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WHAT
IS CREDIT?
Credit is borrowed money that allows
you - the borrower - to buy goods or services now, but
pay for them later. The business that provides you with
the credit is called the lender, or the creditor. Businesses
that typically provide credit in Australia include banks,
building societies, credit unions, finance companies,
payday lenders, and some retail stores.
When you borrow
money you enter into a credit contract, sometimes called
a 'credit contract'. Common types of credit, such as credit
cards, store cards, an overdraft on your bank account,
personal loans and even mortgages, all involve some sort
of credit contract.
All credit contracts are enforceable
by law, and all involve a cost - this is the price you
pay for being able to make use of the borrowed money.
The costs of credit may include interest and other fees
and charges, (see page 9 for more detail).
Under the terms
of a credit contract, you and your lender both have certain
responsibilities. For example, you, as the borrower, are
required to pay back the borrowed money within a certain
time frame and according to certain terms and conditions.
Meanwhile, your lender has a duty to give you important
information about the loan, such as a full explanation
of the terms and conditions and any credit fees and charges
that may apply. |
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WHY
USE CREDIT?
Credit can be a convenient way to purchase goods and pay for them
over an extended period of time - especially larger items that we
generally can't afford to purchase on the spot. For example, a personal
loan can make it possible to obtain a car, and then pay it off in
instalments over a few years. A mortgage makes home ownership possible
for many Australians, as most of us would simply never have the money
to pay the full amount up front. Credit cards are another form of
credit for day-to-day purchases - they provide a number of benefits
including 24-hour access to money, the ability to shop online, and
access to money in emergencies. A variety of credit options are available
to everyday people for everyday purposes, and each has its own mix
of pros and cons…
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CREDIT
CARDS
Credit cards are one of the most widely used
forms of credit. They are readily available from most banks and other
financial institutions. A credit card gives you access to a certain
amount of borrowed money. The amount of money you have available (usually
called 'credit limit') is agreed with your credit provider when you
obtain your credit card (but it can also be varied later). You are
free to spend some or all of that money over any given period. At
the end of each period (usually one month), you will receive a credit
card statement. This statement lists all of the purchases you have
made using your card over the period, and also serves as a bill that
you must pay by a certain date. You are usually required to pay a
minimum payment every month - although you are also able to pay more,
even all, of your bill if you choose (and doing so may save you interest). |
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Credit
cards are one of the most popular forms of credit available.
They offer 24-hour access to money and they're extremely portable,
with most major cards being accepted around the world. Also
they can be safer to carry around than large sums of cash. They
can also be convenient in unexpected situations where you don't
have enough cash to cover a bill - for example, if your car
breaks down and you need urgent repairs or if you need unexpected
medical attention and must pay the bill immediately.
But all this convenience comes at a cost - interest rates on
credit cards are usually higher than those on other forms of
credit (such as personal loans). Fees such as account fees and
transaction fees may also be charged, depending on the card
provider and on how you use your card. Their convenience also
makes it easy to spend without thinking about how the money
will eventually be paid back.
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SECURED
CREDIT VERSUS UNSECURED CREDIT
All credit arrangements are either 'secured'
or 'unsecured' forms of credit. Secured forms of credit require
you to provide an asset (such as a car) as security for the
loan. In the event that you fail to pay back the loan, the
lender can potentially claim that asset as full or part payment
for the loan amount outstanding. Home loans and some personal
loans are usually secured forms of credit, as are some personal
overdrafts.
Unsecured credit is any credit arrangement where you do not
have to provide an asset as security against the loan. Credit
cards, store cards and some personal loans and overdrafts
are usually unsecured forms of credit.
Note: unsecured credit usually comes at a higher interest
rate than secured credit.
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STORE
CARDS
Store cards are credit cards, but which are
generally offered by stores or large retailers. You can use the card
to purchase goods at that store (or group of stores). Some store cards
can be used anywhere, not just to buy goods or services from the card
issuer. In that sense they are more like the general purpose credit
cards described on page 4. With store cards, like other credit cards,
you will usually receive a monthly bill. Some bills may require a
minimum payment, a regular fixed payment amount, or, depending on
the card type, you may need to pay back the full amount spent by the
end of each period. |
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a store card holder may entitle you to certain benefits such
as an interest-free period or a discount on certain purchases
made using your store card. Some store cards may charge higher
interest rates than general purpose credit cards. They may also
charge a variety of other fees. And, of course, they are not
always transportable, that is, you can't necessarily use them
anywhere but at the issuing store or retail group.
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PERSONAL
LOANS
Personal loans, such as those available from
banks, allow you to borrow an amount of money to pay for larger items
- such as a car or a holiday - over extended periods of time. The
amount of the loan can differ depending on the institution or business
offering the loan, your financial situation, and your requirements.
Once the loan is approved you can pay for the item using cash or a
cheque. You will then be required to pay back the loan to the lender
in instalments over time, at an interest rate determined by the lender.
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Personal
loans are suitable for larger purchases that will need to be
paid off over a long period of time - for example, over a year
or a few years. They generally have lower interest rates than
credit cards. They need to be paid off in a series of instalments
over an agreed period of time (the 'term').
As well as interest,
personal loans may come with extra fees and charges, especially
if you miss a payment or don't pay it back in the time agreed.
These fees may, however, also apply to other types of finance
such as credit cards. |
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PROVIDING
A GUARANTEE
Sometimes, security for a loan is provided
in the form of a guarantee. This is when a person, referred
to as the 'guarantor', agrees in writing to pay back a loan
on behalf of the borrower in the event that the borrower isn't
able to, or refuses to, pay back the loan.
'Going guarantor' for anyone, even if they are a family member
or friend, is a risky move that requires extremely careful consideration.
If that friend or family member fails to repay the loan, as
their guarantor, you will be solely responsible for paying back
the full amount owing. If you are not able to pay back the money
owed, the lender may take legal action against you.
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PERSONAL
OVERDRAFTS
An overdraft is a credit facility offered by
some banks to eligible customers. It is attached to your everyday
bank account, and allows you to spend more money than you have in
the account - but only up to an agreed credit limit. |
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repayments tend to be more flexible than repayment arrangements
on personal loans, in that you can usually pay them off in ad
hoc amounts over time. Of course, interest charges apply, and
additional fees and charges may apply if you exceed your overdraft
limit. |
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PAYDAY
LOANS
Payday loans are generally small, short-term
loans that are provided between paydays. They can seem particularly
attractive to customers who have been unable to obtain a loan from
more mainstream financial institutions such as banks, building societies
or credit unions, as they don't always put customers through the same
sort of credit checks as these other institutions. |
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While
payday lenders appear attractive with promises of quick and
easy cash, there is a catch - extremely high interest rates.
The rates that can be charged by payday lenders may be regulated
differently depending on what state or territory they operate
in. In some states, payday lending rates may be capped (for
example in Victoria, payday rates are capped at 48%), but in
other states and territories it is possible to pay more than
1000% interest per year on a payday loan - that's ten times
the amount you borrowed, per year.
It is critical that you read the loan contract very carefully
before signing up for a payday loan - if you are unsure, or
if you are feeling pressured by the payday lender, walk away
and seek another alternative. |
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TOO
GOOD TO BE TRUE
Payday loans may seem to offer quick and easy cash when you need it most, but in some states or territories it is possible to pay more than 1000% per year in interest on a payday loan - that's neither quick, nor easy, to pay off.
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LOANS
THROUGH FINANCE BROKERS
Finance brokers are go-betweens who negotiate
loans for their customers. Some people might use a finance broker
if they don't understand how and where to obtain loans, or if they
are concerned because they don't speak English or have trouble understanding
financial information. |
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Approach
finance brokers with care - while many may be able to assist
you to find a loan that is appropriate for your needs, some
may charge you a fee for this service. Furthermore, some can
recommend loans which may not be suited to the customer but
for which the broker may earn a higher commission from the lending
institution issuing the loan.
In many cases, it is simply cheaper to do your own homework
by shopping around and visiting a variety of credit providers,
then comparing the products they offer, and making your own
decisions about which products will suit your needs and provide
you with the best value for your money. |
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