Personal debt data shows that we should curb our enthusiasm when it comes loans

Published on December 1st, 2020
  Written by 
Bill Tsouvalas
Bill Tsouvalas is the managing director and a key company spokesperson at Savvy. As a personal finance expert, he often shares his insights on a range of topics, being featured on leading news outlets including News Corp publications such as the Daily Telegraph and Herald Sun, Fairfax Media publications such as the Australian Financial Review, the Seven Network and more. Bill has over 15 years of experience working in the finance industry and founded Savvy in 2010 with a vision to provide affordable and accessible finance options to all Australians. He has built Savvy from a small asset finance brokerage into a financial comparison website which now attracts close to 2 million Aussies per year and was included in the BRW’s Fast 100 in 2015 as one of the fastest-growing companies in the country. He’s passionate about helping Australians make financially savvy decisions and reviews content across the brand to ensure its accuracy. You can follow Bill on LinkedIn.
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Australian debt plays a major role in our economy. At grass root level it has had many effect on how people spend, and what type of loans they take out to refinance needs such as cars and credit cards to help us in our day to day lives. However, with all the recent news in the rise of personal loan debt should we be worried.

What makes up personal loan debt?

Personal loan debt is part of many other loan debts that contribute to how much Australia owes. Recent data by the Australian Bureau of Statistics (ABS) showed that these were the 5 categories for reasons why people take out personal loans:

The most popular reason why people will take out a personal debt is to pay off their mortgages. Purchasing a home can be expensive. Most people buy homes not only to just live in, but to own one day. The Australian Bureau of Statistics (ABS) data analysed in the AMP. NATSEM report revealed that owner-occupier housing accounts for 56.3% of all personal debt in Australia.

Most popular categories for personal loanEstimated no. of Australians
Car/vehicle1.342 million
Debt consolidation399,000
Student loan/education381,000
Payday loan181,000

Current Australian debt in numbers

As a nation we currently owe $2 trillion in debt. According data released by finder, this means that when this number is broken down the average Australian household owes $250,000. The rest of the $2 trillion is split into things such as Investor debt, which is associated with investments in rental properties and shares that make up 36.5% in household debt. Student debt which comes from student loans make up 2.1%, and credit card debt which contributes 1.9% in terms of household debts.

Is this a good thing or a bad thing?

One of the questions you might have is knowing whether this is a good or bad thing? But most importantly how it will affect you on a personal level. Debt is not always a bad thing. Every country uses debt to generate wealth that will help strengthen its economy in the long run. This is known as good debt. Australia as a country is still above the good debt line with 56.3% going towards home loans and 36.5% in investments which shows that 92.8% is going towards wealth creation. However, it becomes a problem when the debt it takes on is more than the money it can generate.

This can cause its economy to buckle, or possibly even crash due to the huge payments it must pay back resulting in thousands of jobs being lost. This is on a grandeur scale. When brought down to the average home in Australia this can either work on building a life that is secured with a roof over your head that belongs to you, but it can also create household stress.

Over 150,000 calls were made to the National Debt Helpline showing the financial stress people are undergoing. A recent Digital Finance Analytics survey reported that of the 3.1 million mortgaged households, an estimated 669,000 are now experiencing mortgage stress.

Where to from here?

How you measure whether you are in good or bad debt depends on two factors:

  • Are you taking out personal loans that you can pay back? That means taking out a loan that doesn’t take up more than 40% of your salary.
  • Is it going to generate wealth and leave you in ownership?

If that is not the case, then it’s time to speak to a financial advisor who can help you manage your debt better in a way that won’t financially cripple you. A few quick things that can help you is to consolidate your bad debt, create a budget that will assist you in making payments and reducing unnecessary spending, or set up a regular savings account. In the end you need to invest more into things that give you peace of mind and financial freedom.

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