Get Yourself Out Of The Mire With A Single Loan

Sun Herald

Sunday February 20, 2005

Jane-Anne Lee

There is a simple way to relieve debt pressure but you need to be careful, Jane-Anne Lee writes.

AUSTRALIANS are up to their necks in record levels of personal debt, with more than 1.5 million owing $5000-plus on liabilities such as credit cards and personal loans.

If you are juggling credit card debts as well as personal loans, then a form of personal loan known as debt consolidation will help to eliminate creditor pressure.

It will also improve your credit rating because you'll have just one single payment to make each month so you are not at risk of multiple late payments.

The best interest rates on such a loan range from 7.99 per cent up to 15 per cent. As well as lower interest, you will also be given a time frame to pay it off, allowing you to save money and better manage your finances.

"Compared with a credit card, personal loans are fantastic," consumer advocate Narelle Brown says. "The risk with a credit card is that you only make the minimum repayment so you could take 20 years to pay it off. The beauty of a personal loan is that it is a fixed amount and if you have a fixed-interest rate you will know what you are up for each month."

Of course, personal loans are not just about consolidating debt. They can also be used for holidays, cars, study, home renovations, pools, etc.

HOW TO GET THE BEST DEAL

Loans can be secured (with an asset) or unsecured and offer fixed or variable interest rates. Shop around for the best deals at sites such as www.cannex.com.au, and then contact your bank to see if it can match or better any offer.

If you have a mortgage, you may be eligible for a package banking deal, giving you an interest rate discount off your mortgage or personal loan.

While credit unions appear to offer the cheapest interest deals, with MECU offering 6.05 per cent for its home improvement loan, Garfield Wright, of research house Cannex, says many institutions offer a range of rates rather than a specific figure.

That's because your interest rate will be determined by the amount you are borrowing, the size of your deposit and your credit rating. Time frames will also vary.

"You can expect to pay somewhere between 7 per cent and 14 per cent, but if you have no deposit or credit rating, your interest rate could be as high as 15.65 per cent," he says.

If taking out a personal loan, it pays to do thorough research. For example, if you are offered a low introductory rate on a loan through a car yard, check it doesn't revert to a much higher rate once the honeymoon period is over, Wright says.

BEWARE HIDDEN FEES AND CHARGES

Also, find out about fees. Ask about application costs, account-keeping fees some are up to $10 a month and exit fees, which can be up to $400 if you pay out your loan before the term is up.

If you are keen to pay a loan off faster by exceeding your regular repayments, check that your financial institution offers this option without penalty, Brown says.

She also recommends finding out the "effective interest rate", which includes all fees, so you can make a true comparison of what other institutions are offering. "You may be offered 13 per cent but adding fees in may make it 14 per cent."

If you like checking your account balance online to confirm payment, make sure your lender offers this facility.

Many banks also offer a personal loan plus insurance to cover, say, up to three months' repayments if customers lose their job.

"Find out how much that insurance costs over the term of the loan then make a calculated assessment of whether the risk is worth the cost," Brown says. "If you are in an industry fraught with retrenchments or unemployment, that may be enough to get you through without hardship."

CASE STUDY

GREG Brown knows the value of shopping around. Two years ago, he took out his first personal loan, borrowing $16,000 to buy a car.

The five-year personal unsecured loan with a variable interest rate of about 12.5 per cent was arranged through his bank, St George, which gave him the choice of making higher repayments without penalty. To pay the loan off faster, the 28-year-old warehouse manager paid in excess of his $320 repayments each month, leaving him with a debt of just $1000 by last month.

When he decided to update his car, he returned to the bank only to be offered a lesser deal than a car dealership. The bank offered 12.5 per cent on an unsecured $20,000 loan, while the dealership offered a 10 per cent fixed secured loan over five years through GMAC finance.

"If you pay personal loans off faster they work much better for you," says Greg. "It's also better to make the loan over five years rather than two for more flexibility. I am fortunate that I have steady employment. I make payments of $500 a month which come straight out of my account, so I don't even notice it."

© 2005 Sun Herald

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