Baycorp, the leading Australian Credit Reporting Agency, recently reported that the number of Australians seeking personal loans and other forms of credit has increased significantly.  Personal loan applications increased by 11% between the third quarters of 2004 and 2005, with 642,008 applications submitted during the third quarter of 2005. Similarly, applications for credit cards continued the upward trend of previous years, with a 31% increase between the September quarter 2004, when 707,490 applications were submitted, and the corresponding quarter of 2005, when there were 929,872 applications.  Is this increase in personal debts among the Australian population a bad thing, or does it just reflect increasing levels of prosperity and a greater confidence in being able to repay the debts.

In the 1990s most loans were for the purpose of purchasing a home.  The new century has brought about a trend in which personal loans are taken out for a wide variety of reasons, as banks and other credit organisations become more flexible in their lending criteria.  Many borrowers are taking advantage of the equity that they now have in their property to apply for loans which offer lower fixed interest rates and favourable terms of payment.  There has also been an increase of more than 30% over the past two years in the take-up of variable-rate loans and revolving lines of credit, perhaps due to the fact that these credit arrangements offer greater flexibility to the borrower than loans with fixed monthly payments.  These forms of credit normally require some form of security. Australians are now therefore taking greater risks in their borrowing habits compared with the past.

Moreover, recent trends in spending habits reported by the Australian Housing and Urban Research Institute, suggest that many Australians are using credit facilities to live beyond their means, refinancing their homes to pay off debts and then borrowing money again to pay for holidays and other purchases.  In this context, increased debt is an unhealthy feature of the Australian economy.

In order to avoid the debt trap and to use credit facilities sensibly there are a number of factors you should consider.  If you are considering taking out a secured loan or other credit arrangement, it is important to be aware of the risk of losing your home or other assets, and to weigh this against the benefits of the loan. Unsecured loans come at higher rates of interest, but without the risk of losing your home or other form of security. If you do fail to make the payments, without a court order the lender is unable to take possession of your assets and in most cases will just write off the loan. However, this will have a negative impact your consumer credit rating and you may find it difficult to get credit in future.  Whatever type of loan you choose, it is usually advisable to take out some form of personal loan repayment insurance to ensure that you will be able to make the loan payments in the event of illness, disability or unemployment.

Above all, plan your budget carefully and only take out credit which you can afford to repay.  In this way you will be sure of protecting your credit record – and even your home while still being able to afford things that you can not pay for outright today.