Smart borrowing for a cheery Christmas

RICHARD MEADOWS
Last updated 05:00 12/12/2012
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SMART MOVE: Taking on debt just for hedonistic holidays is dumb but if you're determined to borrow to make this Christmas cheerful, at least make the right choices.

Oh Christmas tree, oh Christmas tree

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It's only two weeks until Christmas. You can practically smell the roast turkey and boozy pudding already. But there's a chemical odour too - the hot plastic of thousands of credit cards being swiped in unison.

At this time of year, screeds of stern finger-wagging articles are written about how to avoid getting bogged down in silly season debt.

This is not one of them.

Let's be honest - some of us are going to have to borrow money to get through the holiday period, no matter what. Others have already done so.

If it is unavoidable, what's the "best" kind of debt to take on?

Most people will turn to their credit cards for help. We know this because in the last few months of each year, the country's combined balances rocket up by about a quarter of a billion dollars.

But what about other forms of lending, like personal loans? Consumer analyst firm Canstar has crunched the numbers in its personal loan star ratings report, released today, to see how they stack up.

At first glance, a no-frills credit card with a bonus interest-free period is a much cheaper form of debt than a loan.

For the purposes of debt consolidation - which means rolling all your loans into one - they're even better, offering generous specials to transfer your balances across.

But Canstar has found that the difference is not so black and white. Let's take a look.

CARD VS LOAN

Canstar looked at a $10,000 debt repaid over a three-year time period.

You could be borrowing that money for debt consolidation, a holiday, or general seasonal splurging.

Here are the contenders in the prize fight:

* A low-interest 12.90 per cent credit card, with a six-month balance transfer period of 2.99 per cent.

* A personal loan, with a slightly heftier 13.09 per cent interest charged each year.

After three years, both loan balances have been paid down to zero.

Canstar found the credit card saved $568 over that period - the clear winner by a knock-out decision.

But that scenario assumes you diligently chip away at the credit card debt each and every month. What happens if you only pay the measly monthly minimum of 3 per cent?

Suddenly it's a very different picture.

The personal loan, which has repayments locked into place over the three years, doesn't change.

But according to Canstar's figures, it will now take more than 17 years to repay the credit card debt. At the end of the three-year period, you'd still have more than $4600 left to pay.

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The big difference between the two scenarios is willpower. 

Personality Test

Are you an impulsive buyer who's always struggling with debt?

Or a careful spender who scrupulously pays off your balance each month?

If you have the steely discipline required to repay on time, repay as much as possible and resist new spending, then a credit card will work for you.

But if there's any chance of a relapse then it's probably not worth it, says Canstar national manager Derek Bonnar.

"It may be slow and steady, and a little bit old-fashioned, but if you can't trust yourself with a credit card, a personal loan will get you over the debt finishing line a lot sooner."

Get the Best Loan

Personal loans fall into two main categories - secured or unsecured.

Secured means you're putting something up as collateral, like a car.

The advantage of a secured loan is that the interest rates are usually much lower - often 3 percentage points less. 

The disadvantage is that if everything goes pear-shaped, your lender has the right to repossess the secured item.

In Canstar's star ratings report, the loans offered by the smaller locally owned banks represent the best value.

Each product was judged based mainly on its price including fees, as well as the features that it offers.

In the unsecured category, Kiwibank and TSB were the only lenders to be given the top rating of five stars. TSB's interest rate was particularly impressive, at 13.09 per cent.

These same two loans were also the only ones given five stars for debt consolidation purposes.

The five-star secured loans were on offer at the Co-Operative Bank, with rates as low as 10.5 per cent, and TSB, at 11.09 per cent.

The report, which can be seen in full here, also looks at application fees, minimum and maximum loan sizes and terms, which are important to consider too.

Other Options

There are plenty of other forms of debt beyond personal loans or credit cards, and it's worth noting that personal loans aren't always easy to get approved. 

"A personal loan with a bank, you're going to have to go through some fairly robust criteria," says Raewyn Fox, chief executive of the Federation of Family Budgeting Services.

Dodgier lenders won't make you jump through as many hoops, but will charge a lot more in fees and interest.

Fox says panic buying during the week before Christmas might tempt some in to getting a "payday loan" or other expensive form of short-term lending.

These loans have astronomical interest rates and should be avoided at all costs.

Another common strategy people use is to ask for all their Christmas pay in advance, or avoid paying bills during December.

Bad idea, says Fox. You're only putting off the inevitable, which will be made even worse when the next round of bills and back-to-school expenses roll in.

Sorted.org.nz suggests hitting up your family and friends for a cheaper option before you look at other forms of debt.

Of course the "bank of mum and dad" may be under as much financial pressure as anyone else at this time of year, but it's worth a shot.

If you own a house and are ahead on your mortgage payments, borrowing against your home will often be much cheaper too.

We all know that taking on debt just for hedonistic holidays is dumb.

But if you're determined to borrow enough to make this Christmas cheerful, at least make the right borrowing choices.

- BusinessDay.co.nz

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