Low cost debt options

The personal lending market in Australia has grown considerably over the past 10 years. When you throw in the credit card market the combined personal debt that Australian’s have is close to 110 billion.

The Australian lackadaisical “she’ll be right” right attitude often means that we are not always the best at searching around and seeking out the cheapest finance options. In fact, Australian’s in general are not great at managing their finance and this is particularly true of lower and middle Australia.

If you do need to get finance for one reason or another, often the cheapest way is via a low-cost cost no frills credit card which generally have very competitive rates. Either that or a personal loan from your bank, might see you looking at rates around the 10 per cent mark. Many credit cards offer an interest free period of 45 days so if you expect you can pay off any debt by then, the debt can often be interest free. If you think you can achieve this, than that option is probably better than a personal loan that can attract interest. However, banks don’t offer this as a give-away, the assume that most people can’t pay off their debt within the interest free period. Often credit cards that have extra benefits (such as rewards programs etc) have much higher interest payments, sometimes above 20% even in this low interest rate environment. If you are cash strapped it’s probably always better to go for a no-frills option as your total interest repayments will be a lot lower. If you are in significant credit card debt, it’s also worth considering a zero balance transfer credit card. These sort of credit cards allow you to transfer your balance and pay zero interest for an extended time, often as long as two years.

However, for many Australian’s these sorts of options are not available due to poor credit ratings. There are a growing number of Australian’s who participate in what is known as the payday lending or cash loans market, where rates can be considerably higher. However, even within this market, you can do things to minimise your repayments. For example, a medium amount credit contract ($2000 loan to $5000) has a maximum annual interest rate of 48%, but if you pay your loan off in regular instalments the overall interest you pay can be substantially lower than his often around he 20% mark. Loans below $2000 generally incur a higher setup cost relative to the size of the loan and higher fees and charges. So a little known fact is that if you are looking to borrow around $2000 from a payday lender, it’s more cost effective to make sure you get a loan for just over $2000 which fall into the category known as medium amount credit contracts (MACCs) which have slightly lower fees and charges and are better geared for early payback.

The other point worth mentioning, if you are in debt it’s often worth considering a debt reduction company that can help you negotiate with creditors and reduce your overall debt burden. The key to choosing one of these providers is to choose a provider that will not charge you an upfront free but only a success fee. In fact the regulator ASIC has suggested that this is a good approach.

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