Personal Lending Part 1 Personal Loans & Credit Cards

Credit Cards

From time to time we will all call upon different forms of credit to facilitate a major purchase. Based on how common this actually is, I thought I would take the opportunity to discuss the pro’s and con’s and their impact in this blog. 

Firstly, let me put it on record I am not against personal finance – I spent more than 14 years of my professional life working for a specialty personal loan provider. What I know is there are some important things you should be aware of when you are looking at personal finance.

Contrary to popular belief, obtaining a personal loan is not a simplistic thing. Personal loan lenders will require an assessment of your personal (and co-borrowers) financial information – this may include credit scoring your application against their criteria, reviewing/verifying your employment, income and finally reviewing the purpose of your loan and your expenses (outgoings) thus confirming the affordability of the new loan.

It is important to note that personal loans like car loans and credit cards are assessed in the same way that home loans are. In some instances it may be harder to obtain an approval as most personal loans and all credit cards because they are unsecured. An unsecured loan means that no security (eg car or house) is attached to the loan. This means in the event you default (don’t pay) the loan is written off as a bad debt. Remember the ramifications for non payment of any debt may include a default, court writs or judgments being lodged on your credit file (VEDA) – this is what is commonly referred to as “bad credit” . When a client has “bad credit” it makes it very difficult to obtain finance for any purpose.

Personal loans generally have varying interest rates, it is not uncommon for interest rates to be around 20% (twenty percent) – to put this into perspective a $5000 loan over a 12 months at 19.95% will only cost the borrow $557 in interest charges. It is important to note that as you pay down your loan interest is calculated on the balance. Most lenders will allow extra repayments at no cost but almost all will have a penalty for paying out your loan early. This figure in many instances is less than the total interest that would of been paid. Some lenders have monthly fees that only last for the time you have your loan opened and cease when you pay your loan out.

In a nutshell, like applying for any finance, ensure you have a plan for your purchase. Make sure you are in a financial position to a) gain an approval & b) afford the repayments and finally ensure you understand the financial obligation you are signing up. Review the fee structure, review the repayments and frequency and more importantly make sure there aren’t any extras in your contract without your permission – this can include insurances and warranties.

Credit cards used to be how people established a credit rating – now people card surf to take advantage of 0 percent balance transfers, frequent flyers points & no/ low interest offers etc. Credit cards are typically approved based purely on the information contained on your application (basic verification including a review of your previous conduct and credit file). In many instances, applications can be made online and an answer can be gained in minutes – a review of a limit may take a little bit more. Like everything, you pay for what you get, how you pay is via monthly/annual fees and the interest rate. Cards with frequent flyer points, various insurances and not forgetting prestige colours ie gold & platinum will typically cost more than a basic no frills card with features – think of it like buying a car, the base model features the top of the range features.

There are a couple of things all borrowers need to be aware of when utilising this type of facility. Firstly, interest rates on most credit cards are between 15-25%, with most rates being set at 17.99%. When you draw money from a credit card you can expect to pay interest rates 22% and above. I strongly recommend you review the rates on all your credit cards to ensure you know what you are exactly up for before you use the card. There is always confusion over the interest free periods – it must be said that there is subtle differences amongst most cars but in general the interest free period is only applicable when there is nothing owing on the card. If there is an existing balance then some cards will hit you an interest charge straight way – again is makes sense to double check your card.

In my humble opinion the biggest charge in the last 10 years for credit cards is the need to disclose the time it will take pay off you card based on your repayments. This is a fantastic step to ensure the card holder has some transparency on a) the time it will take to pay off your card and b) the interest charges. I helped a client move her credit card to a personal loan as she was not reducing her overall balance – it was going to take her 71 years and over $39000. The scary part was that this was a credit card with a $5600 limit. Please always make sure you are reviewing this part of your statement, generally it is right in the middle.

With over 16 million credit cards in Australia (the most popular credit facility in the country), they are also one of the most profitable products for banks. It should come as no surprise when you receive special offers to increase your limit or other tempting offers to get you to use your card more. If you need to use your card just have a plan to pay if of sooner rather than later.

So just to reiterate, personal lending products are not all bad, but they can get customers into trouble if you over spend on credit cards and make minimum repayments. Always ensure you have a plan and always plan to pay them off. If you need help getting your debts sorted out seek help and be disciplined on what is required to pay them out.

Remember that we’re here to help you find the right loan to meet your personal financial circumstances. No matter how bad you might think it is, call us to discuss, we might be able to structure your loans and choose the right loan products to help you.

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