Whether it’s food, fuel or rent, everything seems to be getting more expensive lately.
If you come to the end of the week with no money, you might consider getting a credit card or using buy now, pay later products to help you make ends meet.
While these products can help in the short term, they can cause problems in the long term, says Deb Shroot, financial adviser at the National Debt Helpline.
“If you’re having trouble paying for food this week, you’re probably going to have trouble paying for food next week,” she says.
“If you get credit to pay for essentials, it means you’re in financial trouble and it could put you in a much worse position.”
What to think about before taking out a credit card
When it comes to credit cards, personal loans and other forms of debt, Shroot says it’s important to understand your ability to repay.
“The biggest question when looking at credit is [whether] you have the ability to repay,” she explains.
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It’s worth considering whether you’ll be able to make the payments for the full term of the loan. In some cases, like personal loans, that could mean you’re making payments for years.
“The other thing is to understand the cost. It’s more expensive to buy something on credit than without credit. That has to be taken into consideration,” she says.
Although credit cards have interest-free periods, if you fall behind on your payments, they can be extremely expensive. Many credit cards have interest rates of 15% per year or more and other expensive fees.
On a $10,000 balance, that would cost you at least $1,500 a year in interest charges alone. If you only made the minimum repayments, you could spend $25,000 to pay off the $10,000 loan.
The risks associated with taking out a personal loan
You may also have heard of payday loans, which are often touted as an easy way to access cash quickly.
Payday lenders typically charge a 20% setup fee, as well as a 4% monthly loan fee, calculated on the amount borrowed.
For example, if you borrow $2,000, you could pay $400 in setup fees and $80 in monthly fees. You may also face fees if you fail to repay the loan.
If you borrow $2,000 and pay it back in six months, you could end up paying $2,880, or 44% more than you borrowed.
Before considering a product like this, Shroot suggests speaking with a free financial advisor to take a closer look at your financial situation.
“If they have trouble paying [everyday expenses] …we are able to look at their entire financial picture,” she says.
“We can go through their budget to see if there can be anything they can do; we can refer them to emergency relief centers if that helps; we can even help them access options if they are in difficulty. and possibly put other debts on hold.”
Other options include taking out a loan through the Interest-Free Loan Program, which allows people to borrow up to $1,500 without interest, fees or charges.
If you receive a Centrelink payment, you can also request an interest-free prepayment.
What if you buy now, pay later?
You might also consider using a buy now, pay later product to help smooth out your spending.
Although these products are often advertised as interest-free, there can be significant charges for missed payments.
Another problem is that you might find yourself spending money that you wouldn’t have spent otherwise.
One of the reasons these products are so popular is that they boost retailer sales because they allow people to spend more than they otherwise would.
“Because it’s an unregulated industry, [buy now, pay later] does not offer the same consumer protections as other products,” says Ms. Shroot.
“For example, there’s no limit to the amount of buy now, pay later people can withdraw. If something goes wrong, you’re at the mercy of the company you bought the product with. product.”
Another issue is that different buy now, pay later products have very different fees and charges.
“People really need to understand the terms and conditions of each of the products if they’re going to use them,” Ms. Shroot says.
“We do not recommend using these products for essential services. [In that case] you need more help and support to find a more lasting solution for you.”
Where you can get help
This is general information only. If you need personalized advice, do not hesitate to call on a professional.
