While one might easily and with just cause come to believe that personal loans are nowhere near making a comeback in Australia, the most recent set of official data from the Australian Bureau of Statistics point to a slightly different reality. According to the ABS figures, Australians are, indeed, buying fewer new cars nowadays (down by .6 per cent on the month in March), but it seems they’re borrowing more money. This is especially true for loans taken out for personal needs – the ABS data indicates that this segment of the banking sector saw a 2.8 per cent improvement on the month, in February. In cold hard amounts, this means Aussies borrowed $7.883 billion in February, seasonally adjusted, up from $7.665 billion the previous month. It’s also interesting to note that other loan segments also took off and upward, with business lending going up 1.0 per cent in February (from $28.881 billion to $29.180 billion on the month) and mortgages for owner-occupiers also up by 1.2 per cent (to $13.946 billion).
These are all noteworthy facts, especially now, when more and more consumers are wondering which borrowing option would work out best for them. In the debate between credit cards and personal loans, it seems the latter category is winning, but that’s giving the context no more than a cursory look. In a more nuanced analysis, the fact of the matter remains that Australia’s current level of personal lending debt (i.e. accrued from credit cards and personal loans) is standing at nearly $100 billion. Add to this all the specifics of a consumer’s personal situation: their income, their plans for spending the money, as well as their current level of debt. All in all, there is no clear-cut answer that can be provided from the get-go in the war between a traditional loan and a ‘plastic fantastic’ alternative.
The experts are saying that it all depends on what the borrower is planning to spend the money on. For instance, an ongoing series of smaller purchases, as would be the case in a home improvement plan, might be better suited for taking out a credit card. Personal loans are best used for one-off major buys, such as a new car, a wedding, the trip of a lifetime, or, in more recent times (that is, post-recession), for paying off an existent loan. On the one hand, Australians currently own the banks more money from personal loans than from credit cards ($58.6 billion, versus ‘only’ $40.8 billion, according to data for December 2012 from the Australian Prudential and Regulation Authority). However, as the rates at http://www.bankwest.com.au/personal/personal-loans/personal-loans-overview showed us, loans are more flexible and slightly more affordable, both in terms of interest, as well as in terms of structure.
On average, the interest rate for a personal loan in Australia stands at 13 per cent, compared to the 17 per cent interest that one would be paying for credit card purchases. Yet this is not the only major advantage that loans come with. With credit cards, there is the ever-present, looming spectrum of increasing one’s credit limit. This type of ‘sky’s the limit’ attitude about money one doesn’t own can spell genuine financial disaster for those who don’t budget their credit well. However, increasing one’s credit limit to an amount that never gets spent can actually come to negatively affect one’s credit rating. Apparently, banks will look suspiciously at people with too high a credit limit and will tend to interpret it as a sign of potential risk in paying off new debt. But perhaps the biggest advantage when taking out a personal loan, instead of a (new) credit card is that the former will not invite over-spending, but a determined attitude in repaying the loan in its entirety.