If someone came to you asking for a personal loan, would you write one for them or point them to a reputable lender? If you’re doing the latter, you could be missing out. According to analysis by non-bank lender Liberty, credit card debt in Australia currently totals more than $32 billion, with the average credit card holder carrying $4,400 in debt. But, with credit card interest rates hovering at around 14 per cent, consumers could be better off with a personal loan instead.
Liberty Network Services’ managing director, Brendan O’Donnell, explains: “The big debate that is going on in this area is regarding credit cards v personal loans. We're finding that even though it's early days [for Liberty’s personal loan offering, which launched in December 2015], we're certainly seeing a lot of volume.
“Obviously in this climate, where there are many credit card interest rates that have remained static… it’s a good option for customers and consumers to consider a personal loan instead because the rates can be typically, on average, lower than credit cards.”
Take Liberty’s Personal Best loan, which was recently named as the cheapest rate personal loan on the market. Offering customers between $5,000 and $50,000 over a maximum of seven years, the loan comes with a fixed 7.99 per cent rate (comparison rate 8.26 per cent) – around 40 per cent less than that of the average credit card – and can result in cash in the bank in just 60 minutes.
Mr O’Donnell says that the fixed rate is also attractive to those who want to be able to forecast how much they need to pay per month, which “creates discipline in [the customer’s] mind about the course needed to manage cash flow”.
Although personal loans, are by definition – used for a range of personal means – they are commonly used for home renovations, holidays, veterinary bills, medical bills, car repairs, and buying big-ticket furniture or electrical items. However, the majority are used for debt consolidation (for example, around 46 per cent of Liberty’s personal loans are used for debt consolidation).
Indeed, debt consolidation is on the rise; asset finance aggregator NLG Leasing recently partnered with peer-to-peer lender DirectMoney to meet increasing demand for debt consolidation loans, which rose by 20 per cent in the fourth quarter of 2016 (compared to the previous quarter).
Frank Crombie, NLG Leasing’s director of aggregation service, explained: “This style of finance continues to resonate well with a growing customer base that are increasingly uncomfortable with their household debt, and seek solutions to help streamline and reduce outgoings. In particular, this approach is highly beneficial in consolidating multiple loans such as high rate credit cards, personal loans and high rate vehicle finance.”
But, for brokers, the main drawing point of personal loans is their ability to help customers secure a mortgage.
Anthony Nantes, DirectMoney’s new CEO, explains: “Say, a couple has gone to a broker and they're looking for a home loan (or some other facility maybe, an asset loan). The mortgage broker has realised they've got this big credit card debt and can actually solve that problem, which could also assist them in getting the home loan across for example. That's what we see a lot of; brokers writing personal loans when someone comes for a mortgage but they’ve got a $25,000 debt there.
“By writing a personal loan, [brokers] can assist them in actually getting the mortgage.”
But personal loans are still not considered a “big ticket item” for many brokers, Liberty’s Mr O’Donnell says.
While the company’s offering is currently only available through Liberty Network Services brokers, Mr O’Donnell says personal loans are “not a mainstream product for brokers”.
He explains: “Largely speaking, the majority of brokers out there would refer a customer to an online site that is user-friendly and easy to use. Because it's unsecured lending, there's very little involvement that is required from a broker.
“It’s not in the same vein as the mortgage market, where the volumes are significant for brokers. You wouldn’t have 50 per cent of the total flow of personal loans coming from brokers, it might be 5 or 10 per cent at best.
“Certainly, for the wider broker market, whilst [personal loans] are an important alternative option for customers, it's a low-ticket item relative to doing a mortgage or car finance for a broker. So, the return to a broker is a lot less in terms of their effort.”
However, the managing director says that brokers do recognise the importance that personal loans offer in terms of bridging finance or covering high LVR scenarios that they often face.
“Nevertheless, it is an important option for customers who are looking to take out a home loan and often personal loans can pave the way for them to get that right,” he adds.
But, for some lenders – such as DirectMoney – personal lending is a major draw. According to the peer-to-peer lender’s CEO, the company was the “first non-bank lender to approach the broker channel and recognise the value in it” and has seen great take up from the third-party channel.
He reveals that over the past 12 months the company has seen the amount of personal loans written through the third-party channel rise from 30 per cent to just over 50 per cent.
Mr Nantes says he believes the increase has been down to “more brokers becoming aware of the size and scale of the industry… [and] the need from their client base”.
He adds: “Writing personal loans is really easy, all brokers will have the skills to be able to do it…. And, the reality from a broker's point of view, is that almost all their clients will have a need for a personal loan from time to time. It’s also a great gateway product – brokers can write a personal loan for a client and then a few years down the line they could see their clients coming back for a mortgage.
“I think more and more we'll be seeing a lot of general brokers that are able to take a client all the way through that process themselves very quickly.”
For those looking to start offering personal loans, now is a good time to start, says NLG Leasing’s Mr Crombie.
Highlighting that debts often run high over the Christmas and new year period - with many taking out loans before Christmas to buy presents, or in January, to tide them over during the school Summer holidays - Mr Crombie suggests brokers should be talking to their clients about debt consolidation now.
He says: “Consumers are also becoming increasingly astute about seeking counsel about financial alternatives. We encourage brokers to use this opportunity to strengthen relationships and drive more revenue by simply asking clients whether their cash flow is being utilised to its maximum capacity, or if it could be consolidated to more effectively reach their personal and/or business goals.”
Case study: DirectMoney
Scenario: A 25-year-old person had two credit cards (CBA: $7,287 and Coles Myer: $8,687), along with a CBA personal loan of $12,819, of which he was paying $800-$1,000 a month (primarily on interest).
His broker suggested considering debt consolidation to work towards releasing his debts and reducing his monthly commitments.
Through DirectMoney, it was determined that he was eligible for five-year term of 11.95 per cent ($520 upfront application, no ongoing fees and no early exit fees).
Result: His new repayment commitment became approximately $650 per month (less $150-$350 per month). This enabled the client to actively reduce debt and start a savings plan.
Loan type: Consumer loan
Rate: 11.95 per cent
Turnaround: 48 hours
Term: 60 months
Location: Perth, Western Australia