A lot of people think that getting an instant credit/loan is an easier way to help them make a cheaper purchase. This is because they usually cannot afford to buy something straight away. Whether it is a car, furniture etc. But it will cost you a lot more that people realise if you chose the wrong way of getting a credit/loan.
The responsible way to use credit
-Everyone wants what they can’t usually afford right? And that is normal, you might need to buy a decent car, rather than the cheapest one you can afford. There is a way to use credit in a responsible way. Which in future will help you with future assets such as a house, maybe your own business to start up.
Consumers need to make sure they are using a responsible way of borrowing money by making the term of the loan as short as possible. The longer the loan, yes, the smaller the repayments. But buyer beware, the longer the term, the more interest you will be charged. Whether it is a bank or a finance company. A bank will always be cheaper.
Is credit bad?
-Credit is not bad, but it can be if you sign the wrong contract. The fact is that nowadays, there are a lot of financing companies available in different industries, such as, automoviles, electronics / appliances or home decor etc. A finance company purposely instead of caring for people’s needs, just want to sell you a deal, rather than making sure you are educated enough to understand what you are signing.
How financing companies/schemes engage with customers?
-Most companies, would engaged with their clientele by advertising lower interest rate than banks, or even credit free options. What it is not advertised, is how often they charge interest. Even though the interest rate is lower than a bank. These companies charge interest more often, which costs you more. They also add in extra fees, most common is an ´administration fee´ every time they charge interest.
Example of how financing companies work:
-A clear example is in the automotive industry, very commonly, car dealerships or selling platforms offer a finance company to help you get the car now and pay it off later.
Within the same industry, another issue could be that the fees charged on repayments can go entirely to cover interest and fees that are charged in order to get the loan rather than paying the owed amount.
How is financing normally done?
-Banks are always more open and honest about helping you understand the finance you are applying for. Sometimes loan application fees can be removed or be decreased, for example banks that can do this in New Zealand are ANZ and Westpac.
Nowadays, majority of banks would offer the option of making lump payments to loans, which would decrease the amount of interest paid on the overall loan process. This will also shorten the time a loan takes to get paid. You can also make smaller extra lump payments when you have worked overtime, or have spare money from a bill that was smaller than you anticipated. Like an extra $50 here and there, it all helps you.
There is nothing wrong with getting help with borrowing money. If possible, to avoid all interest charges, you can:
- Use a Bank instead of a finance company
- Arrange to do a deposit payment, an amount now, the rest to pay off later to get the item and avoid paying interest / fees.
- Make a contract with a family member or a close friend to borrow the money from them instead.
Of course, the best option would be to wait and purchase products, when you have saved enough for it. Then there is room for negotiation to challenge the original price to give them a ´cash price.´
In conclusion, consumers are to really read and understand the contract they are going to sign, before signing up with a financing company. As most commonly, some companies might be taking advantage of your financial situation. Or consumers could occur overpaying interest fees over elusive advertisement, when there are other options that could be used.