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

ratecity-debt-consolidation-australia

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.

FixedLoans-Debt-Consolidation

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.

FixedLoansbyPurpose

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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Learn more about personal loans

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, with 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 guarantee the loan, taking on the financial responsibility if the borrower defaults.

What can I use a bad credit personal loan for?

Generally, bad credit personal loans can be used for one or more of 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.

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, 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 bad credit personal loans?

In some instances, bad credit personal loans can help people with bad credit history to consolidate their debts in such a way that it makes it easier for them to repay 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.

However, this strategy can backfire if the borrower spends the extra money 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 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 low doc personal loans?

Self-employed borrowers may be eligible for low doc personal loans, which require less documentation in their application process than many other personal loan options.

It’s important to remember that though low doc personal loans may require less paperwork, you may need to provide additional security, or pay a higher interest rate.

Can you get an emergency loan on Centrelink?

When many lenders assess a borrower’s income to determine whether they can afford a loan’s repayments without ending up in financial stress, they may not count Centrelink payments as income for this purpose.

Before applying for an emergency loan, it may be worth contacting a potential lender to find out if they accept applications from borrowers on Centrelink.

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 charge higher interest rates on unsecured loans than secured loans.

How do I find out my credit rating/score?

Credit reporting bodies like Equifax, Dun & Bradstreet, Experian and the Tasmanian Collection Service will give you a free credit report once a year. You can also get a free report if you’ve been refused credit in the past 90 days.

Credit reporting bodies have up to 10 days to provide reports. If you want to access your report quickly, you’ll probably have to pay.

Can I get a fast loan with bad credit?

Some lenders offer fast loans to borrowers with bad credit. Providers of small payday loans of up to $2000 or medium amount loans of up to $5000 may have no credit checks, though these lenders will usually want to confirm you can afford their loans on your income.

Are there alternatives to $2000 loans?

If you need to borrow $2000 or less, alternatives to getting a personal loan or payday loan include using a credit card or the redraw facility.

Before you borrow $2000 on a credit card, remember that interest will continue being charged on what you owe until you clear your credit card balance. To minimise your interest, consider prioritising paying off your credit card.

Before you draw down $2000 in extra repayments from your home, car or personal loan using a redraw facility, note that fees and charges may apply, and drawing money from your loan may mean your loan will take longer to repay, costing you more in total interest.

What can quick loans be used for?

Many borrowers use quick loans to cover short-term costs, such as paying for car repairs, medical bills, or replacing broken appliances or electronics.

Before applying for a quick loan, consider whether other options are available, such as working out a payment plan or applying for an advance or extension. 

Can you pay off a quick loan early?

Many lenders will allow you to make extra repayments onto a quick personal loan when you can afford them, or even exit the loan early, which can help reduce the total interest you are charged. Be sure to check your quick loan’s terms and conditions, as some lenders charge early exit fees for paying off a loan ahead of schedule.

How are personal loans regulated?

Personal lenders are regulated by ASIC (the Australian Securities & Investments Commission) and must follow responsible lending rules. That means they can’t lend money without making “reasonable inquiries” about a borrower’s financial situation and ensuring the loan is “not unsuitable” for them.