November, about 0.16 per cent less when compared to April.

But there’s many lenders undercutting the average.

Other than the loans for members of the police or defence force, Endeavour/Sydney Mutual Bank is offering secured personal loans with interest starting from 4.45 per cent -- the lowest in the RateCity database.

It’s followed closely by Coastline Credit Union’s secured personal loan, which offers a minimum rate of 4.61 per cent.

People are making big purchases again

Personal loans can be used to make large purchases, including to pay for a wedding, holiday, medical bills, renovations, a car or boat.

The tumble they experienced in commitments hinted that people didn’t feel secure enough to make a big purchase during a pandemic.

In fact, the people who could weren’t spending; instead, they were saving about a fifth of their income.

But it looks like confidence has largely returned. Personal loan commitments are down by only 2.6 per cent in the ten months since the beginning of the year, having recovered more than 30 per cent to $1.6 billion in value.

The rebound is owed to people buying more cars, Amanda Senevirante said, head of Finance and Wealth at the ABS.

“The value of new loan commitments for fixed term personal finance rose 4.3 per cent in October, seasonally adjusted, as commitments for vehicles continued to recover” she said.

Breaking a 31 month streak of falling sales

The ABS hasn’t published statistics on personal loan commitments for November, but above-average sales in the car industry hints it could be another high.

A two and a half year streak of declining new car sales was broken in the month of November. Sales were up by 12.4 per cent to 95,205 when compared to the same period a year earlier, the Federal Chamber of Automotive Industries revealed.

The lift wasn’t enough to offset the year’s performance, however, which is down 16.1 per cent.

“With the Australian economy showing improvement, it’s good news to see new vehicle sales trending in a more positive direction,” Tony Weber said, chief executive of FCAI.

“We believe there are a few contributing factors, including rising optimism from the Australian public as COVID-19 restrictions ease … backed by government support programs during the pandemic, the easing of lending restrictions, and the current competitive automotive market.”

Mr Weber said Australians, unable to spend on international travel, were choosing to spend their money buying new cars this year.

Getting approved for a loan could get easier

Legislation introduced into parliament last week that would scrap responsible lending rules could supercharge the number of personal loan applications that are approved.

Treasurer Josh Frydenberg said the removal of Responsible Lending Obligations (RLO) -- consumer protections that require banks to make sure a person can afford to repay the debt they’re being sold -- will make it easier for people to secure personal loans and other forms of credit.

The legislation will “further support Australia’s economic recovery by reducing the costs and time it takes for consumers and businesses to access credit,” Mr Frydenberg said.

The reforms will enable “the more efficient flow of credit to consumers and small businesses, while also strengthening protections for higher risk products and vulnerable consumers using small amount credit contracts and consumer leases.”

Consumer groups uniformly decried the announcement, claiming the reforms will lead to people taking out loans they can’t afford to repay.

But the news was warmly welcomed by the majority of industries, including the FCAI.

“Freeing up restrictions around financial lending will act as a stimulus for Australian industry,” Mr Weber said.

“As we strive to recover from the COVID-19 pandemic, a more efficient flow of credit to consumers and small business will be a strong stimulant to the economy.”

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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 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.

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.

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 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.

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 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 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.

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.

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 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.

Where can I get a personal loan?

The Australian personal loans market contains dozens of lenders offering several hundred different products. Personal loans are available through a range of institutions, including:

There are three main ways to access personal loans. You can go through a comparison website, such as RateCity. You can use a finance broker. Or you can directly contact the lender.

What do single parents need for a personal loan application?

Much like applying for other personal loans, applying for personal loans for single parents will likely require the following:

  • Proof of identity
  • Proof of residence
  • Proof of income
  • Details of assets (e.g. car, home)
  • Details of liabilities (e.g. credit cards, other loans)
  • Loan amount
  • Loan term