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Unmanaged personal debt can be emotionally debilitating. In a world where many of us require everything instantaneously, where the latest must-have gadget becomes tomorrow’s news by the time we get it home, we constantly feel the need to upgrade. Where we are often defined by the property we own, debt can become the easy answer to making sure we “have it all”. Even to many of us who should know better …
Mortgages, personal loans, car leases, store cards, credit cards, no-deposit and interest-free terms are all financial products designed to ensure you have the things in life that you really want. As GE Money says on its website, “GE Money is in the business of meeting your financial needs with ease, simplicity and speed. From credit cards and personal loans to insurance and retail finance, we can make life easier.” Many other finance companies offer the same sentiment. But “easy” can come at significant cost that is often not just financial.
More than a million Australians are in serious debt and often are being harassed by creditors, which can be very stressful. Many who find themselves in this situation do not know where to turn or what their options are.
If you have tried on your own to control spending habits and/or negotiate a settlement with your creditors without success, then a formal arrangement to manage your debt may be what you need.
John Beecroft, from Debt Assist, knows all too well the toll that personal debt can take on people’s lives.
Eighty per cent of Debt Assist’s business involves helping people deal with their crippling debt, through debt consolidation and debt agreements in a cost-effective manner.
Many of Beecroft’s clients have mortgages, car finance and several credit cards that have reached their limit and they find themselves without the means to meet the various monthly repayments.
He says he is often shocked to find many people do not understand how much interest they are actually paying on the various forms of debt they have.
Beecroft says personal bankruptcy is often seen as the only way out by many, but there are options that may help manage you debt before you get to this stage:
• Debt consolidation allows you to combine individual loans into a single personal loan. You will then make one monthly repayment rather than several, and this one-off payment should be lower than the combined payments you were making. Negotiating a lower overall
interest rate will also reduce the cost of your debt;
• Banks are often not keen to swap credit-card debt that pays 25 per cent interest for a personal loan paying, say, 16 per cent. So if you own property, refinancing your unsecured debt into your mortgage is one of the best ways to reduce your interest cost, lower your monthly repayments and, consequently, reduce your debt stress;
• If you don’t own property or do not have enough equity in your property to tip in your unsecured debt, then a formal debt agreement may be the next step. This is also known as a Part IX and is a legally binding agreement with your creditors to pay part or all of your debt over a set time. The advantage of a Part IX is that the debt is effectively frozen (no further interest accrues) and you pay only what you can afford. The disadvantages are that the Part IX goes on public record for seven years and may affect your chances of obtaining credit during this period.
Debt certainly has its place in today’s lifestyle. However, although it might make life “easier” as some money lenders state, if not managed properly, it can have serious ramifications on your financial well-being, your health and your relationships. Of course, the best way to avoid debt is to set yourself a budget to meet your financial goals and then stick to it.
Personal debt statistics
• Credit-card debt again is on the rise. While this signals a recovering economy
with greater confidence in job security, it can also signal people spending beyond
their means;
• Credit-card debt is currently running at about $45 billion and personal debt at about $90 billion;
• The average level of unsecured debt (credit cards, utilities, personal loans and tax) in
Australia is $25,000-$30,000 a head;
• The average age of people holding the average level of debt is 38 (split about 50/50
between men and women, although women are better at doing something about it);
• It can take 17 to 50 years to pay off a credit card if you pay off only the minimum monthly balance.