Consumers are turning to personal loans to make ends meet as high inflation and rising interest rates strain household finances.
The latest monthly report from credit bureau Centrix shows demand for personal loans soared in August to a 10-month high, eclipsing well over $500 million in new loans.
It was the first time this year that appetite for personal loans exceeded levels seen in 2021.
Centrix chief executive Keith McLaughlin said the increase could be attributed to households closing the gap between what they have and what they need.
“We tend to find that, especially in the second and third tier financial market, if the money is needed to meet a real estate covenant or a rental covenant, or a repayment on a car, then [consumers] will come out to close that gap,” he said.
“Whereas, if it’s discretionary spending, they will tend to reduce that.”
The August report also found that the number of delinquent accounts for consumer loan products remained high, up 8% from a year ago, as households prioritized mortgage repayments over other forms of debt.
Households were falling further behind on their auto loans, with the proportion of delinquent accounts rising for the fifth consecutive month to 4.8%, the highest level in nearly two years.
Meanwhile, purchase now and pay later (BNPL) arrears hit a three-year high of 9.3% and missed energy payments rose to 4.2%, although they are still below historical levels.
McLaughlin said consumers were clear about what they paid for first when discretionary spending was squeezed by high inflation and rising interest rates.
“Obviously, things that aren’t recurring, such as buy-it-now-pay-later transactions or a personal loan, are usually the first to default.
“It could then be a secured loan, like a motor vehicle and usually the last thing people allow to default is their mortgage or their rent,” McLaughlin said.
This dynamic was reflected in the data, as the proportion of mortgages in arrears increased slightly to 0.98%, representing approximately 14,200 mortgages.
“There are few signs of mortgage stress emerging, despite the current cost of living crisis and geopolitical uncertainty,” McLaughlin said.
New residential mortgages were down 33% from a year ago, reflecting the slowdown in the housing market.
McLaughlin said if people or businesses are expecting repayment difficulties, they should contact the lender or credit provider as soon as possible to arrange debt restructuring.