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Interest free deals

Have you ever wondered how interest free deals work?  On the surface they all sound pretty attractive, who doesn’t want to get what they want now and pay it off interest free over 1, 2 or even 4 years?  Maybe you think it sounds too good to be true?  Well, here are some of the things you should know when considering one of these deals:

  1. Using one of these deals will most likely reduce your ability to negotiate.
    Cash is king when buying big ticket items, generally speaking retailers will not negotiate once they know you require finance. Taking up one of these deals might push you to spend more than you initially expect.
  2. Quite often interest free deals are not available on the cheapest products in each range, this means you might have to end up spending more than you initially thought.
  3. Interest free doesn’t mean fee free. Yes it is true that you are not paying interest for 1, 2 or 4 years on your purchase but you are paying fees and these can add up.  For example, currently advertised is a Harvey Norman 2 year interest free deal. This deal has a $25 establishment fee and $4.95 per month account keeping fee.  On a $500 loan that adds up to $143.80 in fees over the life of the loan or approximately 28% of the initial value of the loan.  On top of that, if you miss a repayment, you will be hit by a $25 late payment fee.
  4. Depending on your deal, your repayments during the period might not pay off the total loan by the time the interest free period ends.  Interest free deals can be structured in several different ways, with a few different parts. Some require a deposit, some don’t.  Some have a minimum monthly repayment, some are equal installments, some require no repayments during the period at all.  Make sure you understand which deal you are signing up for and exactly how it works.  Be warned!  Deals that involve a ‘minimum’ monthly repayment, do not see the whole balance of the loan paid off in full by the time the interest free deal ends.  If you have a remaining balance once the interest free period ends you will be hit with a high interest rate.  Usually around 29%.  To avoid this, instead of making the minimum repayment, calculate how much you need to repay to clear the entire balance and repay that higher amount each month.  For example if you have borrowed $500 over 24 months you need to repay $20.83 per month rather than the much lower minimum payment on your bill, to make sure the balance is cleared by the time the interest free period ends.

We have never tried an interest free deal.  We tend to like to be able to shop around and get the best deal possible on the product we have done our research on.  However, I have had friends who have done interest free deals and have been very happy with the outcome.  So if you are considering one of these deals make sure you understand exactly how the loan works and make sure you stick to the rules otherwise these deals can be costly.  Also watch the fees as these soon add up!

Have you tried an interest free deal?  Were you happy with the outcome?

If you liked this, try:

How To Create A Household Budget

5 Websites That Will Make or Save You Money

How I Saved On My Electricity Bill

Where To Get Financial Help For Free

15 Ways To Save Money In 2015

If you would like to read more from me in 2015 don’t forget to sign up to my weekly email using the form below:




Disclaimer:

The information contained in this post is general in nature and does not constitute financial advice. Please see your financial advisor for advice specific to your individual circumstances

09/04/2015 7 comments
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Nimble MoneyMe

I am sure you have seen the ads on TV: having problems with paying your gas bill/phone bill/car repairs/nursery for your new baby?  “Why don’t you Nimble it?” says the guy dressed in a rabbit suit.  Nimble call themselves “smart little loans” but in reality there is nothing smart about them, as behind the humor and quirky advertising, lurks the most insidious form of lending the ‘payday loan’.

But what is a ‘payday loan’?  Typically a payday loan is for a small amount of money, usually less than $2,000 and which is lent for only a short period of time.  Traditionally it was until your next payday and hence the name.  The other trademark of a ‘payday loan’ is the extra ordinate interest and fees interest they charge.   In Australia, fees are regulated at 20% of the value of the loan and a maximum interest rate of 4% per month.  Yes, you are right 4% per month is 48% per year!  So if you borrow a $1000 over 6 weeks it will cost you $1,280 in interest and fees!!!  And that is just for 6 weeks!!!  Worse, in the case of Nimble if you miss a repayment they will spank you with $35 fee and $7 a day until you have cleared the debt.  Yep, they don’t tell you all of that in the cutesy hipster advertising.  Now you understand why it is so easy to get yourself into trouble using this form of lending.

To help you get trapped in a cycle of debt Nimble will even put your hugely expensive loan directly onto a Nimble prepaid visa card for you – just to make sure it is even easier to spend!  And to apply for these incredibly expensive loans all you need is the Nimble app on your mobile phone or internet access on your home computer.

And this is what makes me fear for our children.  You see the clever, soft, hipster advertising isn’t aimed at me, a 40 something  mother, it is aimed at young people who are unaware of the danger that this type of lending represents.  Combined with easy access over the internet or an app on your phone, these types of loans have become far easier to access and more socially acceptable than ever before.  That has got to scare any parent.  No-one wants to see their son or daughter trapped in a debilitating cycle of debt, taking out loans to repay loans, where the horrendous interest costs and fees cripple any chance to clear the debt.

So what are the alternatives to a payday loan?

  • Ask yourself the question “Do you really need it?????” Are you absolutely sure you cannot do without it? Are there other ways to achieve the same goal?
  • If you need the money to pay a bill as the adverts suggest, make sure you negotiate with the supplier first. All utilities, whether you are talking about your telephone, electricity, water or gas bills have hardship programs you can utilise to get the bill paid without incurring more debt.
  • If you are on low income and qualify, you could take out a No Interest Loan (NILS). If you are interested in finding out more please click here.
  • If you are on Centrelink, see if you can receive an advance.
  • Talk to your family and friends and see if they can help you. Usually I don’t believe in mixing family and money but when it comes to payday lending it is a far better alternative than paying extortionate rates of interest and fees.

It is important to know that Nimble and MoneyMe are not the only guises of the payday lending blight in Australia.  Cash Converters, Cash Train and Cash Stop are all payday lenders and so is pretty much anyone else who offers easy short term loans, hipster advertising or not.

So as your child approaches adulthood make sure you talk to them about payday loans and all their different guises.  Tell them about all the things that the snazzy advertising and bouncy jingles forget to mention like the high fees and huge interest rates these loans attract and how easy it is to slip into a cycle of debt.  If they don’t believe you, as most teenagers don’t, tell them to check out this youtube video from “Last Week Tonight with John Oliver”, it is a comedic view of the horrors the payday lending industry have unleashed on the US.  It is exceptionally well done and well worth a watch for both parents and children (though the language gets a bit colorful at the end!).

 

 

I know that when my daughter is old enough, she will be watching it and  I will be telling her all about how payday lending works.   It is only through knowledge and education that we can protect our kids from this insidious form of lending.

p.s If you have a problem with payday lending a Financial Counsellors can help you, call 1800 007 007 Australia wide to hook up with one in your area.  Their service is completely free.

If you liked this you might also like:

15 Ways To Save Money In 2015

How Much Your Credit Card Debt Is Really Costing You

5 Websites That Will Make Or Save You Money

5 Financial Tips You Need To Know Now You Are A Parent

If you would like to read more from me in 2015 don’t forget to sign up to my weekly email using the form below:




Disclaimer:

The information contained in this post is general in nature and does not constitute financial advice.  Please see your financial advisor for advice specific to your individual circumstances.

17/01/2015 11 comments
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credit card cost

Us Aussies have a love affair with the ‘plastic fantastic’.  According to The Money Smart website Australians in total have about $34 billion in credit card debt or an average of $4,400 per credit card holder.  But how much is that credit card debt really costing us?

Assuming you have the average credit card debt of $4,400 and decide to buy nothing else on the card and your interest rate is 18% (most cards range between 17%-19% depending)… here are the numbers:

Repayment Made Total Cost Time Taken to Pay Off
Minimum (2%) $14,883 over 31 years
$100 $7,056 5 years & 11 months
$150 $5,725 3 years & 3 months

 

Yes, you read it right!!!  If you only make the minimum repayment it will take you over 31 years to pay off the $4,400 debt and cost you a total of $14,883!!!!!  What a rip-off!!!!  This is why only making the minimum repayment on your credit card is a big financial mistake!!!  If you decided to increase the repayment to $100 per month it means that you will pay off the same debt in 5 years and 11 months and it will cost you $7,056.  This is a whopping saving of $7,827 and around 25 years off your debt compared to only making the minimum repayment!!!!  If you choose to increase the repayment again to $150 per month – this will mean you will repay the debt in 3 years and 3 months and it will cost you $5,725.  Increasing the repayment by this $50 will save you $1,331 and it will cut 2 years 10 months off your repayment time.  It is amazing how small increases in repayments can make a big difference in how much your debt actually costs you.

If you are interested in the numbers for your debt, make sure you check out your credit card statement as your bank now have to disclose how much your debt costing you if you only make the minimum repayment.  Last time I checked mine it would take me 49 years and 2 months to pay off my monthly debt at the minimum repayment and cost me many multiples of the current debt!!!!!  Ouch!!!!!  (Needless to say I pay off my credit card every single month J) Or you could click here to head over to the MoneySmart credit card calculator and do the numbers for your own debt.  You might be surprised how much your debt is really costing you, but also what great savings you can make by making even small increases in your repayments.

Credit cards can be great tools if used wisely, however beware, if you don’t pay them off every month they can cost you a fortune!!!

If you liked this you might also like:

Top Tips For Getting Rid Of Your Credit Card Debt

How To Create A Budget

10 Easy Ways To Save Money

How To Pay Off Your Mortgage Faster

Disclaimer:

The information contained in this post is general in nature and does not constitute financial advice.  Please see your financial advisor for advice specific to your individual circumstances.

16/07/2014 24 comments
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Yesterday I posted an article which showed that women are better than investors than men, but knowing you have the potential to be a good investor is of no use, unless you know where to start.  So welcome to the Money Mummy school of investing!  Every Thursday I am going to publish a post which guides you through the key principles that you need to know when making your first investment decision.  Successful investing is not difficult and has nothing to do with luck.  There are a few fundamental ideas that you need to know which will greatly increase your chances of success and help you avoid disasters.  So let’s get started.

Before you invest a cent, there is one very important thing you must do and that is make sure your “financial house” is in order.  You must be very clear about how much debt you owe and what type of debt it is.  Generally speaking there are two types of debt, good and bad.  Good debt is debt used to purchase things that increase in value such as a home loan, investment property loan or a loan to purchase shares (more on this later).  These types of debt are classified as good because while you are paying interest on the loan, hopefully, the value of the asset purchased is increasing at a faster rate and you are financially better off.

Borrowing money to purchase things that fall in value is known as bad debt.  Borrowing to buy a car is a classic example of this.  It is widely reported that most new cars loose 30% of their value in the first year, so the asset is worth less than the value of the loan at the end of year one.  Credit card debt and personal loans for holidays are also generally considered bad debt.  Bad debts, particularly credit card debt, must be dealt with before beginning to invest as the interest charged on these cards of around 20%, far greater than the 10% average return for Australian share market (1983-2012).  In this case, the best use of your money is to pay off the cards using the strategies outlined in my post “Top Tips For Getting Rid of Your Credit Card Debt”.  This will give you nearly a 20% return on your money, risk free, it is difficult to get an investment return to beat that!

The next thing you need to do is make sure you have an emergency fund saved in cash.  Six months of after tax income should be saved to ensure that you have the confidence to deal with any bumps in the road that life might bring, a new baby, losing your job, those little things that life throws at all of us that would otherwise knock you off balance.  Yes, agreed with current low interest rates savings accounts are not sexy investments, but your money is safe and easy to access should you need it, which is the whole point of having an emergency fund.  For me the best way to save is to use direct debit.  This ensures the money is whisked away to a separate emergency fund account, before I have the chance to get my hands on it.  Shop around for the best rate you can and don’t be afraid to move should a better deal come along.  To help you compare the myriad of products out there some of my favourite comparison sites include:

http://www.canstar.com.au/savings-accounts/compare-online-saver/

http://mozo.com.au/savings-accounts

Once your financial house is in order, credit cards paid off and your emergency fund well under control, you are ready to move to the next step, understanding the crucial principles of risk and return, and figuring out where your own risk tolerance lies.  Understanding these principles will guide your investment strategy.  Many people forgot these basic principles during the financial crisis and paid a hefty price for it, next week I will explain why.  Stay tuned!

If you liked this post check out the rest of the series by clicking on the links below:

What Is My Risk Tolerance?

Risk and Return

What Are My Investment Choices?

Fixed Interest Investments

Property Investments

18/04/2013 2 comments
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Credit Card Debt

Credit card debt is a major issue for a lot of parents.  Let’s face it having children is expensive and income is often reduced as parents take a break from the work force or return to work part time.  However, like most things, when used wisely credit cards can be a handy tool in managing your finances.

My number one tip and the key to success when it comes to using credit cards, is to ensure that the balance is paid off in full every single month.  For us, we have found setting up a direct debit through internet banking as the best way to ensure this is done.  My other key strategy is to only ever have one credit card.  This makes it easy to keep track of our spending.

But if you already have a credit card debt what is fastest way out?  Here is my simple four-step plan to get you out of debt and back on track:

(1)  Identify how much credit card debt you have.  You can’t fix a problem until you know exactly how big it is.  Be real with yourself, take a good look at your statements so you know how much you owe on each individual card and add them up so you know the total.  The reality of the total figure might surprise you and give you further motivation to rid yourself of the debt.

(2)  Find out what is the interest rate you are paying on each card.  The big secret the credit card providers don’t want to tell you is that credit card debt is crazy expensive!  Most charge interest rates of 19% or more!  Compared to official interest rates of 2.75%, it is massive rip-off!  You’ll find your interest rate on your statement. If you can’t find it, ring up your provider and find out.

(3)  Ramp up your repayments.  Here’s a shock, paying the minimum credit card repayment will not be enough to get your debt paid off.  All credit card statements now tell you how long it will take you to pay off your card if you only make minimum repayments.  When I last checked mine, it would take me 64 years and 7 months!  Let’s just say it’s much longer than my expected lifetime!  The only way to get rid of the debt is to increase repayments as much as you can, prioritising the card that charges the highest interest rate first.  Some prefer to pay off the smallest debt first, to get a sense of achievement.  This is a valid strategy too.

(4)  Get rid of your cards.  While you are paying down the debt, cards should be placed in a safe place (not in your wallet!) or cut up.  However, as each card is paid off you must remember to close the account so you are no longer charged annual fees or reward membership fees if they apply.

Credit card debt is a financial noose around your neck.  Getting rid of your credit card debt is a huge achievement.  By following the steps I have outlined you will get there.  Then with the money you save in interest you can then focus on building your savings and working towards financial freedom.

Happy Investing!

 

Money Mummy

28/03/2013 5 comments
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