Borrowing money for leisure: what to know about personal loans

Demand for personal loans is high, and there’s a growing range of lending options available. Here’s what you need to know.

Boats, bikes and bills are part of a surge in demand for personal loans as borrowers focus on their own backyards during the pandemic.

Data from the Australian Bureau of Statistics shows personal loan activity is near five-year highs, up 39 per cent for the year to August 31.

Separate internal figures from personal lender Plenti show even sharper rises for individual categories in the same time period, with its loans for motorbikes up 112 per cent, boats up 78 per cent and home improvements up 96 per cent.

But Plenti’s biggest rise has been borrowing money to pay bills, up 513 per cent over the year as more households struggle amid Covid lockdowns.

“Leisure activities – particularly with the lockdowns across NSW and Victoria – have definitely grown as a lending category,” says Plenti CEO Daniel Foggo.

“That growth points to people’s willingness to spend money on experiences, or on items that can facilitate leisure experiences,” he says. “This has been a longer-term trend, but has accelerated during lockdown periods.”

The Bureau of Statistics data shows personal loans for investment (excluding housing) more than doubled, while holiday loans also climbed strongly to $4.5m in August but are just a fraction of the $60m being borrowed monthly before Covid struck.

Plenti’s Daniel Foggo says loans for leisure activities have grown. Picture: John Feder

A personal loan is typically a fixed-term debt between $5000 and $100,000 and the space has attracted new online lenders in the past decade. Plenti started in 2014 and has reached $1bn in annual lending.

Foggo says people seeking a loan can improve their chances by reducing their credit card limits, which will improve their credit score because lenders assume they’re borrowing the maximum amount, and shut down store cards or credit cards they no longer use.

“Do your homework and shop for lenders offering quotes that don’t affect your credit score,” he says.

“And remember the basics: only borrow what you can afford to pay back, and what you really need.”

NOW Finance CEO Richard Blumberg says personal loans can offer lower interest rates than credit cards and other forms of consumer lending.

“According to the RBA as at September 2021, the average personal loan rate is 12.4 per cent, while the average credit card rate is 19.9 per cent,” he says.

“But if you have an excellent credit history, you might qualify for personal loan rates in the range of 5 per cent to 10 per cent – and potentially with a loan amount and term that better suits your needs.

Blumberg says borrowers should:

• Do their numbers to work out how much they can afford to repay monthly.

• Check their credit score, because a high score means a personal loan is more likely to be approved and deliver a more attractive interest rate.

• Shop around, look at lenders’ comparison rates rather than headline interest rates, and read reviews from other customers.

“Personal loans don’t work for everyone,” Blumberg says.

“They are still a form of debt. If you know that you have a habit of overspending, for instance, paying your credit cards off with a personal loan may not make sense if you’ll immediately begin building up a new credit card balance.”

In this case, it may be best to cut up the offending credit card.

“Because if you use it to run up more bills, you’ll find yourself with both a credit card and a personal loan to pay off,” Blumberg says.

NEW PERSONAL LOANS

• Motor vehicles up 21% to $1.1bn

• Refinancing up 10% to $140m

• Household goods up 60% to $100m

• Holidays up 73% to $4.5m

• Personal investment up 136% to $391m

• Other purposes up 39% to $288m

Source: Australian Bureau of Statistics Aug 2020 to Aug 2021

Originally published as Borrowing money for leisure: what to know about personal loans