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For borrowers struggling with the rising cost of living, debt consolidation can provide huge relief on their finances and their state of mind. We take a look at why more borrowers are turning to debt consolidation and how lenders and brokers are keeping them on top of their finances
In the past 18 months, the cost of living in Australia has skyrocketed, placing pressure on all segments of the economy. The growing cost of mortgages and rent has seen consumers tighten their belts across the board, but with essentials such as fuel, food and electricity prices also skyrocketing, many Australians have been turning to credit cards, personal loans and buy now, pay later providers to spread the financial load.
According to Will Kiln, chief executive and co-founder of debt consolidation lender Salt & Lime, a growing number of near-prime and prime customers have been taking on extra credit to “help them get by” in the past year.
He said: “We’ve seen a bit of a change in the mix of what we’ve been consolidating throughout the year; there’s been an increase in borrowers using payday lending or pay advance loans and buy now, pay later products. While there’s always been a mix of these sorts of loans, we’re seeing customers now having a higher number of those individual products. So where they might have had one or two before, it’s more common that these clients are using two to three payday loans, or two to three buy now, pay later products.
“These short-term solution products are becoming much more prominent in the mix of what we’re consolidating, which suggests there’s more short-term stress for everyone.”
In fact, the number of borrowers reporting high levels of financial stress has been increasing recently, with the financial service regulator recently revealing that there had been a 28 per cent increase in calls to the National Debt Helpline in the year to August 2023 compared to the previous year.
“For us, it’s widening the field of all customers that we’re looking after. Many of our great broker partners are coming to us with scenarios where customers are already in mortgage arrears and the driver of those mortgage arrears are those payday lending/pay advance products because they’re so cash flow heavy,” he added.
Indeed, the average debt load that the average Salt & Lime customer was looking to consolidate at the beginning of this calendar year sat around $11,000, according to Mr Kiln, whereas that has now risen to around $18,000.
“That increase goes hand in hand with the extra obligations and loans that customers are taking on because of the stress of the general economic environment at the moment,” he said.
Having extra payday loans and buy now, pay later products can come at a substantial cost though, with multiple interest rates and high fees and charges stretching already-stretched budgets further.
According to Mr Kiln, while many short-term finance solutions aim to provide a reprieve to a borrower in the near term, there is often a sting in the tail for the borrower – particularly if any repayments are late or missed.
As such, he co-founded Salt & Lime to not only help borrowers consolidate their debt (offering personal loans/debt consolidation of up to $30,000 across a maximum of five years), but also help them learn more about the debt cycle and improve their knowledge and awareness of financial products along the way.
Improving financial literacy has been at the forefront of the lender’s raison d’être. The lender was founded in 2021 after Mr Kiln had a discussion with a friend who said he was struggling to repay his car loan. After looking at the contract, Mr Kiln realised the loan had an interest rate of about 46 per cent and a lot of fees – but his friend hadn’t realised the true cost of what he had signed up for.
It’s not an unusual problem; according to the Financial Literacy in Australia report from the University of Western Australia, less than half (around 45 per cent) of adults in Australia are financially literate – with young adults having particularly low financial literacy (and also being the most common users of BNPL products).
Salt & Lime was therefore founded to not only offer Australians debt consolidation loans and improve their financial position, but also improve their financial literacy along the way. It does this by offering borrowers rate discounts if they complete financial literacy modules (up to 3.5 per cent) as well as an additional 2 per cent discount if they use salary deductions.
Mr Kiln explained: “We want to support and educate customers with something that is transparent and teaches them the things that they weren’t taught in school. Things like money management, how to save effectively, what a credit score is … all the important things.”
The lender currently has 12 financial wellbeing modules on offer that aim to help borrowers feel more confident in their financial future, with the added benefit of reducing their rate and paying off their loan faster when they complete a module each quarter.
According to Mr Kiln, when the modules were first launched, it was anticipated that there would be a 30 per cent engagement rate, however, 80 per cent of customers have so far completed modules. The lender added that within the first 12 months, the average Salt & Lime customer had increased their credit score by 75 per cent.
He noted that three of the main areas that borrowers particularly wanted help with were budgeting (and managing inflows/outflows) once they receive their pay; understanding credit scores and how they’re calculated and breaking the cycle of relying on payday loan products.
He added that having clear and transparent products and rates, coupled with financial literacy education, had resulted in the lender escalating quickly.
“I think the take-up rate and improvement in credit scores validate everything that we’re doing. Brokers have been having these financial literacy conversations with their clients for a long time. And now they are finding a really great home for these customers for debt consolidation knowing that education will continue with the modules. So, not only are we able to consolidate debt and help people reset, but we’re giving brokers the certainty and peace of mind that their customers have continued support,” Mr Kiln said.
Looking to the future, the CEO suggested that brokers would likely continue to see more borrowers needing the joint services of debt consolidation and financial literacy education, particularly as the expensive festive period and summer holiday period approach, more borrowers roll off their fixed-rate terms onto higher mortgage rates, the tight rental market pushes up the cost of rents and inflation continues to remain over 5 per cent.
He concluded: “I think we’ll see over the next year a continuation of this mortgage stress, particularly as it’s not likely that mortgage rates will come down anytime soon.
“So, I would urge brokers to be really proactive in their communication with how they’re going, how the cost of living is actually impacting them and how they’re managing their mortgage repayments. If they’re having really proactive conversations with customers around the kind of products that they’re using and how they are managing their finances, that can be a pretty good indicator of cash flow stress for customers.”
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