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This
booklet gives information of a general nature and is not intended
to be relied on by readers as advice in any particular matter.
We
suggest you consult your financial planner on how this information
may apply to your own circumstances.
Other
formats
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In a financial context, debt is an amount of money that
is owed to another party. Debt is commonly referred to
as a 'loan' or the use of 'credit'. Many people use credit
or loans to purchase new goods and services and pay for
them later. Debt can be a convenient way to purchase goods
and pay for them over an extended period of time, especially
for larger items that we generally can't afford to purchase
immediately, such as a home, a car or even a holiday.
Other forms of debt, such as credit cards, allow you 24-hour
access to money to shop online and give you access to
money for emergencies. Common types of credit include
credit cards, store cards, bank overdrafts, personal loans
and mortgages. All credit contracts are enforceable by
law, and involve a cost - this is the price you pay for
being able to make use of the borrowed money. The cost
of credit may include interest and other fees.
Mainstream
businesses that typically provide credit in Australia
include banks, building societies, credit unions, finance
companies and some retail stores. Other businesses provide
credit, including payday lenders, but usually with much
higher charges. It is worth shopping around to find the
right product for you. For more information about the
different types of credit products, see Smarter Banking
Make Credit Work for You. |
TIP
BEWARE OF PAYDAY LOANS
A
payday loan allows you to obtain money when you
are in dire need. Sometimes, these are available
to people who have been unable to borrow money through
mainstream lenders, such as banks. Think carefully
before obtaining one of these loans. You could end
up paying extremely high interest rates, in some
cases as high as 1000% per year. For more information
about payday loans see Smarter
Banking Make Credit Work for You. |
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THE
GOOD AND THE BADBorrowed
money is convenient because it can help us achieve our financial goals,
as long as it is managed carefully. When debt is not managed carefully
it can have a detrimental impact on your life, and can also have an
impact on your ability to be able to borrow again in the future.
Good debt is debt that a person can manage by being able to make repayments
according to the terms and conditions of the contract. Bad debt is
where a person is not able to manage the repayments.
When you are considering entering a credit contract, such as taking
out a loan, make sure you fully understand what fees and charges and
rate of interest will apply. There can be significant differences
between the charges of mainstream businesses, such as banks, and other
businesses, such as payday lenders.
WHAT'S THE BEST WAY TO MANAGE DEBT?
For
many of us, borrowing money helps us work towards
our financial goals. But from time to time, our
debt can become a burden. And for some, it can
result in significant financial hardship. The
key to ensuring that debt continues to work for
you, rather than against you, is careful debt
management. Consider these tips for paying off
your debts.
- Modify
your budget to make sure It accounts for your
debt repayments
- Pay
off debts with the highest interest rates first,
as these can cost you more in the long run
- Credit
cards require you to pay a minimum amount each
month. Consider paying more money than the minimum
required so you can pay off your debt faster
and pay less interest
- Think
about consolidating your debts if you have more
than one, but only do so if it will help you
to minimise your overall interest payments and
the fees and charges you pay.
- Once
you've paid off a debt, keep setting aside the
repayment amount to help reduce other debts
faster or put into a deposit account to help
build up your savings.
- Speak
to a financial counselor about putting in place
a debt management plan.
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COMBINE
YOUR LOANS INTO ONE AND SAVE
Consolidating your loans could mean you are able
to reduce the overall interest rate you are paying
and the fees you pay.
In addition, consolidation
can also make your credit repayments easier to manage,
as you will only need to make a single repayment
per month (rather than multiple repayments if you
had multiple credit arrangements to repay).
Always
remember, the aim of consolidating is to reduce
your overall interest rate and the amount you pay
in fees and charges. You will need to do your homework
and read the fine print to make sure consolidating
really will save you money in the long run. You
will also need to think about how you manage your
consolidated loan and any other forms of credit,
such as a credit card.
ASIC's FIDO website has a multi-loan calculator
that can assist you choose between various ways
of paying off one or more consumer loans. Visit
www.fido.asic.gov.au
and check the calculator page. |
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SOME PROS AND CONS
When
used effectively, debt provides some real
advantages. You are able to purchase expensive
items and have the use of them now, rather
than waiting until you save up the entire
price. A credit card also gives you access
to cash in an emergency and is a convenient
way to pay for items, especially when you
are traveling.
But you need to be aware that debt is not
free - interest is what you pay to a lender
for the use of the lender's money. There will
almost always be fees attached to taking on
debt. Also you may get in over your head and
be unable to make your repayments, incurring
more fees. And depending on the type of loan
you take out, repayments can also increase
as interest rates rise. |
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