Debt, is it big business? When you have a look at how much Australians owe and how much interest we pay on average every year it would easily appear that debt is indeed very big business.
At the end of 2013, total household debt in Australia stood at $1.84 trillion, that means every person living in Australia has on average the equivalent of approximately $79,000 in debt. This amount has been higher than it has been at any time within the past 25 years.
Overall Australian’s are living with higher debt, it currently equates to 1.5 years of wages, whereas traditionally it used to sit around half their annual income. This is a massive increase, and is concerning trend. In fact, the richest 20% of households have an estimated average of $1.3 million in savings which is 200 times the average of the poorest households, who have on average $5,900 in savings. Given this is an average; there are some households that find it difficult to afford their next meal. Is this a case of the rich getting richer and poor getting poorer?
Why do banks lend?
Banks are profit-making machines, they exist to get a higher return on their lending. This is the basic premise of any business. In order for a bank to lend to a consumer they consider the following factors:
- Your credit worthiness
- Your earnings
- Your unencumbered assets
- Your repayment history
- Your documentation readiness
- The interest rate you will pay
- The mood of the loan underwriter (yes – this is true)
Based on all these factors, banks determine how much risk they are willing to take on versus the return they expect to receive. Essentially, the worse your repayment history the less they are willing to loan you.
Is it wrong that banks makes money off of the poor? I don’t necessarily think it is right, but you have to expect any business and even charity to charge an amount in order to compensate their risk factor involved with any business or loan transaction.
Debt is big business, it has always been big business, and it will always continue to be big business. I think there is now an issue in Australia, and indeed all around the world, where there has been the successful marketing of consumer debt. Debt is no longer something that should be avoided and only used for large purchases such as a house or car. Debt is now something that we as a society use on a daily basis to fulfil what is needed.
Debt is here to stay, for decades we haven’t been able to find a better system. Should our debt system be heavily regulated? Of course! It is important we protect both the creditor and consumer so neither can be taken advantage of. But we have to understand as a society, that in order to get credit, fees have to be paid.
Rasad Merchant CPA
Strategy and Business Development Manager & Secretary of the Personal Insolvency Professionals Association (PIPA)
Rasad brings over 8 years’ experience working in the insolvency sector to Debt Cutter, where he is dedicated to achieving peak business performance. With a background as both a trusted business advisor, and as a business owner, Rasad uses his foresight to strategically manage business growth and opportunities.