June 27

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Should I Borrow To Repay My Credit Card

Just the other day I was chatting with a friend, she was quite chuffed with herself, she had taken out a loan to repay her credit card. Her credit card debt was $7300 with a massive interest charge rate of 20.8%.  (Similar to a store card)   She knew if she continued to pay the minimum payments of $150 per month  it would take her 39 years to pay the debt completely off.  (moneysmart.gov.au)

So she approached her bank to take out a fixed rate personal loan, she borrowed $10,000 because she also wanted to get herself a new set of golf clubs, since her game had now picked up.

  • Loan amount was $10,000
  • Loan Term 5 years
  • Fees Over The Term $1,000
  • Fixed Interest Rate of 9%

Monthly Repayments $220 + $12  (inclusive of Loan Account Fee)

Over the 5 years the full amount paid to the bank, for this loan including the Loan Account Fee of $12 per month and the Establishment Fee of $250 is around $13.9K. On the surface it looked like the right way to go for my friend, fix the interest rate, fix the repayments and know exactly when it will be paid off. 

Had my friend been in a position to increase her monthly repayments up to $365 per month, according the the smart money site, she would have been debt free in 2 years. (moneysmart.gov.au)  All is not always what it seems when it comes to reducing debt, lower interest rates does not always mean, less money repaid, the term of the loan comes into play.  How long are you going to be making these repayments for?.

You can get these details over on the moneysmart.gov.au website, this is a valuable resource with calculators for working out the best steps to take to reduce your debt  Of course my friend could increase her loan repayments pay the loan off quicker, but then she would have to pay an additional early repayment fee, or perhaps she could have opted for a credit card balance transfer, which would have given her a lower rate on card.

Follow these steps to make sure you are in fact actually reducing your debt:

  1. Only borrow the exact amount you need to pay out an existing debt, otherwise you are putting yourself further in debt.
  2. Consider the overall payment plan, will this cost you more in the end
  3. Can you afford to pay extra on that existing loan to reduce it quicker 

Use the moneysmart.gov.au calculators to work our your own personal options, this is a valuable resource here in Australia for anyone wanting to build their financial knowledge.




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