Things you should consider before deciding to take out credit
There are many things you should consider before deciding to take out any one or more of the different credit options available.
The first and most obvious question you should ask yourself is: Do I need to borrow or can I save for it?
Borrowing will result in an increase in the cost of acquisition through the interest rates / fees charged which will need to be re-paid over time whereas with savings you can earn interest whilst you save towards the purchase.
Assuming you decide that taking credit is required, then you should consider the following:
- How much can you borrow and repay?
- Which credit option is right for you?
- Which credit provider is most suited to your overall financial needs?
How much can you afford to borrow and repay?
Remember anything you borrow will need to be repaid along with interest and any fees and charges incurred in the set up and ongoing management of your credit facility.
So the first question is “How Much can you afford to borrow and repay?”
To answer this you will need to understand your financial position and especially how much you can afford to pay back each week/month when repayments are required.
You will need to demonstrate to the credit provider your capacity to repay your debt before any credit is approved.
A great way of doing this is by establishing a budget of your income and expenditure.
There are budget calculators available to assist you – just speak to an Australian Central Adviser for assistance.
Essentially a budget should provide a true, accurate and complete picture of your income and expenditure to clearly show how much you can afford to repay - whilst retaining your desired lifestyle position. This will then determine how much you may be able to borrow.
It can be tempting to omit certain things in your budget or to gloss over items or under estimate the costs of things as you try to find ways of making your loan appear more affordable. Often these omissions or errors only create false hope or even worse lead to wrong decisions being made that could eventually create more problems for you if you are unable to meet your credit repayment obligations. To avoid this, be honest with yourself and with your creditor about your financial position and what you can afford to repay.
Some important things to remember about setting a budget:
- Include only those income sources that you can rely on throughout the period of the loan / credit. Examples – a one off payment may help in reducing the amount of the loan but should not be treated as regular income (e.g. a bonus payment in one year may not be relied upon in subsequent years). You need to be honest and pragmatic.
- Be mindful of the timing of income and if this varies due to seasonal factors then include this in your budget planning.
- Include all your expenses. Budget work sheets normally come designed to help capture all your expenses such as:
- Weekly living expenses such as food etc.
- Utility costs
- Clothes and other essentials
- Other credit expenses
- Vehicle running costs including maintenance, registration, insurance
- Children’s fees / costs school fees, uniforms, excursions etc
- Education / professional development
- Special events (Christmas, Easter, birthdays)
- Holidays and related expenses
- Health and Medical expenses including gym subscriptions, health insurance and any gaps
- Other insurances
- Entertainment – internal and external (including dining out)
- Pets and pet expenses
- General savings or other investment plans
Remember - the more accurate and complete your budget is, the better decision you will be able to make. This will lead to a greater chance of having the loan/credit facility approved and meeting your obligations in future.
Which credit option is right for you ?
With so many credit options available it can be difficult to determine the right solution to your needs.
When examining your credit options there are some questions you need to ask yourself:
- If deciding upon a home loan
- is a fixed or variable most appropriate?
- if your purchase is more about an investment should you take out a Principal and Interest or Interest only loan or is a Line of Credit the best option?
For other purchases
- For Credit Cards
- what credit limit do you need and will the limit be manageable for your financial position? If you have a higher limit than you actually need, you be may be tempted to use it unnecessarily. This only adds to your financial pressures and is likely to increase your overall cost of credit.
- Are you a frequent credit card user and likely to benefit from any Rewards Program? Or are you better off forgoing rewards and having a card with a lower interest rate? The cost of having a credit card with a higher interest rate may outweigh the benefits of a Rewards Program if you are unable to repay the entire amount of the outstanding balance at the end of the interest free period. If you only make the minimum repayments each month you will be charged interest on the entire outstanding balance. You may well find that a credit card with a lower interest rate is more beneficial for you even if it doesn’t offer rewards.
- Is a store credit facility really the best solution for you? Would you be better off with a credit card or a pre-approved personal loan offering a lower interest rate which also gives you the bargaining power of a cash purchase with the retailer.
There is no one right or wrong answer that suits everyone. As everyone’s personal, financial and lifestyle goals are different, so are the credit options that are suited to their needs.
So before you commit yourself to one option, consider the various options available to you.
You can do this by researching all the options yourself or alternatively you can speak to a trusted Australian Central Adviser for guidance and assistance.
Which credit provider is most suited to your financial needs ?
The next question to answer is - which provider you should get advice from and / or to arrange a credit facility through ?
Again there are many credit providers available and you will need to assess these based on your requirements.
Things you could consider in this regard are:
- The reputation and standing of the provider
- The quality and care shown by their staff
- The clarity of information provided
- Their preparedness to provide you with quality advice based on an understanding of your individual needs
- The broader range of financial products and services that they provide which may aid you in other financial areas and potentially reduce your overall costs of banking
- What assistance and support they may be able to provide to you should your situation change which impacts on your ability to meet your credit obligations
- What information a lender must tell you about your credit
When taking out credit you should always use lenders who lend under the Uniform Consumer Credit Code to be confident that your lender is complying with important legislative requirements. This also provides you with a number of statutory protections.
One of the key requirements under the Uniform Consumer Credit Code is to provide information that is clear, concise, complete and accurate.
Responsible lenders will comply with the requirements of the code – so be cautious of anyone who does not provide you with the following or who does not provide it to you without you having to ask for it:
- The amount of money being borrowed
- The rate of interest and the term including how and when interest is charged
- All fees and charges to be paid in the set up and administration of the credit facility
- The corresponding comparison rate for the loan and other credit options available
- Details of any fees and charges that will be made payable in the event that you default
- How and when you will receive your statements (including opening and closing balances, fees and interest charged, payments made, minimum payment required and due date of next payment)
- Details of any commissions earned by the lender
- How you can progress disputes with the lender and how you can escalate these to an independent authority
