Not Waving, But Drowning
Sydney Morning Herald
Tuesday July 30, 1996
Easy credit has made life more convenient for us all. But JUSTINE TRUEMAN reports there is a wide gap between juggling your debts sensibly, and borrowing your way into deep water.
IT HAS never been so easy to get a loan - and, not surprisingly, Australians have never been deeper in debt. Recent figures show household debt (mortgages and personal borrowings) has risen from 50 per cent of after-tax income to more than 70 per cent since 1990. Over the past 20 years it has more than doubled from just under 35 per cent in December, 1976.
But is all this added debt really making our lives easier?
A recent Newspoll survey found the main cause of personal stress for 30 per cent of Australians is personal finances. And with marketing people tempting us with attractive offers, it's not surprising the number of bankruptcies in recent years has risen at an astronomical rate.
Young people, in particular, are vulnerable. Youth bankruptcies rose 380 per cent in the 10 years to 1994. "I don't think young people manage their finances appropriately," says Mr Trevor Gibson, the author of Mastering Your Money. "They use credit as a means of obtaining things they can't afford."
But it's not only young people who lose control of their finances and end up in trouble. According to Mr George Caddy, official receiver at the Attorney-General's Department, people from blue-collar workers to barristers have passed through his doors faced with bankruptcy.
Ms Deborah Hunter, coordinator for Credit Line financial counselling services, says small business people are particularly vulnerable. "Things just get out of their control and many put their home up for collateral for the business."
For many people, the car loan, often taken out at ridiculously high interest rates through dealer-organised finance, causes the most heartache.
"The car accident is usually the icing on the cake that sends them over the edge," says Mr Caddy. "You run into another vehicle and have to pay the damages or you write off someone else's car and have to pay for it."
He says bankruptcy is seen by many as the ultimate sign of failure - not surprising considering its consequences.
"Your credit rating goes through the floor for some time and it's difficult obtaining a loan for a house in 10 years' time," says Mr Caddy. This is because the bankruptcy is entered on your Credit Reference Association report, which lists everyone who has ever applied for a loan.
Bankrupts can't borrow money, own any assets or leave the country for about three years. They can lose their home and any valuable possessions and if they inherit money it goes straight to creditors.
"You get to keep a car up to the value of $2,500 and some insurance policies and furniture, but a trustee sells things like houses, cars with a fair value and shares," says Mr Caddy.
Think it can't happen to you?
Mr Caddy says the three main causes of bankruptcy are job loss, illness and marriage break-up. "Many (bankrupts) don't have major debts - just the car, house and bankcards - but if suddenly they are unemployed or there's a breakdown in their relationship the money just runs out and they can't pay."
So how can you avoid financial disaster? One obvious step - which will delight the insurance industry - is to understand the value of income protection and other insurance products targeted at cushioning disasters. It is illogical to say "I can't afford it" when you are borrowing money.
The experts also have a number of tips for managing your money better.
DO A BUDGET
"A lot of people don't understand their own finances; they don't know what's coming in or going out. If you do a budget you know that on your income you can or can't afford certain purchases," says Mr Gibson.
He says budgets are a sensible way of organising your money whether you have debts or not.
Basically, a budget involves drawing up how much you earn a week or month and then listing how much on average you spend on different items over that period. This unemotional analysis shows where you can cut spending or boost income.
Doing a budget can also motivate you enough to be able to resist advertising. "It has become easier and more desirable to buy," says Mr Gibson. He points to reward schemes, such as those offered by Fly Buys and American Express, which encourage you to spend.
MINIMISE DEBTS
This can include hunting around for the best rates, saving for a big deposit before buying a house or just paying off loans as quickly as possible.
In the current low interest rate environment, assets such as houses aren't rising in value as fast as they used to, so borrowing is less attractive than it once was. "The thing to remember whenever you go into debt is that you create risk for yourself, particularly with long-term debt like a housing loan," says Mr David Hartgill of Armstrong Jones. "Often people borrow when there may be two parties putting money in and one may have an accident (or a baby) or something."
KNOW WHAT DEBTS COST
Many people don't understand the extra cost of credit.
Mr Gibson says if you buy a new outfit on sale, say 15 per cent off, using your credit card, and it takes about a year to pay off, it ends up costing you the same as when it wasn't on sale.
"People don't realise they pay up to 23 per cent interest on credit cards, so the advantages of buying on special are lost."
According to Ms Hunter, many of the people she sees aren't even aware of what interest rates they are paying. "They can be paying 26.5 per cent and so sometimes the debt isn't going down very much at all. They are just paying off the interest and don't realise it."
LOOK FOR ALTERNATIVES
Debit cards allow you to use plastic to pay for purchases, but the money is taken out of your savings account so you don't actually borrow anything.
An alternative is to save for an item rather than borrow for it. Mr Gibson uses the example of two people who want to buy a car. Mary saves $25 a week for three years earning 6 per cent and buys a second-hand car plus insurance for $4,250. Tom buys the same car but borrows the money, so his repayments are $37.48 a week for three years paying 15 per cent interest.
If Tom paid $25 a week in repayments (the same as Mary) it would take him more than six years to own the car - and by then the value would have dropped substantially.
BE CAREFUL WITH CREDIT CARDS AND TOP-UP SCHEMES
"Lines of credit can be a problem," says Ms Hunter. "People borrow up to $5,000 and when it gets down to $4,000 the company says you can top up to $5,000 again, so the person is forever in debt and topping up.
"Also, a lot of people get into trouble buying cars on credit because if they get three months behind the car can be taken away and they also have quite a large debt on their hands."
TALK TO YOUR CREDITORS
Ms Hunter says the worst thing you can do, if you are having financial problems, is to ignore them. "Often creditors are quite willing to negotiate ... if you can't talk to the creditor get a counsellor, because the debts don't go away. They just get to the legal stage and then it's more difficult to do something."
GET HELP
Counselling is recommended for people with financial problems - especially if they are related to other problems such as gambling, alcohol abuse or compulsive spending.
Ms Hunter says she has seen a rise in the number of people with credit problems since the opening of the Sydney Casino.
"You have to look at the associated issues. This is the difference with counselling rather than just financial advice. You have to find out how they got into these problems in the first place, because if you don't sort those out the financial problems will just come back again." Avoiding bankruptcy
According to Mr Caddy, it's often possible for people facing bankruptcy to come to an unofficial arrangement with their creditors. They can either defer their payments until they get back on their feet or reduce them for a time. A Part X (10) arrangement allows you to authorise an accountant to call a meeting of your creditors and, if they accept your proposal, you avoid legal action.
Mr Caddy says there is also an amendment for a scheme of arrangement where the Government can call a meeting of creditors for you. This is intended for people who can't afford an accountant.
AMALGAMATE YOUR DEBTS
"It's worthwhile thinking about amalgamating your debt if you can do it," says Mr Hartgill. "First write it all down, then talk to your bank manager about it."
However, while putting all your debts in one basket can make life much simpler - and possibly cheaper - there can be problems if your debt is spread across a number of institutions.
According to Mr Hartgill, there can be myriad fees and charges, so work out the costs involved first and make sure the end interest rate is worth it. Some of the fees include stamp duty, fees from lenders, finding fees to find a new lender and government bank taxes like FID.
If you can't consolidate your debts, pay off those with high interest rates first.
USE DEBT CONSTRUCTIVELY
To do this, you need to understand the distinction between borrowing for assets that will rise in value and those that won't. Consumer goods such as clothes, furniture, cars, boats, pools and holidays are nice, but diminish in value. Try to avoid borrowing for these items.
According to Mr Hartgill, you also pay more for the privilege of borrowing for consumables because they are harder for a creditor to sell to get his or her money back. "That sort of borrowing is usually unsecured," he says. "Sometimes with vehicles they can repossess your car, so the security is your car, but usually the interest rate is pretty high because there is more risk for the lender."
He says assets like a home, business or shares are more legitimate assets to borrow for. But he warns against home equity loan schemes where customers can borrow money for personal items, like a pool, and pay it at home loan rates. These loans have attractions, but borrowers must be very disciplined.
"(These loans) can seem attractive but they are secured by your house, so people have to understand they are converting short-term debt into long-term debt," says Mr Hartgill.
You may, for example, be tempted to pay off your pool over 10 years rather than the normal two or three years. The longer time frame can mean you end up paying a good deal more interest even though the rate is lower.
Honeymoon rates can also be a trap as they encourage buyers to adjust to low repayment levels which will rise substantially at the end of the honeymoon period.
13 EASY STEPS TO DEBT MANAGEMENT
* Do a budget
* Keeps debts as low as possible
* Look at the costs involved
* Look for alternative to credit
* Talk to your creditors.
* Get insurance
* Borrow for investment not consumption
* Pay it off as quickly as possible
* Look at consolidating your debts
Ask yourself
* Do you need it with cash instead?
* Can you buy it with cash instead?
* Will it rise in value?
* Will it give you too much debt?
© 1996 Sydney Morning Herald
Share This