A TV ad for a company flogging easy-to-get-hold-of short term loans recently caught my attention. Thirty years in the money business has taught me that quick fixes rarely work, and sure enough, the loans being promoted certainly came with strings attached.
Loans of up to $5,000 are being offered with no security needed and with repayment terms of 18 months to 3 years. Applications can be made online with approval granted to eligible borrowers in a matter of minutes.
For anyone facing a serious cash squeeze, offers like these can be very tempting as the cash provides some temporary breathing space to pay urgent bills.
The sting in the tail is that the company involved is charging interest rates of up to 35%. Yes, that’s 35%.
To put it another way, if you took out one of these loans for, say, $5,000 repaid over two years, the total repayments would add up to about $7,280. To describe this as an expensive form of finance is at best, an understatement.
Let me stress that offers like this are perfectly legal. But for anyone in urgent need of extra cash these types of loans are not the answer.
In fact, if you’re maxed out on your credit card, or struggling to meet home loan repayments, taking on any additional debt is the last thing you want to do, especially at such exorbitant interest rates.
The scary thing is that’s just what a worrying number of Australians plan to do.
An April survey by credit agency Dunn and Bradstreet found one in three Australians expect to experience difficulties meeting debt repayments over the next few months. Nearly 40% of these people anticipate having to use their credit card to cover otherwise unaffordable expenses.
For anyone looking to take on more debt as a way out of a cashflow crisis, I recommend speaking with a financial counselor first. There is no stigma attached to this, and it is not an admission of defeat. Sometimes we just need a bit of help and motivation to draw up a roadmap to lead us out of a debt hole.
Many financial counselors charge little or nothing for their services especially if they are part of a community organisation. The website of Financial Counselling Australia (www.financialcounsellingaustralia.org.au) is a good starting point for tips on managing your money or to track down a financial counselor in an area near you.
The key thing to bear in mind is that there is no magic cure for finding your way out of financial difficulty. It usually takes time to get into this position and it’s likely that it could take a while to get back on your feet.
The solution is simple enough, though, if you can put it into practice – spend less than you earn. And a key starting point is drawing up a budget. This tells you where your money is going, and helps you see areas where you might be able to make savings. You can download a good, interactive budget planner at the government’s money website www.moneysmart.gov.au.I recommend it to you.
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
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