Rob Stock.
This is the time of year when there’s pressure to borrow even more, writes
Personal debt has spiked to a ‘‘mind-blowing’’ $3500 for each man, woman and child in the country, says research agency Canstar. ‘‘The latest figures from the Reserve Bank show we collectively owe over $15.572 billion in household debt, and this is excluding our mortgage debt,’’ Canstar’s Jose George says.
‘‘Assuming there’s around 4.7 million of us living in New Zealand, that’s the equivalent of each of us owing a mind-blowing $3500.’’
With Christmas fast approaching, George urges households to avoid falling into the festive ‘‘debt trap’’ and extending personal borrowing even further.
But although personal debt is increasing at about $500 million to $600m a year, some are paying less for it, thanks to a shake-up of the personal lending market.
‘‘In recent years we’ve seen the personal lending market stirred up as peer-to-peer lenders such as Harmoney and Squirrel, give the more traditional lenders something to think about,’’ George says.
Despite that, the rate floor for the best borrowers has not dropped.
George says: ‘‘As well as bringing more consumer choice to the market, the introduction of new lenders, together with record low Official Cash Rate (OCR), should have reduced the cost of personal lending. Or so you would have thought.’’
In October 2015, the minimum unsecured personal loan rate was 9.99 per cent.
‘‘This year, the minimum rate for an unsecured loan is still 9.99 per cent,’’ he said.
The OCR has dropped by 100 basis points over this period.
‘‘Whilst we have seen reductions in mortgage rates, this has not been replicated in the personal lending market,’’ George says. ‘‘Canstar’s advice is to do as much research as you can.
‘‘A good starting point is online comparison sites but if something is still not clear, ask the lender to clarify. Don’t make assumptions; it could cost you.’’
There are also some basic steps people should complete before even starting to fill out a loan application. First, George says, ask yourself if you really need to borrow the money.
Christmas is a happy time for lenders. Pressure to spend more in November and December leads to a traditional jump in indebtedness even though those months see fewer cars changing hands.
Reserve Bank figures show that even in years where total personal debt declined, the average fall in November and December was less than the average fall in other months.
Among the most attractive Christmas debt funding options are the pay-nothing now deals promising zero-interest until repayments begin after six, 12 or 18 months.
But George warns: ‘‘The more attractive the deal looks, the more you need to be going into it with your eyes open.’’
He crunched the numbers on a $2000 debt, comparing a traditional 36-month personal loan with an interest rate of 15.32 per cent, with a loan where there was nothing to repay for 18 months followed by interest of 29.95 per cent.
If borrowers cleared both loans in 36 months, they would end up paying the same amount in interest, George says, but the borrower who took the deferred payment deal would find themselves with an open revolving credit facility.
Having open credit lines can lead to people remaining in debt for years.
A smart, disciplined buyer could use the interest-free deal to make purchases, and then repay the debt before interest kicks in.
However, accepting these offers may hinder shoppers’ ability to haggle for lower prices.
It is commonly held that the average deferred payment borrower doesn’t repay the debt before interest kicks in. If they did, lenders wouldn’t make any money.
‘‘All lenders are in this business to make money,’’ George says.
And people who take on Christmas debt should avoid stacking Christmas debt on Christmas debt.
‘‘You want to make sure that after next Christmas you are not looking at servicing two Christmas debts,’’ says George.
‘‘Generally speaking, the better your credit score, the better deal you should be able to secure.’’ Jose George of Canstar