Are Personal Loans Just for the Poor?

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Are Australians missing out on the good things in life because they believe personal loans are just for the poor? Personal loans are still perceived negatively by some sections of the Australian population.

There are perhaps several reasons for this:

  1. There’s still a widespread belief that if you need to borrow money, you have a problem. You’re borrowing money because you need to do so to cover your living expenses.
  2. The huge growth of the payday and short term loans sections of the market, that these have been criticised for targeting those who are short of money and need to cover living expenses, and the fact many consumers don’t understand the differences between short term or payday loans and other personal loans.
  3. Negative perceptions of Australia’s big banks and some of the other financial institutions in the country, although this doesn’t always directly link to the myth that personal loans are just for the poor.

What’s the Problem?

That these beliefs are still held is strange. After all, many of us borrow money and spend a huge chunk our lives repaying debt, be that our mortgage borrowing or credit cards. Yet, these everyday types of borrowing are seen as part of the fabric of modern life. While credit card providers might pick up a bad reputation because of things like hidden charges, misleading promotions, rip-off interest rates that mean you rack up debt even when you don’t spend any more money with them, and not doing enough to encourage you to make more than the minimum payment each month, we use them every day without thinking about it.

Yet, we don’t see someone using a credit card and think “Oh, they must be poor if they’re having to use a credit card.” Likewise, a mortgage is the largest amount of money most of us will ever borrow for personal reasons, yet home ownership is regarded as a status symbol and still a sign of having achieved the Australian Dream.

What’s the Truth About Personal Loans?

The truth about personal loans is a long way from the perception of them as being just for the poor, as the charts below highlight. (Source: Ray Morgan Data)

How Much Do Personal Loan Applicants Earn?

This first chart highlights the earnings bracket of individuals who apply for personal loans across Australia.

We’re not about to put an arbitrary figure on what you’d need to be earning to be classified as “poor,” but what we will note is that 28% of all personal loan applicants have an annual income of $80,000 or more.

$80,000 is just above the average salary figure in Australia, so to say personal loans are just for the poor when almost a third of applicants are earning more than Australia’s average salary is completely wrong.

What is the Socio-Economic Status of Personal Loan Applicants?

While the measurement of socio-economic status can be controversial, in this case it is useful for allowing us to identify the background of people who are applying for personal loans on top of their salaries.

With 40% of personal loan applicants fitting into the AB or C socio-economic categories – indicating home ownership and some level of seniority in their employment – this further enforces the notion that personal loans being for the poor is simply a myth.

Where are Personal Loan Applicants at in Life?

One final factor we’re interested in, which we think may help us nail the myth once and for all, is at what stage of their lives personal loan applicants are at when they seek out finance.

There are some key factors we can analyse here:

  • Personal loan applicants tend to be higher earners. While the chart doesn’t highlight it, these applicants will also be able to borrow more due to their income.
  • A large percentage of older applicants, who may be more likely to have paid off their mortgage or be very close to doing so, are looking for personal loans.

What Does All This Tell Us?

These charts combine to show us that much of Australia isn’t missing out on the opportunity to take out a personal loan. Far from personal loans being a sign that someone is poor, could it be the case that Australians are using personal loans to get those things they want now, rather than saving? Does that mean that Australians who are using personal loans could even be enjoying a better quality of life than those that aren’t using personal loans, whether or not their reason is because they hold a misconception that loans are just for the poor?

Let’s consider two scenarios:

  • Person A believes personal loans are just for the poor. This person saves up for the things they want in life, but always seem to be using their savings to cover emergencies or unexpected expenses.
  • Person B is open minded when it comes to borrowing and understands the opportunity taking out a personal loan can bring. Instead of saving money which may end up being spent elsewhere, they take out a personal loan, enjoy whatever they want out of life, and repay the loan over a period of years having enjoyed a once in a lifetime holiday or enjoying the benefits of their new car or recently completed home renovations.

Who has the better lifestyle out of these two people?

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