This is Money Week and in-keeping with the theme this year we talk about making good choices about managing debt.
Betty and Jim need to buy a new fridge costing $1,795, and have little savings except they are both over 65 and can access their KiwiSaver funds. The salesperson talks them into borrowing using a consumer finance loan and paying it off over 3 years. They agree thinking this would be the best option, but is it?
In addition to the interest rate which is 17.75% pa, they must pay:
• An ‘Establishment’ fee of $95.
• A ‘Monthly’ fee of $3.50.
• An ‘Early Repayment’ fee of $50 if they decide to clear the loan early.
Over three years this means that their $1,795 fridge actually costs $2,577. As their KiwiSaver returns have been 6% pa, they should use these funds rather than entering into a high cost consumer debt contract.
Not all debt is bad, and generally can’t be avoided when we need to purchase a home. However some purchases are not ideal to use debt for, especially items that quickly decrease in value, such as appliances and cars, or have no financial value, such as holidays.
If you do need to borrow:
• Shop around for a lower or interest-free deal, you don’t have to use the shop’s Finance company.
• Don’t just focus on the interest rate; look at the fees as these can really add up.
• Don’t be pressured to make a decision on the spot.
• Make sure you know the full cost in dollars before borrowing and factor it into your budget.
• Stress test your budget e.g. what will happen if you lose your job? Can you sell something quickly to pay the loan back.
• The length of loan is important, a long-term, low interest loan, such as adding the new family car to your mortgage over twenty years, will accumulate the real cost much higher (like the fridge above).
• Can you avoid borrowing and instead save up for the items that will quickly depreciate in value or have no value, like a holiday.
• Good planning and budgeting skills are essential in managing your finances so seek advice.
Visit www.sorted.org.nz for a wide range of useful calculators and tools.
This information is general. A Disclosure Statement is available on request.