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Thinking of Getting into Debt?

There are some simple rules when you are thinking of getting into debt, which may save you a lot of grief if you use them before you make a committment that will take an extended time to pay off..

Many of the above remarks have come from experience gained by the writers personal experience, or the knowledge gained from a number of years working in financial institutions.

Press any of the bullet points to be taken to expanded comments on any of the listed donts...

Dont Finance Longer Than Life

If the warranty period on a washing machine is 1 year, dont get finance that will be longer than 1 year, otherwise, you may be 2 1/2 years later on, with a washing machine that fails to operate, and the need to continue paying off the finance for the broken Machine and also having to pay for the finance that you take out to buy the replacement.

Dont finance short term debt long term

Consolidation seems to be on everyones minds lately, get a number of small loans, consolidate them into a big loan, and lower your payments.

While this is true for most, it can become the nail in the financial coffin for most people, who, on discovering that they have just paid off their credit cards, end up spending on them again, leading them to not just have the Consolidation Loan, but also having the numerous credit card bills to compound the issue.
Although you may be able to consolidate once or twice, it evolves into a situation where you spend, finance, spend finance, spend finance, until youi cant finance any further.

As you get more finance your ability to get 'good' credit declines, to a point where the only organisations that will loan you money will charge you 30% or more..

Thats the equivalent of a 30% pay cut!!

Dont Borrow more than you need

This may seem straightforward, but again, people think, while i am getting a loan, i could get a 'XXX' or a 'YYY' by extending it for only 1 more year.
DONT DO IT!! This will keep you in debt longer and have you paying higher interest for longer.

Aim to pay off a loan in the shortest period possible giving you a chance to turn your finances around, and change from a borrower into a saver!!

Dont Consolidate without Settlement

If you are in financial difficulty and you are tempted to get a consolidation loan, dont consolidate unless you can negotiate some form of discount.
Many organisations will offer prompt payment terms to settle an outstanding debt if it is paid in full, so why not take advantage of that.
Some Companies like KiwiDebt Limited will offer debt settlements as part of their service.

Remember every loan you take out costs you in terms of setup fees, booking fees, etc etc (some may waive them in special circumstances).

Dont Duplicate Fees and Charges

If you decide that you want to take out another loan, you may not need to pay setup fees to get a loan off the ground, many companies will waive the setup fee just to get your loan up and running.

Loan protection insurance (PPI) is another thing, many companies charge you for loan protection insurance when you drawdown the loan, check the fineprint when you take it out, as, many policies may not provide sufficient cover for illness, accident, and redundancy
And if you do decide to consolidate, if you had loan protection cover from a previous insurer, you may be due a refund when you pay your loan off early

This has become a scam in the UK so caution to you the NZ Consumer see [here]

Investigate the Annual Interest

Even if you are only thinking of getting a 'pay back next payday' loan, make sure you treat any lending as if it is longer term, making sure that you completely understand the 'actual rate' of interest that you will repay.

The writer has seen instances of loans in excess of 900% per annum, meaning if a person failed to pay a loan back within the (1 month) period of the loan the person could end up paying back 9X the amount they borrowed within a 12 month period

Always try banks before finance Co's

Banks tend to have a better rate of interest than high street finance companies, and banks dont tend to take your household posessions as security.

If a bank turns you down for a loan, perhaps you cant really afford the loan in the first place...

Dont Secure Items You Need to use to live

Never, ever, ever, never, ever (this is serious)
Never take a loan out if the lender wants you to use your furniture, your fridge, washing machine, your kids beds, or your dining table as security (collateral) for a loan

If a lender says that they wont lend you the money, otherwise, maybe it is best to just walk away.. or...

You could end up sitting on the floor eating your food off a cardboard box as you try to explain to your kids why the men came and took their beds, and that they would have to sleep on the floor.

If you cant afford to lose it dont use it!!!

Dont borrow if the bank etc requires a loan funding account

In the definition I have been given by a major NZ bank, a loan funding account is where funds are deducted to repay a loan that you have borrowed.
A number of banks which I have in the past borrowed from have a rule, borrowers cannot loan from them if they do not have a loan funding account

An explanation that is given when the bank is questioned about this is that the bank does not have the ability to accept payments on a loan directly, their systems are not designed that way.
(if banks systems cant work without the need for a loan funding account, would you trust this sort of non-technologically advanced organisation with your money - I wouldnt!)
Examples I have come accross recently however tell another story

- A debtor (borrower) has an issue with his health, and cannot meet his loan payments as he is contractually obliged to.
- Debtor fails to make the required payment into the loan funding account
- Loan funding account makes the deduction as per normal to the loan account, taking the loan funding into overdraft

Bank account (loan funding account) goes into Unarranged overdraft, and is charged an 'honour fee', the account is charged with a 'failed loan payment' fee, the account is charged penalty interest due to the unarranged overdraft.
but wait there's more...
When the debtor resumes work, because he was required to pay his salary into the 'loan funding account' the bank deducts every cent that the client has paid in and the debtor's payments which come out of the account bounce, incurring a raft of dishonour fees

The above is a regular scenario, victims of which include a 64 year old woman, who was forced to live on the dole after she was made redundant at 63years of age.

The comments and opinions expressed here are the opinions of the author, based on the experiences of dealing with families that have become overcommitted due to making one or two decisions which have compounded, resulting in the reposession of houselots of furniture and the eventual bankruptcy of the individual / family.

If you feel that the above comments are unjustified, then you probably have that 'its never going to happen to me' attitude that people get just before something aweful hapens to them, such as cancer, head injuries or a raft of other illnesses which take a person from their daily life and turn them into bad debtors.

The writer urges you to use the above information as a starting point to expand your knowledge in order that you may avoid becoming a statistic on the insolvency / bankruptcy register.