Australians are shunning high interest credit cards and turning to personal loans for large purchases.
Driving the switch are tech-savvy consumers taking up loans from peer-to-peer (P2P) lenders, a new breed of online competitors to banks.
More of us are favouring personal loans over high-fee credit cards. Photo: Getty Images
Credit card applications fell by almost 4 per cent in the March 2017 quarter compared with the same quarter last year, the latest report on consumer credit by credit bureau Equifax shows. That’s the biggest fall since September 2012 quarter.
Personal loan applications rose by 13.5 per cent over the same period, the biggest increase since the March 2005 quarter. The latest period of sustained growth in personal loan applications started in the second half of 2015.
Equifax, which recently changed its name from Veda, holds the largest number of credit records on individuals and its figures are consistent with trends in official data.
Reserve Bank figures suggest that more frequent but lower value transactions are being made on credit cards.
Angus Luffman, the senior general manager of consumer products at Equifax, said credit cards were being used more for everyday transactions but it was likely that consumers were increasingly using personal loans for higher value household purchases.
“The growth in personal loans has, in large part, been driven by newer lenders who cater to consumers’ increasing demand for an online experience,” Mr Luffman said.
He was referring to the growth in P2P lenders, also called online marketplace lending, which is still small but growing quickly.
These new players use “risk-based pricing”. Just as insurers offer discounts based on the customer’s risk profile, so too do P2P lenders offer lower rates to borrowers with the best credit scores.
As a result most borrowers with a P2P loan pay much lower interest rates than they do with traditional lenders such as banks.
One P2P lender is showing an interest rate on its website of 10.3 per cent on a $ 10,000 unsecured personal loan paid back over three years.
Banks would typically charge 13.02 per cent for a loan on the same terms, while credit cards are higher still – typically 14.15 per cent for a non-rewards credit card and 19.6 per cent for a rewards card, plus annual fees.
Mr Luffman said the uptick in personal loan applications was also because more retailers were offering finance.
Mitchell Watson, the research manager at Canstar, said consumers needed to do their homework with personal loans and consider fixed fees.