Most of the news stories are centred on the negatives of debt, but in reality there are plenty of positive aspects to personal debt. After all, very few of us could actually afford to purchase a home or attend university without some sort of assistance through credit. The key is to make debt work for you, not against you.
It pays to be informed about debt
While financial jargon can make debt seem confusing or overwhelming, it’s important to arm yourself with information about what you are signing up to. Without a clear understanding of the key principles, you could end up paying more than you need to over the lifetime of your loan.
Before taking out any form of personal debt, it’s vital that you understand the terms of the loan. Obviously you’ll have to pay back the entire amount plus interest, but beyond that, terms can vary widely and depending on the type of debt there are different aspects to understand. With your hard-earned cash at stake, don’t be afraid to ask as many questions as you need to in order to make sure that you thoroughly comprehend the details around repayment amounts, interest and the length of time you have to pay off the amount in full.
Additionally, following an in-depth investigation, ASIC is warning consumers to steer clear of debt management businesses that promise to quickly consolidate your debts and simplify your financial situation. Often referred to as ‘debt consolidation firms’, these companies may charge high upfront fees for services you could do yourself for free – including straightforward tasks such as challenging or checking your credit history.
We have compiled some of the key facts it helps to be aware of for the most common types of personal debt.
- When it comes to home loans, arguably the most important aspect to understand is what the interest rate is, and whether it’s fixed or variable. If your home loan rate is variable, find out how and when these rates are reviewed.
- A standard mortgage term is 30 years, but there can be some variability in that.
- Understand the impact of paying minimum payments on the life of the loan, and conversely the effect that additional payments will have to the term. Making additional payments when you have the capacity can have a significant impact over the length of your loan – and consequently, over the amount of interest you will ultimately be liable for.
- Consideration should also be given to the frequency of loan repayments, as this can also have an impact on the life of the loan and subsequent interest payments.
- Finally, ask your lending provider about mortgage offset accounts. These can provide an additional means to reduce interest, as they can allow you to offset the amount you owe on the loan and only be charged interest on the difference between the loan amount and the amount in your eligible linked offset account.
- Understand the terms of your credit cards and be responsible with using them. While it’s very tempting (and easy) to use a credit card to purchase something you can’t quite afford right now, remember that with high-interest rates on credit cards – and the fact that interest compounds – you are likely to end up paying far more in the long-run than the original purchase price.
- Paying your card off in full every month is a goal to strive toward, and until then it’s wise to limit your reliance on credit.
- When you apply for a car loan, you’ll be offered different loan terms. Though increasing the loan term usually decrease the monthly payments, try to take out the shortest car loan possible. Often a long-term car loan (eg six years) will result in you owing more money than the car is worth by the end of your loan term.
- Teach yourself to budget; the hardest thing about setting a budget is sticking to it. It takes discipline and commitment to budget, however, with advances in technology there are some great tools available to help simplify budgeting and help you to visualise where you are spending. There are many great apps which assist in tracking expenses and providing a summary of where your money is going, allowing you to put in place a course of action.