Generally in the interests of financial fitness we would suggest that it is best to avoid borrowing money to purchase consumer goods and only borrow to purchase assets that cost so much that it may not be feasible to save the amount at once and where there is a good chance that the asset will appreciate in value, for example a property.
However sometimes life can get ahead of us or we feel like a treating ourselves and we buy things which we currently do not have the money for. In this situation it is helpful to understand the options that are available and to choose one which has the lowest cost and/or is the easiest and fastest for you to pay off.
Most of these forms of borrowing are “unsecured”, as the lender requires no security for the debt, however some forms of lending such as car loans can be “secured” with an asset (the car) used as security for the loan. When a loan is secured the lender may be able to sell the security item if you are unable to repay the loan.
Companies such as Afterpay, zipMoney and Oxipay offer a service where they will pay for goods on your behalf and will require you to repay them over 4 equal instalments due every 2 weeks. If you make the instalments on time then you are not charged any interest. If you are unable to pay the instalments then you will be charged late fees and
It is a grey area if payment via installments is considered borrowing as the providers argue no interest is charged to customers that pay on time. However given customers are ultimately charged interest if they miss payments we have included it in this section.
Pros: No cost if installments paid on time, easy to apply online
Cons: Limited number of retailers accept it, limited to smaller amounts (though this can increase over time), will ultimately cost fees/interest if repayments are late
Credit cards are issued by most banks and they enable you to borrow money to use as payment for goods and services up to a pre agreed limit. The bank will expect the customer to pay back the amount borrowed plus additional charges such as interest and fees. Generally the fees and interest rate of credit cards are high.
There are many types of credit cards but the major affiliated companies include Visa, Mastercard and American Express. Credit cards are prevalent and almost all retailers, food and entertainment venues will accept them as a form of payment.
Often credit cards will carry incentives to encourage customers to use them such as reward points for spending that can be redeemed for travel, gift vouchers or even cash back.
The costs of a credit card include an annual fee, interest on amounts borrowed (though some credit cards have an interest free period) and late payment fees. Also the retailer or supplier may add a surcharge to the price of goods or services when paying via credit card as they are also charged a fee by credit card companies when they accept a payment.
You will be required to make minimum repayments on a credit card each month covering interest charged as well as repaying a proportion of the amount borrowed, however so long as you do not exceed the agreed credit limit and continue to make the minimum repayment there is no set time by which you need to pay off the loan.
Pros: Accepted as payment almost anywhere including online, relatively easy to apply for, can have interest free period, some good incentive/reward plans
Cons: High annual fees and interest rates, can make it too easy to spend more than you need
You can use a personal loan to borrow a specific amount of money and then repay the bank, including interest of course, over a set period. Generally the money borrowed using a personal loan can be used for any legal purpose and they can be used to fund larger purchases, holidays or small renovations.
Personal loans can be secured (will have a lower interest rate) or unsecured and many personal loans allow the borrower to make extra repayments and pay back the loan faster reducing interest costs. Also personal loans is are often cheaper than credit cards and as they have a repayment schedule, encourage people to pay them off.
Personal loans can also be offered with fixed interest rates for those that wish to lock in the price of the loan.
Pros: Can be cheaper than credit cards, discipline of repayment schedule, can use security to lower interest rate
Cons: longer application process
More info and useful questions to ask about personal loans: https://www.canstar.com.au/personal-loans/what-is-a-personal-loan/
A car loan is borrowing for the purpose of buying a car and will usually be secured by the vehicle. You can use a car loan to purchase a car and pay for it using monthly installments over a period of up to 10 years. The installments will include interest on the loan as well as repayment of the car purchased.
A car loan can be thought of as a secured personal loan with the car used as security. Car loans are available for new or used cars though generally banks/financiers will only use cars that are less than 5 years old as security. If you are borrowing to buy an older car you may need to consider an unsecured personal loan.
Pros: Secured car loan may have cheaper interest rate, discipline of repayment schedule
Cons: longer application process