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BORROWED
MONEY COMES AT A PRICE, AND THAT PRICE GENERALLY TAKES
THE FORM OF INTEREST, OR FEES AND CHARGES, OR BOTH. THE
COST OF A CREDIT ARRANGEMENT WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING THE TYPE OF CREDIT YOU SELECT, THE
AMOUNT YOU BORROW, THE TYPE OF PROVIDER OFFERING THE CREDIT,
THE TIME YOU'LL TAKE TO REPAY THE DEBT, AND WHETHER OR
NOT THE CREDIT IS SECURED OR UNSECURED.
GENERALLY, THE MORE YOU BORROW AND THE LONGER YOU TAKE
TO PAY IT OFF, THE MORE INTEREST YOU PAY.
WHAT
IS INTEREST?
Interest is the amount you pay to the credit provider
for the use of their money. The interest you pay is calculated
as a percentage on the amount of money you have borrowed
(or the amount you still owe), and is then added to the
total amount you must pay back. Interest is usually payable
at regular intervals over time.
The type of interest can vary depending on the credit
product and the credit provider. For example, personal
loans may be described as fixed rate or variable rate
loans, while credit cards may be described as offering
interest-free days or offering ongoing interest. Let's
have a look at some of these terms in more detail. |
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FIXED
RATE LOANS
Fixed rate loans mean the interest rate is set for the life of the
loan. Your repayment amount and frequency may also be set at the beginning
of your term. With such loans, you may have to pay an early repayment
fee if you make additional repayments along the way or pay out your
loan early.
Fixed loan repayments are easy to include in your budget
as you always know what your repayments will be - they'll never change
until the loan is paid out. Fixed rate loans are protected from changes
in interest rates. While this means that if interest rates go up,
your repayments will still stay the same, it also means that if interest
rates come down, your repayment amount won't.
You may also be able
to get a fixed rate loan which is 'interest only' in that the principal
is repayable at the end of the loan and you only make interest payments
during the loan term.
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VARIABLE
RATE LOANS
Variable rate loans have interest rates that
are subject to change. Such changes may occur at the credit providers'
discretion or according to market rates. If the market rate goes up,
so will the interest payments on your loan, and if market rates come
down, your interest payments will decrease as well.
With most variable rate loans it is possible to choose the frequency
of your repayments, for example, you might choose to make a repayment
weekly, fortnightly or monthly. You also have the freedom to make
additional payments at any time, or simply increase the amount of
your regular repayment - two strategies that will help you to pay
off your loan faster and therefore save on the overall amount of interest
you pay. Depending on the loan, you may incur an early termination
fee if you pay out your loan earlier than the term stated in the loan
contract.
Variable rates typically also apply to personal overdrafts and credit
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INTEREST-FREE
DAYS ON CREDIT CARDS
Many credit cards offer interest-free
days - this is a set number of days during which interest
is not payable on new purchases. If purchases are not paid
off in full by the end of the interest-free days period, interest
will become payable on the purchases, up until the time they
are paid off in full.
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HOW
TO PAY NO INTEREST
If you have a credit card with interest-free
days, avoid paying any interest on your purchases by always paying
the total amount owed on your statement (not just the minimum payment)
by the due date. |
The
interest-free days available are usually up to 44 days, although some
credit cards may offer up to 55 interest-free days. You will be sent
a statement at the end of each billing period that shows you the full
amount owing as well as the minimum payment required. Unless you pay
the full amount owing (not just the minimum payment), by the relevant
due date you are likely to incur interest on both the outstanding
balance and new purchases in subsequent statement periods until the
entire debt is paid off. This is subject to the terms and conditions
applying to your credit card which may provide for interest to be
calculated in a different way. Interest charging terms are important
and you should pay special attention to them.
Store cards may also allow you to buy goods on credit and pay no interest
for, say, the first six or twelve months. After that, interest will
be payable and that interest may be at a relatively high interest
rate (and may even be backdated to the date of the original purchase).
Paying minimum repayments only can be a costly way to pay off your
credit card debt. The consumer watchdog, the Australian Securities
and Investments Commission, advises that paying off a credit card
debt of $1,000 can take more than 11 years if paying minimum payments
only, and would cost $860 in interest. Paying a debt of $10,000 would
take 27 years, and would cost $11,000 in interest!*
*Source: Australian Securities and Investments
Commission, www.fido.asic.gov.au.
Calculations are based on a typical credit card with an interest rate
of 16% per year, and minimum repayments of 2.5% or $10 (whichever
is the lesser), and interest charged from the date of purchase. |
ONGOING
INTEREST ON CREDIT CARDS
Not
all credit cards offer interest-free days. Some cards charge
interest from the time the purchase is made until the time
the purchase is paid off in full. However, these cards usually
offer lower rates of interest than the interest applied to
a card with interest-free days.
So, disciplined spenders who pay off the outstanding balance
on the card in full, every month, by the due date, might consider
a credit card that offers interest-free days, as they will
be able to avoid any interest payments (if they stick to the
payment plan). Interest savings could also be achieved if
only part of the outstanding balance is paid off.
However, people who are more likely to always carry some amount
of debt on their credit card may be better off considering
a card with a low rate of ongoing interest - even though there
are no interest-free days, the overall interest to be paid
is likely to be lower in the long run depending on spending
patterns.
You should also remember that, although many credit card terms
offer interest-free days on credit cards, it is common practice
to charge interest on cash advances on a credit card account
from the date the cash advance is drawn until it is repaid
in full.
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COSTLY
CASH ADVANCES
A cash advance on your credit card is when you
use your card to withdraw cash. Sounds simple enough - but cash advances
are usually an expensive way to access cash.
Most cash advances incur
interest from the date you obtain the advance, right through until
the date you pay off the advance in full. You might also incur a cash
advance fee, usually around 1.5% of the total amount advanced. |
LOW
INTEREST AND INTEREST-FREE CREDIT OFFERS
Sometimes you may see loans or credit cards offering low interest,
or even no interest, for a fixed period of time (for example,
for six months or one year). Some of these offers provide good
opportunities for consumers. However, some also come with a
catch.
Some low interest loans may only offer low interest for a certain
period of time, (often called the 'honeymoon period'). Once
that period is over (usually after six months or a year), significantly
higher interest rates may apply from that point forward. |
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OTHER
FEES AND CHARGES
In
addition to interest, other fees and charges usually apply
to credit arrangements, such as annual fees on credit cards,
or administration fees on personal loans. The credit provider
has the obligation to let you know what fees, charges and
interest rates apply and when they will apply. It is vital
to be fully aware of any fees and charges that apply (as well
as interest rates) before entering into a credit arrangement.
In the table below, we've summarised some of the typical fees
and charges that apply to credit products. We can't tell you
how much the fees are in each case, as they will differ depending
on the credit provider and depending on the credit product.
The credit provider will be able to tell you more about any
costs that apply to the products they provide.
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COMMON
CREDIT FEES AND CHARGES
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| Administration
fee (also called 'account-keeping fees') |
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| An
ongoing fee that may be charged on some personal loans
at regular intervals - such as monthly or yearly, depending
on the loan and depending on the provider. |
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| Most
credit cards now have an annual fee which is applicable
to all card holders on the account. |
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| May
be charged when applying for a loan, and may still be
payable even if your application is not successful. |
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| Usually
applied when obtaining cash on your credit card - it may
be charged as a percentage of the total amount advanced. |
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| May
be charged if you have tried to make a payment with a
direct debit, and the payment was declined because you
have exceeded your credit limit (if paying with a credit
card) or didn't have enough funds in your account (if
paying from a bank account). You may also incur a charge
from the business you were trying to pay…such as a gas
company if the direct debit was intended to pay your gas
bill. |
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| This
fee may apply to a personal loan if you pay out the loan
earlier than within the stated term of the loan. |
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| This
one-off fee may be applicable when you open a personal
loan or other form of loan. |
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| Government
taxes and charges |
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| Government
taxes, such as stamp duty, may apply to some credit arrangements
depending on the state or territory you live in. |
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| Federal
and State Governments, where applicable |
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| Merchant
fees (also known as surcharge fees) |
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merchants may choose to charge a fee when you pay for
goods or services using your credit card. Merchants are
required by law to tell you if a fee applies for credit
card transactions, and how much that fee is. |
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| If
you have exceeded the limit on your overdraft or your
credit card, you may incur an overdrawn account fee. |
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| Overdue
payment fee (also known as late payment fee) |
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fee may apply if you miss a payment on your credit card,
or if you miss a repayment on a personal loan. |
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| Of
the credit cards that offer reward programs for card holders,
many charge an annual reward program fee (this is in addition
to the annual fee for the credit card itself). |
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RELATED
PRODUCT COSTS - CONSUMER CREDIT INSURANCE
Some
credit providers may offer consumer credit insurance (CCI)
when you apply for credit. CCI is not compulsory. If you do
take out a CCI policy, you can cancel it at any time.
However,
if you become unemployed or disabled, CCI policies usually
pay part of your monthly balance for a set period. If you
die, CCI may also cover all your balance up to a set limit.
The cost of your cover often depends on your outstanding monthly
balance. You will need to read the policy wording carefully
and then decide whether the risks you are taking are worth
the cost of taking out the insurance.
You may cancel your CCI policy and get a refund, within 14
days of first receiving confirmation of your CCI policy or
at the end of the 5th day after the policy was issued or sold
to you.
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COMPARISON
RATES
In
accordance with the Consumer Credit Code (see Credit
providers and the law), lenders are required to make 'comparison
rates' available for their fixed term credit products, such
as fixed term personal loans and home loans.
The
comparison rate is a tool for helping consumers identify the
cost of credit. It is a rate which includes the interest rate
(sometimes also called the 'annual percentage rate') of the
loan, as well as certain fees and charges that relate to the
loan. So, while a personal loan may be advertised with an
interest rate of 5.75% per year, once fees and charges are
taken into account, its comparison rate may in fact be 6.25%
per year.
Looking
at the comparison rate can be useful. But consumers should
be aware that comparison rates don't include all fees and
charges. For example, Government fees and charges such as
stamp duty and other taxes are not included, nor are one-off
charges that might only apply in certain circumstances, such
as redraw fees or early repayment fees or overdue payment
fees if you miss a repayment.
They
also don't include other factors which may make the loan more
attractive or less attractive than other similar products,
such as discounts on other products offered by the same lender,
or flexible repayment arrangements. |
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TOP
TIPS FOR KEEPING FEES AND INTEREST DOWN
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Avoid
late fees on loans and credit cards by always paying
your bills and instalments by the due date |
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Avoid
over-the-limit or dishonour fees on overdrafts and credit
cards by always staying within your credit limit |
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Try
to keep your credit card interest charges to a minimum
by always paying more than just the minimum payments |
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If
your credit card offers interest-free days, avoid all
interest charges by always paying your bill in full
by the due date - that means paying the full closing
balance shown on your statement, not just the minimum
payment |
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Always
try to avoid costly methods of accessing money, such
as obtaining cash through credit card cash advances |
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Try
to keep to one credit card only - not only will your
credit situation be easier to manage, you will also
avoid doubling up on annual fees |
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CONSOLIDATION
LOANS - DO THEY SAVE YOU MONEY?
If
you have more than one personal loan, it may be worth looking
into consolidating your loans - you may be able to reduce
the overall interest rate you are paying, and you may be able
to reduce the fees you pay. Consolidation loans can also make
your credit repayments more easy 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. Watch out for unscrupulous dealers who advertise
consolidation loans that seem to be a convenient answer to
all your debt problems, but instead trap you into paying even
higher rates of interest, as well as fees and charges.
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