Get your scores in order before seeking a loan

AUSTRALIANS have borrowed $46.6 billion in personal loans over the last 12 months, research has found, but experts claim many are unaware of how loan applications are assessed and how they may affect their own credit scores.

RateCity analysed Australian Bureau of Statistics data from the past 12 months and found personal loan numbers were up 6.4 per cent year on year, with more than half a million Australians using them to buy cars. The total borrow for new cars was $8.33 billion at an average loan size of $36,341; while a further $5.88 billion was borrowed for used cars.

On top of this, we borrowed

$6.05 billion for debt consolidation and

$2.54 billion for household goods, but despite the huge outlay, many borrowers are confused about how personal loans work and why they may not be offered the low interest rates they see in advertisements.

RateCity CEO Paul Marshall said personal loans are often awarded through risk-based pricing, which means the lender assesses the loan applicant before determining approval and offering an interest rate. “Lenders are increasingly moving towards a risk-based pricing model where their lowest rates are only available to customers with excellent credit scores,” Mr Marshall said.

“The problem is, consumers are completely unaware.

“They see a low advertised rate, apply for the loan and then scratch their head as to why they get offered a much higher rate, or worse still, get rejected outright.

“Every application can put a mark on your credit file and has the potential to reduce your score even further.”

RateCity’s 2018 consumer survey found 46 per cent of Australians with a personal loan didn’t know their credit score could affect their interest rate, while 71 per cent weren’t aware of their own credit score.

Personal lender SocietyOne’s interim CEO Mark Jones said people needed to pay attention to their credit score when applying for a loan.

“Knowing you have a good credit score can sometimes be used as a bargaining tool to access a better rate,” Mr Jones said.

“On the flip side, discovering you have a low score could instead indicate a problem you weren’t aware of, like an unpaid bill, which should be resolved before applying for credit to get the best deal.”

He said it was important to do due diligence when selecting a lender and to steer clear of payday loan companies.

“Small amount loans with a principal of $5000 or less provided by ‘payday’ lenders are often quite high-cost, and so can some times exacerbate a situation of financial hardship,” Mr Jones said.

Other major personal loan borrowings over the year were $2.54 billion for household goods; $826 million for travel and holidays; $759 million for boats, caravans and trailers; and $409 million for motorcycles and scooters.

Ratecity has launched a Personal Loans Marketplace, where customers can input their credit score, income and borrowing needs to find personal loans they are likely to be approved for, without risking their credit files.