Personal loan amounts have seen a dramatic increase of $30 billion between June – August 2019, in a market totalling more than $173 billion in outstanding personal loans between Australian loan customers. Taking into consideration the $5 billion fall in personal loans during 2018, these new stats are intriguing.
Trends like digital disruption in the form of fintech and alternative lenders have had an ongoing effect on the lending landscape, with personal loan borrowing riding both the highs and lows relative to consumer habits.
Demographic trends like the rise of millennials as a dominant force in the economy are also making their impact on the sector. Longer-term spending habits and a love affair with online lending platforms and “buy now, pay later” providers have seen a shift in traditional market habits, with consumers moving away from credit cards in recent years. Yet, as Australians spending habits change, the demand for personal loans continues to climb.
In this time of change, it is worth taking a look at what’s happening in the personal loan segment in terms of consumer motivation.
Why are more Australians borrowing now than ever before, despite these changes? And how do consumer motivations, choices, and behaviours vary across the different age groups?
1. Motivations for personal loans: why are people borrowing?
For most of those demographics sampled, the reason for taking out a personal loan was to pay off debts.
Debt consolidation was the most common motivation across all three sampled demographic segments.
37.4% of boomers, 37.1% of millennials and 39.6% of Gen X said they were borrowing to consolidate debt. The most common type of debt for those getting a loan for debt consolidation include credit card (52%), personal loan (29%) and car loan (18%) debt.
Home improvement was also a popular motivation for obtaining a personal loan, most commonly in boomers. 20% of boomers stated they took out a personal loan for home improvement. Compared to 17.2% of Gen X and 12.6% of millennials, this could be due to the fact that the boomer generation is shying away from downsizing in favour of aging in their existing home. Another potential explanation could be homeownership, as the older demographics are more likely to own their own homes and be interested in investing in improvements.
The next most popular reason for taking out a personal loan was buying a car, with 14.1% of millennials borrowing to purchase their first vehicle. Understandably, the rates among Gen X (12.0%) and boomers (11.4%) are slightly lower, as these demographics tend to already own a car or have access to other loans such as secured car loans.
Personal loans for travel are more popular than one might think. Millennials (8.7%), Gen X (7.8%), and boomer (8.7%) demographics all remain at similar levels, reflecting this modern collective mind-shift toward embracing life experiences in favour of possessions.
Medical expenses are another reason people go to lenders for personal loans. When it comes to borrowing for medical reasons, boomers were slightly more likely (2.7%) to take out personal loans than millennials (2.1%) and Gen X (2.3%). Commonly, people take out personal loans for medical-related expenses such as dentistry, surgery (including cosmetic) and urgent care bills.
Millennials (4.0%) were more likely to say they were borrowing to finance a wedding than boomers (2.1%) and Gen X (1.4%). Young couples are taking out loans to fund “Instagram-worthy weddings” and to afford the average wedding cost of $36,000. For couples who need to cover the costs that they haven’t saved for, a personal loan has helped to fund their dream wedding.
Taking out a personal loan to invest was the least likely motivating factor across all age groups. 1.8% of millennials said they were borrowing to invest, while 1.4% of Gen X and 1.1% of boomers were borrowing to invest. Factors influencing these stats can be due to risk factor. Borrowing to invest is high-risk, and many people would rather take out a personal loan on something more tangible.
2. Average loan sizes: how much are Australians borrowing?
Most personal loans average around $15K to $16K across the three surveyed age groups.
Gen X respondents were associated with the biggest loan size, with a borrowing average of $16,793. The boomer group followed at $15,676, while the millennials had an average of $14,832 for their loan sizes. These differentials could partly come down to borrowing power and income levels.
By household type, families were the most likely to borrow more, with an average of $17,289. Couples on average borrowed $14,946, while singles were likely to borrow the least, with an average of $13,966.
Reasons for these variations could be attributable to the number of people in the household and how that corresponds to financial needs, which naturally would increase the borrowing amount. Families are more likely to need a bigger car, home, caravan, etc. to accommodate their lifestyle. Singles, on the other hand, may have less income overall which means less borrowing power.
3. Credit scores by age group
The oldest age group, the boomers, unsurprisingly had the highest average credit scores at 775. This could be attributable to the fact they have had more time in the workforce and time to build their financial security. Gen X followed with an average of 744 in credit scores, and millennials had the lowest average credit scores at 707. This could be attributed to boomers being more efficient in debt repayment and on-time payments. Additionally, younger generations such as millennials may have delayed applying for credit cards or depend on credit less frequently than the other generations. This means they don’t have decades of credit history as the older generations typically have.
4. Borrower profiles
The data showed boomers were most likely of the three demographic groups to own their own homes and not have a mortgage. Millennials were most likely to be tenants with no mortgage.
Among Gen X respondents with a personal loan, 49.86% owned their home with a mortgage. Boomers were second most likely to own a home with a mortgage, with 49.49% of those taking out personal loans falling into this category, in contrast to 31.64% of millennials.
Millennials were the most likely to be a tenant with no mortgage (50.30%), followed by Gen X at 36.89% and boomers at 31.76%.
5.72% of Gen X respondents were tenants who also had a mortgage over a separate property, and 5.33% of millennials and 4.78% of boomers fell into this category.
Boomers were the most likely personal-loan borrowers to own their home outright, with no mortgage (9.73%), followed by Gen X at 2.79% and millennials at just 0.85%.
Again, these figures suggest life stage and time in the workforce could be impacting whether borrowers owned their own home, rented, or were renting and investing. The lag in homeownership among the younger generations can be attributed to rising student loan debt, delays in marriage, and a slower rate of building savings. At the same time, it suggests a small percentage of consumers who owned their homes outright were accessing small loans for personal use.
The figures also suggest having access to a mortgage and potentially the option to refinance a mortgage wouldn’t replace personal loans in many cases. For example, refinancing a mortgage might be too complicated for a consumer wanting to access extra funds for personal reasons. In this case, a personal loan might better serve their requirements.
5. The most popular times of the year for personal loans
As for the most popular time of year for personal loans, the months before Christmas and August take up the biggest share of activity in the space. October accounts for 9.62% of personal loans, with August a close second at 9.31%.
November and September follow at 9.19% and 8.92% respectively. February (8.50%), January (8.48%), May (8.25%), and July (8.15%) are relatively similar in terms of activity levels.
The quietest time of the year for personal loan borrowing are Easter, the period just before the end of the financial year, and Christmas, with April (6.76%), March (7.57%), December (7.58%), and June (7.67%) taking up the lowest shares of annual activity.
6. Borrowings from traditional vs non-traditional lenders
Online lenders are steadily winning market share from banks. In 2010, Australian banks’ share of personal loans was 86%. By 2018, it had fallen to 72%. Research on Australian millennials indicates as much as one-third do not trust banks, so as this generation becomes a dominant force in the economy, banks’ share of the personal loan market could continue to fall.
Additionally, non-traditional lenders might be mobile or online only. This suits millennials, who are comfortable doing most things on their phones and tend towards mobile-first engagement. Millennials are increasingly ditching the credit cards in favour of popular ‘pay now, buy later’ options. The ease and convenience of these platforms mean that they can purchase goods to enjoy right away without having to spend money upfront. Alternative lending has also become more popular in recent years, with borrowers looking to private lenders instead of traditional lenders. The higher rate of returns, lower interest rates, and ease of online accessibility appeals to modern generations, particularly the younger demographics who are naturally distrusting of traditional financial institutions. People are looking for lenders who are on par with the modern economic landscape. In a generation facing increased job insecurity, more and more people are looking for ways to save money as they think of their financial futures.