Women's Wheels
Sydney Morning Herald
Tuesday October 22, 1996
Young females and small cars are helping to drive the competition in personal loans. VITA PALESTRANT reports.
YOUNG, upwardly mobile women are driving the small-car sector and the personal loan market alongside it. As a result, the feminine touch has done wonders for competition in the car yards and financial institutions alike.
The new-found purchasing power of young women is virtually the only sign of life in the otherwise lacklustre motor trade. The executive director of the Motor Traders' Association of NSW, Tony Selmes, says: "There are some structural changes in terms of the types of vehicles being sold."
He says young professional women are expressing a strong appetite for small cars such as the Mazda 121, Festiva, Barina and the newer Korean product.
"These women are a significant and identifiable section of the market. They have the capacity to pay and they are practical and shrewd. They are buying the smaller cars new now, rather than second-hand cars," he says.
As astute shoppers they recognise these cars represent good value, being economical to run with their three-year warranty and price of about $15,000.
The National Australia Bank readily agrees that car ownership is growing among women. It wants its share of the $12 billion personal loan business, of which car loans are a major slice.
"It's a growing market. Women are not having children until later and they are staying in the workforce longer," says an NAB spokesman, Haydn Park. "The sales figures from car manufacturers reflect the fact that they are purchasing their own cars. They are good payers and therefore a very attractive market."
The general manager of the NSW Teachers' Credit Union, John Prescott, confirms this. "Young women are definitely buying cheap new cars rather than second-hand cars."
While credit unions offer lower interest rates for cars, banks treat all personal loans the same, offering borrowers one rate no matter what the purchase is for.
The good news is that interest rates are likely to drop before the festive season arrives, giving all shoppers (male and female) a reason to put more bounce in their step as they pound the car yards and negotiate finance.
The managing director of Cannex financial services, Andrew Willink, has forecast a drop in interest rates of between 1 and 1.5 per cent over the next 12 to 18 months. "Inflation is likely to be maintained at a low rate of between 2 and 3 per cent and, barring any accidents, it will have a direct effect on interest rates. Competition is another factor driving margins lower," he says.
Already competition is ensuring a wide variation in interest rates and fees, making it essential that borrowers shop around for good deals. As the accompanying table from Cannex indicates, rates can vary by more than 4.5 percentage points, with entry fees ranging from nil to $100.
Credit unions are the largest lenders of personal loans, offering innovative products at competitive rates. With a 15 per cent slice of the industry, that translates into serious business.
Dr Vern Harvey, the chief executive of Credit Union Services, says: "The personal loan market is our traditional market, with the car loan a major part of it." Because credit unions maintain close ties with their members, they are able to approve applications speedily with minimal fuss, he says.
Credit unions know their customers well and bad debt is not a problem. While commercial finance companies carry loans in arrears of 7 to 8 per cent, credit unions carry less than 1.6 to 1.8 per cent. "Our borrowers have a very good record of repayment. Basically, when you become a member of a credit union, you become a very loyal customer," says Harvey.
As the table on the cover shows, credit unions offer the lowest rates, starting at 10.9 per cent at Community First Credit Union, and often have no entry fee or only a modest one. Banks, on the other hand, have higher rates and charge an entry fee of about $100.
Harvey says it reflects the higher cost of their paperwork. "It's expensive for the banks to process the application. They don't know who you are and have to do extensive checks. Our costs are nowhere nearly as great. In part, it explains why banks push credit cards rather than personal loans for small borrowings."
A calculation by Cannex shows that if you need short-term finance from a bank, for a small amount of money, credit cards are a better option despite the higher rate. This is largely explained because of the personal loan's high entry fee.
For instance, on $3,000 over a two-year period, a credit card at 15.95 per cent costs $15 less than a personal loan at 13.5 per cent - $3,670 versus $3,685. However, if stretched to three years, the personal loan works out $31 less. As a credit union member with a nil entry fee, the personal loan would win hands down from the start.
One of the more innovative credit union offerings on the market is Endeavour's capped rate car loan. Capped at 9.8 per cent until December 31, 1997, it reverts to a variable rate there after - but the rate is guaranteed not to exceed Endeavour's variable home loan rate (currently 9.25) by more than 2 percentage points. The loan is available for new vehicles only, for maximum terms of five to seven years. A minimum loan amount of $10,000 applies and a minimum deposit of 10 per cent is required. Interest is calculated daily and the loan is secured by way of a bill of sale. For used cars less than three years old, a higher rate, 11.25 per cent, applies.
Unlike the banks, which offer a single personal loan product for everything, credit unions have tiered rates. Alex Sala, the chief executive of Endeavour, says it sets rates "specific to the asset the borrower requires". This means that car loans, especially for new cars, tend to be viewed more favourably than other personal loans.
"The interest rate is commensurate with the risk. It also depends on the particular circumstances of the borrower. We will assign them the most appropriate rate," says Sala.
Rates for personal loans range from 10 to 18.5 per cent. Even so, Sala says, people are better off sticking to a personal loan: "With plastic, you recycle debt and never get off the treadmill."
As a further illustration of the different tiers, State Government Employees, one of the largest credit unions, has three options: new cars at 12.5 per cent, second-hand cars at 13.3 per cent and personal loans at 15.9 per cent. Community First Credit Union, with its low car rate at 10.9 per cent, has a personal loan rate of 18.25 per cent.
NSW Teachers' Credit Union offers a single rate for new and used cars, 11.4 per cent, and will do a REVS (Register of Encumbered Vehicles) check on used cars.
Endeavour's capped car loan has an establishment fee of $35. With rates under pressure from competition, Sala says the fee is necessary. "Explicit pricing is no longer built into the interest rate margin."
To accommodate shopping patterns, the credit union's telephone branch will approve loans on Saturdays. Members are also offered a free and independent car-buying service through Auto Search, which is linked to several credit unions. Sala says the service appeals to people who do not have the time to shop around and who have no mechanical experience. The service has been especially popular with women who have better things to do than cruising Parramatta Road.
The NAB's variable loan is 13.5 per cent. Although securing the loan against the mortgage is an option - and an advantage at 9.25 per cent - Haydn Park says the unsecured loan is by far and away the preferred option. "People still have a cookie jar mentality and want to keep their loans separately. They usually take out the loan for the life of the car and will pay it off in three to five years. They like the comfort of knowing how much it is going to cost them and how much they will have to repay so they can budget," he says.
The banks normally suggest a credit card for customers in the market for borrowings under $5,000.
Betty Weule, the manager of Credit Line, says new loan products are flooding the market daily, making it harder for borrowers to assess them. "The most important message is: shop around. There are significant differences in what you can pay for funds - 10, 15 and 20 per cent. It's also critical to establish how interest is charged so that if you make additional payments there is a benefit," she says.
Providing you are disciplined and good at making extra repayments, she says credit cards can work to your advantage and are convenient to use. For larger amounts a personal loan will be more suitable, but again check on how interest is charged. Weule is least enthusiastic about home equity loans. While there is the advantage of the lower rate, two factors should be considered. "It is secured by your house - if you default you could lose it. And while you may not get into hot water with this type of finance, easy access and the temptation to spend might mean you don't get ahead with paying off the mortgage."
Finally, don't automatically accept the finance that is offered with the car, she advises. "Many people think the finance goes with the car, but it doesn't. In all likelihood it will be the most expensive of the lot."
Another problem confronting consumers is the habit some dealers have of adding unnecessary extras and pushing up the loan value. "In one case a buyer ended up taking finance for $10,000 for a car purchased for $5,000, once break-down insurance, accident insurance etc was included."
BE prepared to negotiate on entry fees if you are in the market for a personal loan, advises Cassandra Williams, financial analyst at Cannex. It may mean a saving of $100.
"The trend is to lower application fees. A lot of institutions are getting rid of them. They don't have a lot of leeway with interest rates but they can make concessions on entry fees. They will either waive it or reduce it if they want your business badly enough," she says.
The personal loan market is being eroded by home equity loans and credit cards, with the standard product increasingly directed to the under-30s. "Home owners can obtain a cheaper source of funds through their mortgage ... If there are two incomes, the bank may suggest you amalgamate everything under one facility. But for smaller purchases you are better off with a credit card."
Some tips from Cannex:
* If you are making a substantial purchase on your credit card, ask the bank to use its simulator to show you how to pay back the loan quickly. Stick to the repayments rigidly.
* If you take out a fixed personal loan, be aware that there is usually no benefit to you if you make extra repayments or pay it back early.
* If the loan is variable, establish how interest is calculated. Is it calculated daily? How will you benefit from extra repayments?
* Generally it is more advantageous if interest is calculated daily and charged monthly.
* Watch out if interest is calculated monthly and charged monthly. Institutions are often reluctant to lend to young people who have not yet established a financial history. Williams suggests youngsters try the institution their parents use as a first step.
Credit Union Services, which represents the credit union industry, offers two publications - Focus (for ages 18 to 22) and Buying A Car On Your Terms.
TOP 10 NEW CAR LOANS
Rank Institution Prod Name
Interest Rate Min Loan Max Loan Entry Ongoing
Fees Hotline
1 Community First C/U Ltd Car Loan 10.90 $5,000
$25,000 $40 (02)9749444
2 Power CU (NSW) New Car Loan 10.95 $0 No
Max $0 1800 811 233
3 Endeavour Credit Union Car Loan 11.25 $0 No
Max $35 1800 224 008
4 NSW Teachers CU Car loan unsec var 11.40 $0 $35,000
$0 131221
5 City Coast CU (NSW) Var rate personal loan 11.90 $0
$25,000 $0 (042) 299788
6 SGE CU* (NSW) New Car Loan 12.50 $5,000
$30,000 $40 (02) 9267 9077
7 SIROCREDIT Var rate personal loan 12.95 $0 $30000
$0 1800 338698
8 ANZ Bank Pers Fully Drawn Advance 13.00 $0
No Max $100 1800 035500
9 Advance Bank X-Press Personal Loan 13.50 $2,000
$15000 $100 131 346
9 Bank of Melbourne Regulated Personal Loan 13.50 $1,000
$20000 $0 131 575
9 NAB Var rate personal loan 13.50 $2,000
No Max $100 132 265
10 Police CU (NSW) Var rate personal loan 15.46 $1,000
$30,000 $0 1800 252300
Source: CANNEX 15/10/96
For up to date rates call 019 725 663
* State Government Employees Credit Union.
Note: Membership to some credit unions restricted.
© 1996 Sydney Morning Herald
Share This