Know Your Debt

 

It’s hard for some people to accept, but at some point in your life, you will need to experience debt. This debt can come in many ways; some being unnecessary and some being unfortunate, and well, some can be pretty beneficial. Yes, debt can be useful at times as you need it in order to move forward in life. You take mortgages, for example, not everyone can break open their piggy bank, walk down to the nearest open home and slam that $300,000 down on the table. Debt allows you to make those big purchases that you otherwise wouldn’t have been able to.

This need for debt is what makes it inevitable that you will eventually have to take some on. So it pays to know what type of debt or ways of borrowing exists. Most of you will recognise each of these forms of borrowing, but being able to compare them to their fees, interest rates, conditions and benefits, is something that might take some time. So we have taken some of the primary ways of borrowing and compared these points for you so that you can have a basic overview for yourself.

 

Personal Loan

Fees: Low                                                                  Interest Rates: Medium

Lending conditions: Medium                       Benefits: Mild

 

A personal loan is a lump sum payment of money that you borrow from a financial institution. This sum of money is then paid back over a set time frame with a fixed interest rate and consistent payment amounts. A personal loan can be from a bank, a credit union or a third-party lender and you can apply for one for any reason once you are over the age of 18. Need a new car? Want to travel? Or need to cover emergency costs such as a funeral or vehicle repairs? A personal loan can be your friend to help you when you need it.

There is an initial application fee when getting a personal loan which is added to your overall loan amount, but besides that, most of the time there are no other fees. The interest rates for a personal loan can range from 6.99% p.a. – 22.99% p.a. which is quite a substantial variation. This variation is caused by the borrower’s credit score which is a given rating of the individual’s credit history. A lower score is perceived by the lender that the borrower possesses a potential risk when borrowing money. So the interest rate is increased to compensate the possibility of repayments going wrong.

A personal loan can be beneficial to the borrower in the sense that it is a stable and safe way to get the funds needed for any emergencies that pop up or necessities in life. You cannot spontaneously go out and get a loan, as there are application and lending criteria set in place. You need to follow the process and work with the lender so that everyone can benefit from the process.

You can check out this variation of interest rates online by checking out the lenders own websites or else intermediary websites such as www.finance.co.nz which display them all.

 

Car Loan from a Vendor

Fees: Medium                                                       Interest Rates: Medium

Lending conditions: Medium                      Benefits: Mild

 

A car loan is a personal loan as well; except, the loan is done through a vendor or car dealership from where you purchased the motor vehicle. The dealership may go through 3rd party lender or broker and get them to find the best personal loan offer for the buyer of the motor vehicle. This personal loan has the standard interest rate and fees that the institution would offer, but then has additional charges added on top for the broker and vendor.

It’s like adding an intermediary to the personal loan process and having them do the hard work for you. A car loan is handy as you get the vehicle or product that you were after without having to do the whole borrowing process yourself. But going with a car loan from the dealer/vendor adds extra debt for you in the end. As you cover the fees for their services, as well as the opportunity cost of potentially missing out on a cheaper interest rate if you had looked elsewhere.

 

Student Loan

Fees: Low                                                           Interest Rates: None

Lending conditions: Low                          Benefits: Mild

 

A student loan in the eyes of society is the best type of debt you could get. It’s interest-free, you pay a simple fee of $40 a year for it, and in order to get one, you just simply show proof of enrolment and provide your details to www.studylink.co.nz. You also can get a higher level of education from studying that will assist you in furthering your career in your chosen field and opening the doors to jobs that would have otherwise been closed. Yes, a student loan by many is considered good debt. However, this piece wouldn’t be fair if we kept a total bias to this debt now, would it?

A student loan can be beneficial, but not all of the time. With a student loan, you acquire a large sum of debt (upwards of $30,000) and pay off a minimal amount (12% if you earn above the $374 weekly threshold) of it from every pay check. This 12% doesn’t sound too bad, but this debt can sit there for a very long time and affect your debt/income ratio when you apply for other forms of debt later on in life, like a mortgage. Having a higher debt/income ratio means you will be offered higher interest rates when borrowing in the future, causing you to end up paying more. This debt could act as a burden on your life especially if you are unable to get a job in the narrow field that you studied for. Or even worse, you end up disliking your area of study and only decide to finish it since you have committed so much already.

Yes, a student loan in most cases is a justified form of debt. But you need to make sure it is for the right reasons and that you utilise it once you get it. Leaving school, working full time and being able to purchase a home earlier, can sometimes be the better financial option in the end.

 

Payday Loan

Fees: High                                                          Interest Rates: High

Lending conditions: Low                          Benefits: Low

 

A payday loan is a small loan that works as an advance on your pay. The conditions for getting one are simple, and the whole process can be done online with the money in your account within 24 hours. Dealing in primarily small amounts ($100 – $5,000) a payday loan can give you the cash in a hurry, but at a considerable cost. The interest and fees added to the repayment of the loan are quite high in comparison. You could expect an annual interest rate around 400% that gets compounded daily.

You don’t realise how high these interest rates are because you elect to pay them off within the next couple of weeks. The hefty fees and rates that come with payday loans often get ignored because you believe you will pay them off in next week’s pay check. But this is a dangerous mindset to have. A payday loan is handy if you are stuck in a sticky situation and need emergency money fast. But that interest can add up quickly, and quite often the benefit of having $1,000 a couple of weeks earlier is not worth the cost.

 

Credit Card

Fees: Varies                                                      Interest Rates: High

Lending conditions: Low                          Benefits: Low – Medium

 

Credit card debt is the most common form of debt as nearly everyone has at least one credit card. They are easy to use, convenient and the conditions to get one aren’t very high. The fees from credit cards often vary as some come with no fees at all whereas others come with large application and use fees or else hidden fees you don’t find out about until you are locked into a contract. However, the one thing most credit cards have in common is the high compounding interest rates added on to their monthly bills. Everyone knows somebody who has dealt with the trials and tribulations of trying to pay off reoccurring credit card interest. They pay ever so much off, think to themselves that they deserve a reward and treat the newly available credit as money and go ahead and use it again.  This action results in them being put back in the same spot as they were in before, meaning the cycle resets, ready to begin again.

Yes, credit card debt can be a tricky one if misused. You have temptation everywhere you look, so if your self-control is not up to scratch, then staying away from the credit cards might be the best course of action for you. However, if you can control yourself and can pay off your bill every month, then borrowing money with a credit card can be pretty handy for any financial emergency that comes your way.

 

Mortgages

Fees: High                                                          Interest Rates: Low

Lending conditions: High                         Benefits: High

 

A mortgage/home loan is the one piece of debt that everyone will eventually attempt to take on in their life. Owning your own house is not an easy feat and acquiring the money for one by yourself is even harder. As we said at the beginning, not many individuals have $300,000 lying around in their piggy banks. This is why you seek the help of lenders in the form of a mortgage, to help you purchase your own home. Buying your own home is one of the most significant decisions you will all make in your life. It’s an enormous sum of money, so making sure everything goes down perfectly is essential. This is why the fees associated with a home loan as well as the conditions for obtaining one are so high. A lot of people and procedures are involved when it comes to acquiring a mortgage and signing the deed to your own home. When you take into consideration the lawyer fees, Land Information Memorandum (LIM), Lenders Mortgage Insurance (LMI), moving expenses and rates etc. The fees start to add up.

Getting a home loan is an expensive process, but it is well worth it. Because in the end, you have an asset that can only go up in value. The initial saving period for your 20% deposit could be tough as you may find yourself squeezing tight on every penny that comes your way for a few years. But like we said before it is worth it! As owning your own house means you gain an appreciating asset as well as a home for you and your family.

 

 

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