As more Australians begin to take on more debt than they can comfortably afford, debt consolidation is fast becoming a necessity than a possibility. In the latest household debt figures released by the Australian Bureau of Statistics, almost three-quarters of Australian households (73%) have some form of debt.
While this is understandable with increasing costs of homes and other expenses not matching a parallel increase of salaries, the concerning figure is that, of these households, 28 per cent were servicing a total debt that was three or more times their annualised disposable income.
While debt consolidation is somewhat comparable to debt refinancing, the latter generally covers existing loans, while the former can include multiple types of debt including increasingly popular Buy-Now-Pay-Later (BNPL) debt and gradually declining credit card debt.
Below, we’ll look at three reasons debt consolidation works for the consumer, and how you can reduce existing debt while learning to avoid unnecessary debt in the future.
The average personal loan debt increases as we age, with those in their 60s having the highest average personal loan debt compared to other demographics, according to Experian, a multinational credit reporting agency that conducted the study in the U.S.
However, the average personal loan debt for a 20-year-old in the US is around $3,000, an average that increases year-on-year to around $10,000 for 29-year-olds.
This average is also just under half the average debt of those in their 60s, which indicates that personal loan debt is not only growing increasingly common but remaining persistent throughout our entire lives.
Now let’s consider the figures closer to home. Recent figures released by Australian lender, Plenti, show the number of Australians borrowing to consolidate their debt is similar across the primary generational demographics:
Learning to compare financial products and choose an appropriate loan for your situation and needs is crucial to minimising your personal debt over your lifetime.
Learning to do this early on - i.e. in your 20s - with smaller, personal debt, means you’ll be far better equipped to make bigger decisions later in life, such as choosing a home loan in your 30s or 40s.
While it’s encouraging to see nearly 40 per cent of Australians in all major generational demographics choosing debt consolidation, the types of debt they are consolidating shows a lack of options for accurately comparing loan offers in Australia.
The three most common types of debt people are looking to consolidate are:
It would be unfair to say that this is purely the fault of lenders and their methods of advertising loans and credit card offers, just as it would be unfair to say that consumers are irresponsible in how much debt they choose to take on before it becomes unmanageable.
In reality, it’s a combination of both, where the solution isn’t to chastise either side but simply provide a better option at the start of the process; creating customer-focused application processes which match the most suitable loan to the user based on their unique, personal needs.
Compare this to buying a car (unsurprisingly taking second and third place in the statistics) where finding a suitable car loan, or comparing whether a car loan or a personal loan is more suitable, is entirely dependent on the individual’s circumstances and requirements.
Debt consolidation should always be an improvement from your current situation, which is designed to help Australians:
To do this, you’ll want to compare personalised offers from as many lenders as possible to find the best deal and the lowest repayments.
While many might argue this is unnecessary energy to spend on saving a few dollars or a few weeks on total repayments, the reality seems to paint a picture where the consumer has until recently had little way of accurately comparing offers, instead choosing the most popularly advertised option instead of the option most suitable for them.
This is most clearly seen in the BNPL industry, where missed payments have created an increasingly lucrative financial opportunity for this type of lending; a $40m+ opportunity only two years ago.
According to ASIC, the value of missed payment fee revenue for all BNPL providers that ASIC covered totalled $43 million, a 38 per cent increase from the year before. For Afterpay, one of the most popular forms of BNPL, late fee charges comprised 20 per cent of the business’s revenue in FY18-19.
This coincides with the increased adoption of these services, which saw the total number of BNPL transactions increase 90 per cent from FY17-18 to FY18-19, totalling 32 million.
If Australians had easy access to comparing offers and choosing a loan personalised for their situation and needs, this is $43m that could have been put toward reducing their personal debt instead, while finding better ways to save money and reducing the reliance on the BNPL industry altogether.
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Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.