What can personal loan statistics tell Australians about borrowing?

When you apply for a personal loan or any other form of credit, it’s important to make a decision that will work for your household’s financial situation and your personal goals. It can also be worth looking at some statistics to see how your credit plans fit in with the wider Australian economy, so you can be more confident about the decisions you are making.

Organisations affiliated with the Australian government, such as the Reserve Bank of Australia (RBA) and Australian Bureau of Statistics (ABS) collect and publish personal finance data from across the country. RateCity also keeps track of loan and credit products across the Australian finance marketplace, so you can compare different offers and make a better-informed financial decision.

Credit cards have higher interest rates than personal loans

In the RBA’s February 2020 statement on monetary policy, it found that interest rates are higher on credit cards than on other personal finance products. This is also reflected in the RateCity database, where the average personal loan interest rate at the end of October 2022 was 12.06 per cent, while the average credit card interest rate was 16.30 per cent.

Of course, this doesn’t mean that you’ll always pay more interest using a credit card than you will with a personal loan. If you can pay off a credit card purchase within the card’s interest-free period (often between 44 and 60 days from the start of a new billing cycle), you won’t be charged interest on your purchase. If you can regularly pay off your credit card balance, it’s possible that you may never pay interest on your credit card.

But if you’re making a major purchase that may take months or years to pay off, it may be worth considering whether a personal loan could prove a more affordable option than a credit card. While you’re obliged to make regular principal and interest repayments over your personal loan’s term, the generally lower interest rates mean you may pay less interest on your purchase than you would by using a credit card. And because a personal loan involves borrowing one lump sum rather than accessing a credit limit, you may be at less risk of getting stuck in a debt spiral.

You can use personal loan and credit card calculators to estimate the costs involved and work out which may be the best choice for you. 

Home loans have lower interest rates than personal loans

While personal loans generally have lower interest rates than credit cards, as lenders consider them less risky, the same applies for home loans compared to personal loans. One reason why mortgage rates tend to be cheaper than personal loan rates is because all mortgages are secured loans, with the property being purchased serving as collateral.

For example, according to the RateCity database, while the average personal loan interest rate was 12.06 per cent at the end of October 2022, the average variable interest rate for an owner-occupied home loan was 5.39 per cent.

Keep in mind that because a home loan typically involves borrowing much more money than that of a personal loan, and the loan term can be measured in decades rather than months or years, the total interest you may be charged on a mortgage will often be more than what you’d pay on a personal loan, even if the rate is lower. A home loan calculator can help you work out the potential total cost of a mortgage.

Around half of all personal loans are secured by property

According to the RBA, around half of personal loans in February 2020 were secured by the value of property. This may include secured personal loans that use property as collateral. It may also include home equity loans, where a mortgage holder refinances their home loan in order to borrow extra money. 

If you’re a homeowner, you may be able to use the equity in your property to “top up” your mortgage when you refinance. Alternatively, you could use your equity to secure a flexible line of credit, which functions similarly to a credit card with a limit based on your home’s usable equity.

Because home loan interest rates tend to be lower than interest rates for other types of personal loans and credit cards, accessing your home equity may offer the benefits of a personal loan while costing you less in interest charges. However, this could also mean that the mortgage on your property may take longer to pay off in full, and you may pay more interest on your property in total.

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