A recent MoneySmart report by ASIC found that around 63 per cent of Australians have experienced a cash shortfall between pay dates in the year preceding the report.
And while the above outlays are far from essential spending, as a nation we are increasingly treating lifestyle expenditure as a necessity.
We could blame the proliferation of social media and constant digital connectivity for this growing social pressure to attempt to have it all, all of the time – to spend on lifestyle, sometimes before considering how much might be needed for the essentials.
So how might we best meet these unexpected needs for cash?
The old model: long-term debt for short-term cash
Our “go-to” source of small personal finance has traditionally been the credit card.
It’s not unusual to hear of friends or family who seem to be forever juggling repayments on massive credit card debt – a financial struggle with seemingly no end in sight for some.
But the strangest aspect of this scenario is the way that one-off purchases are being serviced by a long-term credit facility.
The normalisation of just “putting it on credit” has led many Australians to adopt the habit of maintaining a certain level of personal debt, in order to meet ad hoc, one-time cash needs.
And it’s a situation that hasn’t just happened by chance.
It’s not a secret that the business models of many credit card companies are based on consumers never repaying their debt or taking years to do so.
The ASIC MoneySmart credit card calculator estimates that the average credit card debt of $3,300 at the average rate of 18 per cent can take 26 years to repay at a total cost of $10,670 if making the encouraged minimum repayments – a handy profit for the credit card company.
But according to ASIC, Australians do appear to need access to personal credit every so often. So is there a way to meet these individual cash shortfalls while avoiding the ongoing debt trap?
The new model: a snack-sized approach
Luckily, a more appropriately structured and credible option is becoming increasingly available.
A new form of financing based on tech innovation is steadily emerging as a more suitable means to consume credit in smaller, snack-sized portions.
Though the short-term loans come with interest costs (like any type of finance), borrowers can treat themselves occasionally, and still be debt-free in no time.
Importantly, the key takeaway here lies in the attitudinal change this type of model encourages, with a sharp movement away from the long-term debt accrual mentality that we’ve just come to accept over the years.
Further to this, recent tech advances in fintech mean that the loans are also now being delivered in a way that’s much more suited to the current generation of digital natives.
Our behavioural science team has determined that around 68 per cent of our loan applications are initiated from a mobile device. Twenty-five per cent of these are thought to have occurred while on public transport, and a further 10 per cent while waiting for a service provider, such as a doctor or hairdresser.
So these small loans may also be more appropriate in terms of delivery, given our increasingly digitalised and convenience-based approach to life.
Like Uber, Netflix and AirBnB – digital innovators who use technology to deliver products or services in the manner most suited to the consumer – snack-sized debt is about meeting a consumer need in the way that works best for them.
When it comes to personal finance, this could involve consuming one-off, snack-sized debt for one-off, snack-sized purchases.
It simply makes sense.
Clayton Howes is the chief executive of small-amount consumer finance company MoneyMe.
