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Up Close And Personal

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Tas Bindi 8 minute read

Tas Bindi finds out why the time is right for brokers to be more active in the personal lending space.

There has been much commentary around the Australian Securities and Investments Commission’s (ASIC) revised credit card assessment rules, with many suggesting that the new rules could negatively impact consumers, including those looking to take out a mortgage.

Under the new rules, which came into effect on 1 January 2019, consumers with significant credit debts are required to demonstrate their ability to repay their debt over a three-year principal and interest term, with ASIC also increasing the debt servicing expense for credit cards from 3.0 per cent to 3.8 per cent.

According to Peter Beaumont, head of growth at Wisr, these changes mean that consumers will find it more difficult to obtain finance for a property or asset purchase if they have large outstanding credit card limits, whether utilised or not.

Expressing a similar sentiment, Mark Woolnough, head of third-party distribution at RateSetter, says that new credit card assessment rules will “act as another nail in the coffin for high-interest credit card debt”, adding that the easiest way for customers to improve their loan serviceability when applying for a mortgage or other loans is to close their high-interest credit cards.

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Both leaders say consolidating credit card balances with low-rate unsecured personal loans is a sound strategy for customers looking to reduce their outgoing costs and improve borrowing capacity before lodging a home loan application.

They add that brokers are in a prime position to help customers avert any negative consequences that ASIC’s new credit card rules could have on their personal finances.

“Debt consolidation personal loans are a straightforward tool for brokers to offer their clients so they can take control of their financial commitments and improve their monthly cash flows,” Mr Woolnough says.

“One simple amortising loan set over a period of up to five years could be the best option for clients to stave off the effects of the new rules when it comes to evidencing affordability of future loans.” 

In the customer’s best interests?

In addition to credit card consolidation, the Wisr head of growth says the other main reasons why mortgage brokers recommend unsecured personal loans is to address “shortfalls” in funding for home or land purchases (such as inadequate deposits), as well as to replace the traditional practice of drawing down small amounts against the available equity in the home for discretionary purposes.

“For example, for home improvements, it is much simpler and quicker to borrow a Wisr seven-year unsecured personal loan in 24 hours rather than try and refinance or top up a mortgage that can take weeks,” Mr Beaumont adds.

Similarly, the RateSetter head of third-party distribution says that following a home purchase, often a personal loan “will make much more sense” – whether it be for renovations, health or new vehicles – than adding costs to a mortgage and paying interest on that debt for “maybe over a decade”.

Mr Woolnough believes that the “regulatory emphasis on best interests duty” will also increase the incentive for brokers to be more active in the personal lending space.

“Is it in the best interest of your client to take either a personal loan for $30,000 or refinance your mortgage to add $30,000? In most cases, the answer will favour personal lending, and this dynamic increases the incentive for brokers to engage in personal lending,” he explains. 

Demand on the rise

Lee Slattery, general manager for B2B at Latitude Financial Services, agrees that there has been a noticeable increase in personal lending activity in recent years, adding that the broker channel has helped drive the lender’s “extraordinary growth”.

“We have seen a big move to the payments and instalments market space, like with our LatitudePay... Yet, we have still seen more broker market share in the personal lending space, driven in my view by customers still wanting someone to help them personally with their finances,” he says.

Likewise, Mr Woolnough says RateSetter has seen a “surge” in personal loan originations via the broker channel.

“Over the last two financial years, we’ve seen a 14 per cent increase in personal loans funded and a 22 per cent spike in loan volumes. The commercial value of the personal lending is becoming self-evident to our 9,000 brokers,” the RateSetter head of third-party distribution adds.

He has also observed an “uptick in aggregator appetite for personal lenders on their panels”.

“Aggregators have become more and more motivated to enable access and educate their brokers about how personal loans can help their clients and enhance the sustainability of their business,” Mr Woolnough says.

Both Wisr and RateSetter expect customer demand for personal loans to continue on its current growth trajectory.

“Consumer sentiment has continued to shift away from expensive credit cards – famous for their ‘bells and whistles’ – towards simple to use and understand personal loans,” Mr Beaumont says.

While personal loans are traditionally not considered “big-ticket items” (such as residential mortgages or commercial loans), customers forming a relationship with a broker expect that relationship to encompass an array of services – both within and beyond lending.

“A broker’s relationship with the customer is vital, and someone wanting headphones today will be a car buyer tomorrow and looking for their first home next month, so having their broker guide and help them is so valuable,” Mr Slattery says.

Similarly, Mr Woolnough says that customers’ financial situations evolve, and that brokers can “avoid the unnecessary costs and hassle of client turnover if they are equipped [with] a diverse range of offerings”.

“Brokers can acquire new clients and retain existing clients by ensuring they have the answer to their financial requirements – whether that is buying a home, refurbishing a home, buying a car or just cleaning up personal finances,” he says.

The RateSetter head of third-party distribution adds that the case for brokers to diversify into personal lending has also intensified due to economic and regulatory pressures – such as a “sluggish housing market or intense industry scrutiny post-royal commission”.

“Personal loans create new revenue opportunities for brokers who need to tide themselves over during periods of chilled mortgage lending,” Mr Woolnough says.

“Brokers across the industry should at least be contemplating where personal loans could provide them defensive income or growth opportunities.” 

TOP TIPS FOR BROKERS 

For brokers looking to be more active in the personal lending space, Mark Woolnough, head of third party at RateSetter, shares the following tips:

  • Keep debt consolidation front of mind. When helping them prepare for a new home purchase or refinance, analyse a client’s current financial position to see whether you can help improve their finances, potentially reducing monthly interest charge and overall repayment.
  • Find out whether clients have unencumbered assets. Offering motor vehicles as security can reduce personal loan rates – the rates will be lower than if the client is unsecured.
  • Tell the world you do personal loans. Advertise. Dedicate a section on your website, social media, blogs, whatever channels you have. Ensure your existing and prospective clients as well as your referrers are aware that you can assist.
  • Don’t forget the credit score. Make sure you’re doing soft credit checks. Understanding the client’s credit score will ultimately determine their personalised rate through risk-based pricing.
  • Remember that personal loans are easy, simple and fast. Clients want an enjoyable, digital experience where they can access funds quickly. Compared to increasing your client’s home loan (assuming they have the equity), often your customer will have access to their funds well before the home lender has picked up their file to assess.

When considering future growth and sustainability, Mr Woolnough offers the following advice to brokers:

  • Don’t fear personal loans. Embrace them. Understand that personal loans assist customers throughout their financial life cycle.
  • Don’t tell yourself that you don’t have the demographic of a personal loan customer. So, you don’t have a customer base that includes a 42-year-old male, home owner with a mortgage with two kids?
  • Make personal loans part of your annual business plans. As Antoine de Saint-Exupéry (a French writer, poet and journalist) once said, “A goal without a plan is just a wish.”
  • Recruit the right people. Ideally, you want a dedicated resource to focus on building your personal loan business. Alternatively, you could work with your lender partners and have them assist in training your existing staff that will, most often than not, be the ones that keep close to your existing customers.
  • Don’t discount the opportunity, even if you feel you’re not ready right now. It could be an important strategic goal to ensure future growth and sustainability.
Up Close And Personal
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up close and personal
Tas Bindi

Tas Bindi

Tas Bindi is the features editor for The Adviser magazine. 

Prior to joining Momentum Media, Tas wrote for business and technology titles such as ZDNet, TechRepublic, Startup Daily, and Dynamic Business. 

You can email Tas on: This email address is being protected from spambots. You need JavaScript enabled to view it.

 

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