Credit cards.
Personal loans.
Buy-now-pay-later (yes, it’s debt).
Tax debt.
HELP debt.
Mortgages.
Payday loans.
There are two which one could argue are ‘good debt’ – can you pick them?
If you said mortgages and HELP debt, you’d be right. The others, we generally want to steer clear of.
There’s a lot to know about debt. Rather than getting hot and heavy, let’s take things slow and get to know a bit about these ladies.
Meet Ashleigh, who has a car loan.
Ashleigh is 22 and lives with her family. When she had her first financial coaching session, she mentioned she had a car loan. She borrowed a total of $20,000. $17,000 of this was used to buy a car and the remaining $3,000 was spent frivolously. Oops.
She had no idea what the interest rate was on her loan and was shocked to hear it was 13.5% pa. The high rate was partly due to the loan being ‘unsecured’, meaning they can’t take the car if she stops making repayments.
Ashleigh’s standard repayments are $89 per week. Over the life of the loan (7 years), Ashleigh’s repayments will total approximately $31,000.
If Ashleigh increased her repayments to $150 per week ($61 per week more), the loan would be repaid in around 3 years (instead of 7). She would pay around $4,600 interest (instead of $11,000). Imagine what else she could do with the extra $6,400!
Let’s take it a step further..
Ashleigh felt like she was wasting $200 per week (as a 22 year old with a stable job and low living costs – it’s easy to do!). If she instead increased her car loan repayment to $289 (being $200 otherwise wasted + her standard $89 repayment), her loan would take around 1.5 years to repay. That’s 5.5 years earlier! Less interest too. She’d pay around $2,000 interest over this time, rather than $11,000 interest.
Ashleigh could also consider negotiating or refinancing to get a lower interest rate.
But let’s assume Ashleigh was a homeowner who instead decided to consolidate her car loan with her home loan. If her interest rate was 13.5% and it then drops to say 5%, this is a smart move, right?
Not necessarily.
Whilst the interest rate is lower, the term of the loan would be extended. If you run the numbers, you will see that the amount of interest paid on the car loan portion would be substantially higher than what it was under a 7 year term, despite the lower interest rate.
The moral of the story? If you can, consider the appropriateness of making higher repayments.
Meet Natasha, who recently checked her credit report and credit score.
Natasha has been working on her finances. As part of this, she decided to check her credit score and credit report to know where she stands and correct any mistakes.
There are a few providers to choose from. Natasha chose to use Canstar for her credit score check. It was simple, free and didn’t affect her credit file. For her credit report, Natasha opted to use Equifax. You’re entitled to access your report for free once every 12 months and it only takes a few minutes. You’ll need your driver’s licence and Medicare card to verify your identity.
A better score will help with loan approvals and negotiating better rates. For Natasha, it was also a way to check for, and correct, mistakes that had been made.
If you find any mistakes in your report and have trouble sorting it out, reach out to a financial counsellor to see if they can assist. Financial Counselling is a free service in Australia, available via organisations such as the Salvation Army (1800 722 363) and the National Debt Helpline (1800 007 007).
The moral of the story? Check your file.
Meet Lisa, Lesley and Lorraine, who all have a credit card.
Lisa has had a credit card for over 10 years. She has always repaid the full amount owing each and every month. Whilst she incurs an annual fee, she’s never paid any interest.
Lesley on the other hand, has had outstanding credit card debt for as long as she can remember. She only ever pays the minimum and buries her head in the sand about the interest (which totalled $2,000 over the last 12 months!).
Lorraine’s situation is different again. She has outstanding credit card debt, but also has savings. Her savings are more than sufficient to extinguish the debt, but she’s reluctant to use her savings to pay it off. She’s earning 2% interest on her savings and paying 22% interest on her credit card. It’s like trying to walk up the escalator that’s going down.
The moral of the story? If you have a credit card, pay it off in full each month. If you can’t, seek support from a financial counsellor or financial coach.
Meet Karina & Jason, who has a mortgage.
Karina considers herself a savvy shopper and always focuses on getting the best deal. But she also consistently avoids some important life admin – negotiating their home loan interest rate. Sound familiar?
Even a small reduction on their $600,000 home loan will save her thousands.
The moral of the story? Prioritise and focus on areas where you can make the biggest impact. Whilst small amounts do add up, start with the tasks that ‘move the needle’ the most.
Meet Stacey & Josh, who received a refund on their junk insurance premiums.
Junk insurance? What’s that? It’s also known as consumer credit insurance. Many have it, but few realise. Insurance is generally a good thing, but as Moneysmart points out, consumer credit insurance is poor value. That’s why businesses such as Claimo successfully claim refunds for the premiums.
Stacey & Josh opted to DIY and claim their refund on their own. They received a $2,800 refund for a policy on a loan that had already been closed down!
The moral of the story? Check your existing documents and read the fine print.
Meet Sam & Alex, who got into trouble with buy-now-pay-later (BNPL).
Let start by acknowledging most BNPL purchases are for wants, not needs.
Research has also shown that using BNPL results in an increased cart size. That means you’re more likely to spend more with BNPL, than if you were using your own money upfront.
BNPL can be a slippery slope. In fact, in one week alone, Sam & Alex had BNPL repayments totalling $929. In the prior 3 months, a quarter of their income went towards paying for things that had been purchased with BNPL!
The moral of the story? Best to steer clear of BNPL, even if they claim it’s a ‘budgeting tool’.
Meet Jess & Dan, who opted for an interest free deal.
Jess & Dan were buying a lounge. They ended up applying for an interest free deal. But in doing so, they lost negotiating power on their purchase. Furniture, white goods and electronics sold by major retailers are all negotiable – even when they’re on sale!
The moral of the story? There are pros and cons to everything.
Meet Matt, who was in a payday loan spiral.
Matt recently borrowed $1,900 from a payday loan lender. Once the high establishment fee and monthly fees were added, the amount to be repaid was $3,200. Ouch.
Some are ‘better’ than others, but if you’re in a position where you’re contemplating taking out a payday loan, reach out to a financial counsellor first. You may even find you’re eligible for a ‘No Interest Loans Scheme (NILS) loan’ instead.
The moral of the story? Payday loans – don’t even go there.
Meet Toni, who learnt about the snowball and avalanche methods.
Both of these are debt repayment methods.
The snowball method involves repaying the smallest debt first, regardless of the interest rate.
The avalanche method promotes repaying the debt with the highest interest rate first.
Even though the snowball method is not the fastest way to repay debt, many people have more success with this because they experience the feeling of achievement sooner.
The moral of the story? What is best for one person, won’t necessarily be best for another.
