How Borrowing Habits Change After COVID-19
The coronavirus pandemic has affected not only the economy and social interactions but also how people spend and manage their finances.
Aside from spending less and saving more, many are tapping into the benefits of financing to get through their daily lives—from individuals who have lost their jobs and in need of money to support their family to businesses that deal with enormous cash flow pressures.
Here are some changes in borrowing habits post-COVID-19:
1. Going digital for financing transactions
From loan applications to repayments, more and more people are relying on the internet to do most of their borrowing errands.
Fintechs like Positive Lending Solutions are in the frontier of lending innovation as most of their processes are performed online even before the coronavirus outbreak. They make borrowing experience easy, smooth and fast with online quote requests, loan calculators, and pre-approval applications that are done in the click of a button.
Traditional banks have also adapted to the changing world with more and more digital improvements. Now, almost all banks have mobile apps to help clients do banking transactions, including inquiring and applying for loans and making repayments, while at home or on the go.
2. Filing for repayment holidays
Repayments holidays existed before coronavirus but their significance was greatly felt amid the pandemic when many people lost their jobs and were unable to repay their loans.
Most of the banks and lending institutions have offered repayment holidays during the pandemic outbreak. This limited-time offer differs from one company to another.
In Australia, the Big Four banks (CBA, ANZ, Westpac, NAB) and some of the smaller banks and lenders have allowed mortgage borrowers affected by the COVID-19 pandemic to pause their home loan repayments (repayment holiday) for a period of up to six months since March.
Some of these repayment holidays are still ongoing. Those who haven’t yet taken a mortgage payment holiday will be able to apply for a three-month break until the end of October 2020.
Some credit card issuers have also offered payment holidays for borrowers who were struggling to pay their bills during the coronavirus lockdown.
Despite the temporary relief, borrowers should be aware that interest is still incurred on the loan over the hold period. This could cost them more throughout the life of the loan. Some lenders may also charge fees on repayment holidays, which again adds to the overall amount of the loan.
3. Getting Chattel Mortgage and Equipment Financing
A lot of Aussies are taking out loans to buy commercial vehicles and business equipment and take advantage of the $150,000 instant asset write-off threshold, which was announced in March to help more business owners get more tax deductions on their expenses.
From 12 March 2020 until 31 December 2020, the Australian Taxation Office set the threshold amount for each business asset to $150,000 (up from $30,000) and expanded to cover businesses with an aggregated turnover of less than $500 million (up from $50 million).
The government has also provided an additional depreciation write-off scheme for asset purchases valued over $150,000. (Visit the Australian Taxation website to learn more about the requirements and coverage of these programs.)
Meanwhile, car leasing has fallen off tremendously, in part because many people who favour leasing extended their leases during the pandemic lockdowns.
When it comes to the types of cars being financed, many borrowers are financing used vehicles, partly because new car inventories are down because factories haven’t been producing new vehicles for some time.
4. Taking out Business Loans
A lot of businesses had been negatively affected by the lockdown and social distancing measures. To help Australian small and medium enterprises survive, the government had provided several financing assistance.
- Coronavirus SME Guarantee Scheme, which supports up to $40 billion of lending to SMEs including sole traders and not-for-profit companies. Under the scheme, the Federal Government also guarantees 50 per cent of new loans issued by eligible lenders to SMEs.
- Temporary increased in the threshold at which creditors can issue a statutory demand on a company and the time companies have to respond to statutory demands they receive
More SMEs are also tapping into various sources of financing to fix the temporary gap in their business cash flow or reopen after shutdown, such as:
- Business loans from banks, credit unions and online lenders
- Business lines of credit and credit cards
- Equipment financing
- Merchant cash advances
- Inventory financing
- Purchase order financing
While business loans are everywhere, SMEs must remember that they are also competitive. Businesses are likely to get approved and get low-interest rates and favourable terms if they are profitable, established, and have a good business credit score.
5. Frequent credit card use
Ever since the coronavirus forced many people to spend more time at home, online shopping has become part of day-to-day life. Most of these online stores require the use of credit and debit cards for payment.
This means that more and more people are purchasing online stuff using credit cards. With mobile banking, online credit card repayments is not an issue.
While credit cards are helpful for online shopping, cardholders are reminded to use their cards sparingly to maintain a good credit score. The ideal credit card utilisation is around 30% of the credit limit.
When one maxes out their credit card, their credit score takes a hit. Debt usage or credit utilization makes up 30% of the credit score. Even if approved for a loan, a lower credit score means a higher interest rate.
Changing Attitude Towards Debt and Financial Health
In recent months, lenders have been handling a lot of requests for relief and dealing with the internal issues facing all banking organisations. Now, lenders are going to have to see who can resume payments, who needs refinancing or modifications, and who can’t pay.
Borrowers, on the other hand, are paying more attention to their financial health. They will be working to protect their credit standing going forward.
As lenders also tighten up in certain areas, an interesting alignment is created: a decrease in demand and a decrease in supply at the same time.