Choosing the right financial product
Posted by Clint Davis | 19 Feb
Choosing the right financial product for you: tips and hints
When it comes to online transactions and selecting the right financial product for your needs, there are a number of considerations to be made. That’s why we have compiled some questions which should be considered before applying for a credit facility. You should consider the following:
“Is a one-off sum going to service my needs, or will I require an on-going credit facility?”
This question will be the key in determining whether a loan or a credit card might better suit your requirements. Both have advantages and disadvantages. Credit cards can be obtained easier, but often come with higher interest rates whereas personal loans typically have a lower interest rate but can incur additional fees such as loan protection insurance. Consider carefully whether your financial requirements could be solved with a single one off payment, or whether there exists a risk where you may require access to additional credit.
“Is my personal information at risk when I apply for credit online?”
The internet, by its very nature, has inherent risks associated with its use. However, most lenders have stringent security measures in place and there are certain compliance obligations that most businesses must satisfy when transacting business online. For example, the Privacy Act imposes certain obligations upon businesses to ensure that your personal or credit information is secured and stored safely to avoid misuse or corruption. If you are concerned about your security online, it’s best to ask your lender about their privacy practices in order to determine whether the risks involved.
“Will my information be used to market new products and/or services to me?”
The law requires that an organization does not use or disclose personal information that it holds about an individual for the purpose of direct marketing (Australian Privacy Principle 7.1). However, there are some exceptions to this requirement, such as where:
- the personal information has been collected directly from an individual, and the individual would reasonably expect their personal information to be used for the purpose or direct marketing (APP 7.2); and
- the personal information has been collected from a third party, or from the individual directly but the individual does not have a reasonable expectation that their personal information will be used for the purpose of direct marketing (APP 7.3).
It’s important to note too, that both of these exceptions require an organization to provide a simple means by which an individual can request not to receive direct marketing communications, typically known as “opting out”.
“Will I pay higher interest on a personal loan or a credit card?”
There are a number of factors to consider here. Does the loan have a variable rate or fixed rate? A variable rate means that you can benefit from lower interest rates when they occur, but also risk being exposed to higher rates when the market changes. A fixed rate means that you will never pay a higher interest rate than is stipulated in your credit contract, however, this loan type also excludes you from obtaining any benefits associated with lower rates.
In contrast, some credit cards offer a ‘zero percent interest rate’ for a fixed term (most often on balance transfers). While a customer can benefit from these short term periods where the interest rate is reduced or excluded entirely, at the end of this ‘sunset’ period, the interest rate usually resumes at a higher rate than the standard purchase rate. For example, one of the major banks is currently offering a Mastercard with an interest rate of 5.99% per annum for balances transferred from another credit card. However, at the conclusion of this period, the Cash Advance rate (21.24%) per annum will apply. There are also considerations to be made for the term of credit facility. While a personal loan with a fixed rate means that you will know exactly how much interest will be paid over the term, this can sometimes be more than a credit card would incur if more than the minimum repayment is made towards the debt.
“How do I know if a payday loan will suit my needs, and why do these loans charge such high interest?”
This is a common misconception. Under the National Credit Code, there are fixed interest rates and charges that can be applied to a Small Amount Credit Contract. For a Small Amount Credit Contract, or SACC, the applicable interest rates are; an establishment fee of 20% of the loan amount, and an ongoing 4% monthly fee equal to the adjusted credit amount. For example, if you were to borrow $500.00 for a term of 3 months, you would pay a total of $160.00 in fees. In some cases, it can be financially beneficial to use a small amount loan as opposed to a credit card, and vice versa depending on your circumstances.
A credit facility such as a personal loan or credit card can be a long term commitment. Some Personal Loans can be for a term of up to 7 years, and most credit card facilities can remain open for life pending you satisfy your credit repayment obligations. When you consider this, you can almost think of it in terms of a relationship – would you commit to a lifelong relationship without learning everything you could about the person first? It should be the same for any long-term commitment that has the potential to impact your financial future! I recommend making note of the following points before applying for any credit facility:
- Is the objective for which you require the credit something that is urgent, or could it be afforded by saving the funds instead? Often a great sum of money can be saved in the long term by avoiding interest repayments on loan contracts
- Will you be able to sustain the proposed repayments for the term of the loan? There can be substantial costs involved with defaulting on a credit contract, including dishonour fees and overdrawing fees.
- What are the alternatives to a credit application? Speaking to friends or family for financial support can often save a lot of money in the long term. If you require the funds to service a debt, speak to the creditor about arranging an affordable repayment plan instead.
- Are the funds you seek for something you need, or something you want?If the answer falls into the latter then often it’s more financially rewarding for your future to exercise patience and wait until you can afford the product or service as opposed to seeking credit for it.
- What are your rights under a credit contract? There is plenty of useful information about your rights as a consumer under credit contracts and leases. Educate yourself as to the rewards and risks involved. One very handy resource is the Australian Securities & Investments Commission’s (ASIC) MoneySmart website, which can be viewed here at moneysmart.gov.au
The most important thing is to do your research and consider your needs carefully before submitting an application. For more insight into the financial services industry, check out our other articles!