Debt consolidation is key driver of demand for personal loans according to non-bank lender Liberty.
An analysis by the non-bank of more than 2,000 recent personal loan applications has revealed that nearly half (44%) were made to consolidate debts – primarily credit card debt.
According to Liberty, credit card debt in Australia currently totals more than $32bn, with the average credit card holder carrying $4,400 in debt.
Heidi Armstrong, head of consumer advocacy at Liberty, said it’s not surprising that an increasing number of Australians are turning to personal loans given the fact they are likely to carry interest rates that are significantly lower than a credit card.
“In a climate where many credit card interest rates have remained static, despite RBA
cuts to the official cash rate and the government flagging concerns about how long it takes to pay off credit card debt, it’s only natural that consumers are considering other options,” Armstrong said.
According to Armstrong, making the minimum monthly repayment on a credit card debt of $10,000 with an interest rate of 18% would see the cardholder pay $26,332 in interest, plus the original $10,000 principal, over a 43-year period.
In comparison, Armstrong said a $10,000 personal loan with an interest rate of 8.26% over a seven-year term would see the borrower pay just $3,201 in interest on top of the principal.
While personal loans carry features such as being to pay off extra debt without penalty and redraw any available funds for free as well as being able to attach a debit card to a personal loan to use like a credit card for purchases and for cash withdrawals, Armstrong said their best feature is the fact they are on a fixed term, rather than being a revolving line of credit like a credit card.
“Until more people realise there are alternatives to credit cards, Australia’s love affair with plastic and plunging deeper into debt will continue.”