Debt Rider

The Age

Monday May 26, 2003

Denise Cullen

Personal loans trump credit cards. By Denise Cullen.

MORE and more consumers are casting off the shackles of credit card debt in favour of cheap-as-chips personal loans. Lenders report that ``debt consolidation" - where borrowers swap an expensive form of lending for a single-digit interest rate alternative - is now one of the most popular reasons for applying for loans up to about $40,000.

Kerry McMorrow, the general manager of marketing with Community First Credit Union (CFCU), says a recent campaign offering personal loans at 9.5 per cent a year ``to assist customers who are serious about getting rid of their debt" has resulted in a noticeable spike in the number of loans for that purpose.

``The percentage of all loans taken out that were for the purpose of debt consolidation rose from 13.5 per cent in January to 23.8 per cent in March," she says.

Other lenders, too, are jumping on the low-rate loan bandwagon.

Not surprisingly, the best deals on offer are for people who can provide some sort of asset as security for their loan - for example, car loans around the 7 to 10 per cent interest rate mark are common for borrowers who offer the vehicle as security.

One exception is CFCU's New Car Loan, which offers a 7.2 per cent unsecured loan for purchases of ``brand new" cars.

It is possible to get single-digit interest rates for some unsecured loans too.

For example, Members Equity (ME) also has a 9.9 per cent deal for customers who want to borrow between $5000 and $30,000.

According to Lisa Montgomery, chief executive of Infochoice, it makes good sense to refinance on rates like this when you have racked up a total of, say, $20,000 to $30,000 on several different pieces of plastic.

Alternatively, she suggests it might be worthwhile rolling your debts onto a cheaper card, such as the Members Equity MasterCard at 9.75 per cent, or the Bank West Lite MasterCard at 9.99 per cent.

But, she warns, borrowers who go the personal loan route after ``maxing out" their credit cards must exercise some serious discipline to avoid getting into further difficulties.

``If you do refinance into a personal loan, you need to cut up your credit cards, or just keep one with a lower limit, such as $500 or $1000," she says.

The absolute worst thing you can do is to use the personal loan funds to pay off your credit card - but then just keep on racking up debts like you always have.

``Accumulated debt is a problem but the greater problem is the spending habit that led to the debt," she says.

``(People with overspending issues) are like people who have problems with food - it's hard to break the habit."

But debt consolidation is not the only good reason to get a personal loan.

According to Catherine Wolthuizen, finance policy officer with the Australian Consumers' Association, personal loans are a low-cost alternative to credit cards for people who want to get their hands on a sizeable amount of cash quickly - for example, to buy a new car, pay school fees, or take a holiday.

``They're perhaps the way to go if you can't save up, or you don't want to have to wait," she says.

Ms Wolthuizen says one of the best things about personal loans is their finite nature - they demand regular, fixed repayments, which require the borrower to exercise a greater degree of spending discipline.

And unlike cards, which allow people to maintain revolving (and, often, ballooning) lines of credit, personal loans do eventually terminate, usually after one to five years.

You do need to shop around to find the most suitable deal though.

Uncovering the fees and charges that apply is an important part of this. For example, establishment fees are common with personal loans, and can be as high as $400.

Also check that the lender won't slug you for making extra repayments, or paying your loan out early.

And check that the cheap rate you saw advertised actually applies to you.

While ME boasts ``one low fixed rate - regardless of term and purpose", be aware that all lenders will look at your credit rating, your financial history, your assets, your liabilities, and your future income earning potential - and, after taking all that into account, may deny you credit or, at the very least, price their products according to the risk you present.

For example, CFCU bases the interest rate for its personal loans ``upon the credit risk of the individual", up to a maximum of 13.5 per cent per annum.

``However, this is not the only factor that is taken into consideration when assessing the loan and determining the rate," Ms McMorrow says.

In most cases, the procedure involved in securing a loan tends to be short and sweet, and most applications can be turned around in 24 hours.

However, this ease should not encourage prospective borrowers to adopt a scattergun approach, Ms Montgomery warns.

Multiple credit applications within a short period of time are a red flag to the next round of lenders you approach, so if you are rejected, step back and take stock of your situation.

``If you keep getting knocked back, go and consult with the (next prospective) organisation first," Ms Montgomery says.

``Get them to give you an indication of how likely your application is to be successful, before you put pen to paper again."

QUICK CASH
How credit cards and personal loans compare
CREDIT CARDS                                            Over
                                        Rate    Free    Annual  Late    limit
Joining         Reward
Institution     Product                         %       days    fee     fee
fee     fee     program
Members Equity  Members Equity MasterCard       9.75    44      $30     $25
Nil     Nil     No
BankWest        Lite MasterCard         9.99    40      $36     $25     $25
Nil     No
St. George Bank         Mastercard (55 free days)       10.99   55      $59
$22     $5      Nil     No
ANZ Bank        ANZ Visa First Low Interest     11.75   None    $26     $25
$25     $33     Yes
mecu            Visa                    12.00   None    Nil     Nil     Nil
Nil     No
PERSONAL LOANS
                                                                Rate
Application     Loan            Loan term
Institution             Product                                         %
fee             amount          (years)
Community First Credit Union    New Car Loan (variable)
7.20    $100            $20,000 to $60,000      1 to 10
Community First Credit Union    Unsecured Car Cash Car Loan (fixed)
9.50    $100            $5000 to $35,000        1 to 5
National Australia Bank         Unsecured Over Five Years* (variable)
9.64    $100            $20,000-plus    5-plus
Members Equity          Members Equity Personal Loan (fixed)            9.90
None            $5000 to $30,000        1 to 5
National Australia Bank         Unsecured Over Three to Four Years (variable)
10.14   $100            $20,000-plus    3 to 4
*A SERVICE FEE OF $10 A MONTH APPLIES TO THIS LOAN. SOURCE: INFOCHOICE.COM.AU AT
 MAY 2003

© 2003 The Age

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