Understand credit in a crisis

Anthony Keane and Sophie Elsworth look at what you need to know about consumer loan fees

MANY Australians are worried about their finances, as uncertainty sweeps the globe and could continue to do so for months.

When high interest rates and fees are added into the mix, the impact can be financially crippling in times of crisis.

The coronavirus pandemic continues to spread, and whether it’s a credit card, store finance, buy now, pay later scheme, personal loan or payday loan, it’s vital to understand the cost before signing up.

PRIORITISE DEBTS

Consumer finance specialist Lisa Montgomery said “there’s uncertainty for some people if they are going to get paid or lose their job”.

“If they are in a sector that’s impacted by the virus, that’s a real issue for them,” she said.

“If you overlay the uncertainty of the current environment, there’s a lot of anxiety to repay debt. So if you find yourself in difficulty you should contact your financial institution right now.”

Ms Montgomery urged consumers to also “prioritise their debts” and look at how they could rear range them.

“Your financial institution can help you do it,” she said.

CREDIT FEES

The Australian Securities and Investments Commission says the key fees to watch out for depend on the type of loan.

Credit cards have annual fees that are often automatically charged each year to your account, reward program fees for cards that earn points, late repayment fees, cash advance fees, over-limit fees and extra charges when using the card overseas.

Personal loans have application fees when starting the loan, and monthly service fees and missed payment fees.

Buy now, pay later schemes can include late fees of up to $15 for missed repayments, monthly account-keeping fees up to $8, establishment fees of up to $90, and paymentprocessing fees when making extra repayments.

Payday loans – usually the most expensive form of shortterm finance – can charge establishment fees of 20 per cent of the amount borrowed, monthly service fees of up to 4 per cent of the amount borrowed, default fees of up to double the amount borrowed, and other enforcement expenses if you default.

SEEK HELP

ASIC’s Moneysmart.gov.au senior executive, Laura Higgins, said people should be made aware help was available when dealing with credit.

“For instance, if people are currently receiving government payments from Centrelink, there are some payments available through Services

Australia,” she said. “If you have a payment plan and are paying things off at a certain rate, and are looking to make changes, stop and look for information and make some informed decisions.”

All credit contracts show the loan term, how interest was calculated, repayments, fees and charges.

Ms Higgins said consumers should make sure they ask any credit provider for the fine details of any contract.

“A credit provider must give you a credit contract before you sign up for a loan or a credit card,” she said.

“Reading a contract can seem too hard–or-too-boring–but don’t avoid it or put it off.”

Ms Higgins said consumers could use moneysmart.gov.au calculators to work out the total fees they would pay. The site has calculators for personal loans, credit cards and payday loans.

GETTING CREDIT

Marketplace lender SocietyOne’s CEO, Mark Jones, said lenders would be “a lot more cautious because there’s risk in the environment” before dishing out credit.

“It’s good to have all of your information and to be able to show your situation has not changed over the last few months,” he said. “In these times when there’s a lot of uncertainty when looking forward, people need to make sure they have got enough cash for a rainy day.

“Sometimes a loan can be quite useful in case the person needs to take time off or their workplace shuts down for a month.”

Mr Jones suggested refinancing loans on a lower rate and to consider relying on rainy day savings or a credit card, if available.

He said being able to service credit was “key”.

“If you are thinking about applying for credit, make sure you are up to date on all existing credit facilities, such as phone bills,” Mr Jones said. “And know what your potential outgoing costs are.”

He also recommended consumers search for loan providers that did not charge ongoing monthly fees. “Fees and charges should be easy to find on a lender’s website,” Mr Jones said.

“Comparison sites can also help you compare but make sure you look at the comparison rate and not just the headline rate.

“Be aware that some fees are not included in the comparison rate, such as early repayment fees.” The comparison rates include all the standard charges and fees.

As for popular buy now, pay later schemes, Ms Montgomery said consumers should err on the side of caution.

“If your employment is uncertain at this point, buy now and pay later might not be the best decision for you,” she said.

“You want to be able to pay later and if there’s a question around your pay cheque coming in, or you are going to take a reduction, you want to make sure you can maintain your essential expenses.”

After pay revealed late last month that its global customer numbers had more than doubled in a year to 7.3 million active users, including

3.1 million across Australia and New Zealand.