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Consumer tips

This article is designed to assist consumers by looking at ways to get financially savvy and avoid making (costly) mistakes.

The author has worked in banking and an Ombudsman service has seen first hand some of the mistakes made by people when it comes to money.

The truth is that we all make mistakes..... but as the saying goes the important thing is to learn from them.

Generally speaking all debt is bad, however, there are some debts which are more positive than others given the right conditions.


Good Debt

There are some long term debts which are good (with some exceptions) because they work as an investment, whether that is investing in your skills by education to gain employment or achieving a financial goal such as property ownership.  A student loan is considered a 'good debt' because it is an investment in your skills set which should (in theory) enable you to gain employment long term.

A mortgage is considered a good debt because it works towards achieving a goal which is property ownership.  It should be noted however that not all university degrees will guarantee you a job and not all mortgages are wise. For example, if you take out a mortgage for an overpriced property you can barely afford. This is not a good debt as if interest rates rise or your job situation changes you can find yourself in a position where you have to sell and even worse, if you sell when the property market has dropped you may find that you owe money for a property you no longer own. In an ideal world you would only borrow what you can afford and gain equity on your property.

Bad Debt

I used to work at an Ombudsman service our common complaints were to do with car loans that consumers could no longer afford. What is the issue with car loans? you may ask. After all, like a mortgage it is working towards a goal.  That goal being ownership of a car.

Well to answer this, you need to remember that a car is a depreciating asset, meaning as soon as you drive your sparkly new car out of the dealership it is going to keep going down in value.

Car is written off?

The loan will still exist.

Sold the vehicle?

The loan will still exist.

Want to exit the loan?

The loan will still exist.

Car loans often have high interest rates (25% per annum being common). And before you cry 'help me Ombudsman' remember there is nothing illegal about car loans given normal circumstances. So before you get tempted to purchase that new sparkly Volkswagen. Think again.

Still dying for your new car? Save the money until you can afford it or buy second hand.

Another culprit which I would put under 'bad debt' is rental goods. Why?

Consumers will often pay three times the amount of the goods for a set period. I.e 2 years and at the very end of it, they do not even own the goods.

Now don't get me wrong, occasionally these rental good companies will allow you to purchase the goods at the end of the term, however that is discretionary and by that stage you have paid more than three times the amount of the goods themselves. Most goods that are under rental agreements are depreciating assets such as electrical goods. If something happens to your rental goods in that period i.e they get stolen? you still cannot exit the rental agreement (given normal circumstances).

Consumers are often sold these rental agreements due to the promise that goods will be replaced and repaired without further cost. Truthfully, you would still be better off buying the goods outright and then paying for repairs at a later stage if need be.

My advice? Purchase the goods outright once you've saved the money or lay-by.

Timeshare Agreements

Why these agreements are still legal?

I have no idea. Timeshare agreements are a very, very niche financial product which burdens most and benefits very few.

They often use high pressure tactics, such as giving out free scratch cards, claiming that the consumer has 'won a free holiday'.

Remember there is no such thing as a free lunch...

They will then tell you that in order to redeem your free holiday prize all you need to do is attend a presentation.

It is at this presentation they will make you feel like you are part of this niche rich club and serenade you with holiday brochures. They lure their next victim individual into signing up to life long membership (yes.. life long membership exists).

The membership costs around $816 per year, sound a bit expensive? That's ok they are more than willing to help you pay for it. This is when they refer you to their finance company.

The finance company helps you purchase points (points system = holiday) with the timeshare company.

Lets just say that you purchase 20,000 timeshare points which you can use on a holiday, that will cost you around $17,000.

The Finance company will then transfer that $17,000 across to the timeshare company and you are issued with points. So basically, you don't even see the money in your bank account like other loans. All you have are 20,000 points to use on holidays. Well what could be wrong with that you may ask?

Think about it logically.. how often do you actually go away? In Australia we are entitled to 4 weeks leave. That would mean you are probably going to go away once a year. Well what about public holidays? Timeshare companies usually have many conditions placed on their holidays, which excludes split weeks. So any 3 day getaways are usually not possible.

So then you have around $600 per month coming out of your bank account for the loan you took out with the finance company ($17,000) plus an additional $68 for membership per year (part of the $816).

Want to know what the cherry on top? the timeshare agreement means that they do not even have to 'guarantee' you holidays at any point. It is subject to availability. So how would you like to pay $668 per month with no holidays or anything guarantee really....just some fancy certificate with 20,000 points? Go and join a timeshare agreement.

My advice?

Go and book your trip, at a time when YOU decide to go away via a travel agency or better yet book it online. Do not get sucked into a timeshare agreement if it is not going to benefit you. Remember they are completely legal at this point and are not that easy to exit.

















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