Interest Rates on Personal Loans Partly Fund Housing Credit

It seems that the global financial crisis has not discouraged people to apply for house loans despite higher interest rates and very strict lending standards. Obviously, the crisis has significantly affected the pricing and structure of the mortgage market in Australia. However, the quality of housing loans offered remains the same. In fact, during the critical period of economic downturn, housing finance has been made available to consumers who are prepared to take on the higher interest rates and the challenge of making payments amidst the soaring prices in basic goods and services. Housing credit has steadily grown about 8 percent every year.

Because money is tight, wholesale lenders have decreased considerably in numbers. The big banks took over in providing housing credit to consumers. Moreover, the relatively increased cost in funding housing has not been altogether imposed on the borrowers. Customers who applied for business and personal loans have partly born the housing finance cost through higher interest rates.

Looking at some statistics, the average variable rate of housing loans has rose to an estimated 110 basis points compared to the cash rate since the middle of the year 2007. This figure is actually below the 130 to 140 basis point increase in the overall funding costs of bank in this particular time. On the other hand, business and personal loans has multiplied more compared to the cash rate and significantly more than the increase in funding costs.

Moreover, mortgage rates have changed and affected the monetary policy discussions of the central bank. It is true that interest rates imposed on mortgages have rose compared to the cash rate. The Reserve Bank has noted these changes especially in deliberating and drawing up their policies. RBA still consider the cash rate as the major factor in the interest rate structure in Australia, not excluding the mortgage rates.

Small time players in the lending sector have experienced a better outlook since the middle of 2009 especially when the securitization market has gradually regaining its foothold. During this period, the long and short term cost of wholesale funding has lessened while deposit costs is still high. This is paralleled by the market shares of small lenders, which have increased a little over the last months. These will most likely remain as is and no signs yet of returning to its pre-crisis levels in the near future.

Practicing a more stringent lending standard has resulted in a few of the banks lessening their maximum loan with (LVR) valuation ratios of 95 to 97 percent. Back in 2009, LVR was at 90 percent. Some of the changes consist of increased interest rates buffers, more “genuine savings” requirements, and not so easy procedure in acquiring low doc and non-conforming loans. The end results is an lower LVR in the share of new owner-occupier housing loans by more than 90 percent decrease to 17 percent at the closing of the year 2009 as compared to 27 percent in the quarter of March. Moreover, the low doc loans share fell to approximately 7 percent. Clearly, the Australian mortgage credit will more or less remain sufficient given a marketplace that is still very competitive.

How Payday Loans Become a Vicious Cycle

Payday loans can be deceptive. You are forced to turn over a post-dated check for a loan and in addition, there is a possibility that you will be harassed and threatened because of some collection practices. The high rates of payday loans make it difficult for so many borrowers to repay the loan simply because they are already in a financial crisis.

When we are short of cash, Payday Loans or Check Advance Loans may seem like an easy way out of a temporary cash shortage but for many people, this can be the beginning of a vicious and expensive cycle where you will find difficulty getting out of in the long run.

An example of this situation would be about Carlie. Carlie was short of money to pay for her monthly bill and so she went to a payday lender and borrowed money to make up for the shortage and she was charged $50 for up to 15 days or 2 weeks. She needed to repay her loan when she receives her next paycheck in the next 15 days. When she got her check, she realized she didn’t have enough money to pay off the amount she borrowed with the $50 interest fee, so she paid the additional $50 to the lender and rolled her payday loan for another 2 weeks.This cycle went on for about 6 months and in the end, she had paid a total of $600 in fees and still owed the principal amount of $200. She had already paid 3 times more than what she borrowed and that puts her in a much deeper financial debt than she was in before she made the first loan.

The interest rates on a personal loan from a bank tend to be 10 times lower than even the lowest rate payday loans. Even a high-interest rate credit card has a much lower rate than a payday loan. The interest rates of payday loans rate from a whopping 300%  which may go up to to 1,000%.

A payday loan is requested for a short period of time, usually one to two weeks. You will be required to provide proof of employment and some identification and to secure the loan, you will also be required to write a post-dated check for the principal and interest fees of the loan.  A $100 loan can cost you $15 of interest for 2 weeks. This may seem reasonable enough  for an emergency situation,however, did you know that the annual interest rate on that loan can amount to 360%? If it becomes a vicious cycle, you will end up more badly in debt than you were in when you first borrowed money from the payday lender.

If the money you need is not for an extreme emergency, you may want to try these other alternatives for less expensive loans:

• Ask your employer for a pay or cash advance.
• Consider asking your friends and family for a loan first.
• Consider a credit card advance.
• Contact a local credit union for a small loan.
• Request additional time to pay the bill from your creditors.
• Try credit counseling.
• Prevent financial emergencies.

To prevent financial emergencies, take time to look at your income and expenses. Write it all down. Try to save a little money each time you get your paycheck. No matter how little, this still will add up and it’s still better to have some when you need it.