Lifelines in a sea of debt
Rob Stock looks at the options for borrowers facing payback time after a pre-Christmas binge and finds traps for the unwary.
Post-Christmas debt blues spark a loan-consolidation rush starting in February when credit-card statements start arriving in letterboxes, but the wrong moves could end up doing more harm than good for borrowers.
Hundreds of loan firms compete at this time of year for the attention of borrowers with too much hire purchase, credit card and car debt looking for ways to bring down their monthly repayments.
Debt consolidation is about doing that by combining some or all of the debt together through a new loan.
Googling New Zealand "debt consolidation" shows how varied the strategies are for tackling debt woes.
The search brings up 34,800 results, but the top 10 ordinary links, and the first 10 "sponsored" links (Google accepts cash for highlighting certain search results) illustrate the options available, good and bad.
The first rule of debt consolidation is to talk to your bank, building society or credit union. These lenders have the lowest fees and interest rates, though only two came up in the search: National Bank and PSIS.
The other banks were crowded out by credit brokers (which claim to search the market for the best loan for clients) and finance companies.
For borrowers who have not missed payments, it is madness to head anywhere but the first-tier lenders.
National Bank and PSIS call centres told us to expect a $150 fee for a $10,000 debt consolidation loan far lower than at GE Money ($265), Credit Express (around $250-$350), Finance Point ($350) or Asset Finance ($612).
Interest rates are also likely to be lower. While PSIS is offering 14.5% unsecured (10.5%-12.45% secured), and the National Bank is offering 16.95%, GE Money's call centre warned us to expect rates of up to 35%, though it did offer what it called a "blended rate" where GE offers the average interest rate on all of a borrower's existing loans.
Loan broker East Bay Finance expected its rates to start at 18.95%, and Finance Point warned that an unsecured loan would attract a rate of 21.95%, or 17.95% secured.
Even if you think your bank is likely to turn you down, go and ask.
"Don't be embarrassed," said Dave Murray, head of marketing at PSIS.
The worst that can happen is they say no, and if your purpose is to hide your debt-incurring ways from the bank, don't bother. It'll find out next time it checks your credit report.
STRETCHING THE STRETCHED:
One common trick lenders use is to lower a borrower's monthly repayments by extending the period of their loan.
Someone struggling to pay $236 a fortnight to clear a $10,000 loan at 20.9% would end up paying a total of $2243 in interest if he or she kept to the two-year schedule.
Stretching that out to four years, even at a higher interest rate of 23%, cuts fortnightly repayment to $147.47, but total interest payments end up at $5186.
While that can keep someone's head above water, the result is deeper debt.
Many lenders let borrowers capitalise fees, so they end up paying interest on them.
Fortunately, there is advice available. Two of the Google results were for Consumer and Sorted (the Retirement Commission's website), though Consumer's excellent 2006 report on the sharp debt consolidation practices rife in the market including the rort of pressuring borrowers to accept over-priced insurance they don't really need are for paying members only.
One site that did not appear in the top 20 of our Google search, but should have, is that of the Federation of Family Budgeting Services (www.familybudgeting.org.nz). Its volunteers, dotted around the country, offer confidential advice for free.
GET A VISION:
Dave Murray, head of marketing at PSIS, said most lenders will give you a loan, not help you change your ways. "Debt consolidation should be about getting ahead.
"We know people have taken on a pot-load of debt, and are finding it hard to get through. We try to help our customers get out of debt and stay out of debt. That's a different mindset to what most other lenders are about."
American Express was the only credit card company in the top 20 results.
Switching balances from one issuer to another, or from a high interest card to a lower interest card, can cut costs. Standard cards have rates of 20.95% now, while low interest cards can be as low as 11.95% (BankDirect).
Balance transfers tend to offer temporarily lower rates between 5.99% and 9.95% for borrowers moving a balance from a rival's credit card to their own.
The trouble is, said Jamie Cureton-Royle from The Specialist Lender, borrowers only have to make minimum repayments of around only 5%, which means loans can take decades to pay off.
And borrowers continue to have a dangerous revolving credit loan they've already mis-used.
Three mortgage lenders popped up in our Google search Wizard, The Specialist Lender and Problem Mortgages and it is tempting for those with too much consumer debt to bang it on the mortgage, lowering repayments and slashing interest costs into single digit mortgage debt.
But Cureton-Royle said borrowers must remember they are converting unsecured debt into secured debt, so missing payments could mean their home is at risk.
They are also converting short-term debt into long-term, which can mean interest costs are bigger in the end.
John Grant from Wizard said it was wise, when getting a mortgage top-up, to have the lender create a new, separate mortgage account to contain your consumer debt, and create a fast-track schedule to pay it off.
There are costs in refinancing consumer debt onto the mortgage. Legal fees range from $250 to $500 and there can be unavoidable insurance fees for those who do not have enough equity.
Mike Parkes from Problem Mortgages said it was not uncommon now to find people with "inverted debt profiles" owing more in consumer debt than they had in equity in their homes.
Those who succeed in such refinancing were unlikely to find rising house prices rebuilding their equity as quickly as it has in recent years.
One rarely-explored option for those who have not missed any repayments is to take a short mortgage holiday banks usually allow up to three months which costs nothing to arrange. During that time, money for mortgage payments can be redirected to paying down consumer debt.
For those who have missed payments, the current credit crunch will leave many out in the cold because very few lenders are interested in what has become known as "sub-prime" mortgages.
"Everyone's getting fussier in what they lend and the people they lend to," Parkes said. "If you have missed payments, it gets harder. No one wants to know you."
This means more bankruptcies can be expected.
Sunday Star Times