Influx of personal loans to combat credit card debt
New research by Liberty has found that nearly half (44 per cent) of the firm's personal loan applications are made to consolidate debts – primarily credit card debt.
Australia’s collective credit card debt is more than $32 billion dollars ($4,400 per cardholder on average) and according to Liberty, this is why more consumers now see personal loans as a viable alternative.
Heidi Armstrong, head of consumer advocacy at Liberty, said it comes as no surprise that so many consumers see personal loans as a viable alternative for their credit card debt, especially when the numbers are compared.
“If you only made the minimum monthly repayment on a $10,000 credit card debt at 18 per cent interest, you would pay $26,332 of interest, plus the original $10,000 principal, over 43 years - that's insanity," said Ms Armstrong.
“In comparison, on a $10,000 personal loan at 8.26 per cent on a maximum seven-year term, you would only pay $3,201 in interest on top of the $10,000 principal. That’s a saving of over $23,000. Plus, you’d be completely debt-free at the end of the loan term. It’s a strong argument for competitive personal loans,” Ms Armstrong said.
Liberty noted that more recent personal loans are akin to many credit cards through their features – providing the borrower with almost as much freedom and flexibility. These features can include a debit card, free redraw and only paying interest on money withdrawn rather than the fully approved loan amount.
However, Ms Armstrong said the best feature of personal loans is that they are on a fixed term, whereas credit cards are a revolving line of credit – and that is often where people come unstuck.
“Until more people realise there are alternatives to credit cards, Australia’s love affair with plastic and plunging deeper into debt will continue,” she said.