Bankruptcies at 24 year low; how you can stay on top of debt

Bankruptcies at 24 year low; how you can stay on top of debt

Falling into debt is a reality that many Australians are living in – but they’re fighting back. With bankruptcies at a 24-year low, it’s clear there are more ways than ever you can stay on top of your debt.

According to the latest personal insolvency statistics from the Australian Financial Security Authority (AFSA), bankruptcies were at their lowest level in the March 2019 quarter since the March 1995 quarter.

Bankruptcies fell 9.2 per cent to 3,765 in the March 2019 quarter compared to the March 2018 quarter – and these figures fell across all states and territories besides the Australian Capital Territory.

In terms of debt agreements in this same time period, there was a drop of 31.5 per cent to 2,552 across all states and territories.

Total personal insolvencies also fell 19.4 per cent in the March 2019 quarter compared to the March 2018 quarter.

The good debt

Believe it or not, there is actually good debt. Good debt is considered an investment that will grow in value or generate long-term income – such as a home loan.

If you want to get on top of your home loan, there are a few ways you can pay it off faster:

  1. Make more frequent payments – switching from monthly to fortnightly or even weekly repayments can help you to reduce your principal owing, so you shorten your loan life and ultimately pay less in interest.
  2. Make larger repayments – if your loan allows you to make additional payments, lump sum payments or increase your repayment amount, this is one way to reduce your principal and shorten your loan length.
  3. Refinance, but keep making the same repayments – switching to a more competitive interest rate will allow you to reduce your loan interest and therefore your repayment amount. However, if you were to continue making the same amount in mortgage repayments, you’ll help to pay off your debt much faster.

Low rate home loans

The bad debt

Bad debt may seem a little more obvious. This type of debt is usually provoked by purchasing things that lose their value and do not generate long-term income or carry high interest rates, like a credit card or pay day loan. 

Signs you may have a debt problem include:

  • More than 20 per cent of your spending money is going towards loan and credit card payments
  • You’re only making minimum repayments
  • You’re being declined credit (new loans, credit cards etc.)
  • You’re borrowing money to pay debts
  • You’re missing payments
  • Debt collectors are chasing you

Don’t feel discouraged – there are options available for you to help you get your head above water.

Firstly, organise your finances and make a plan. Do a financial health check and examine what debts you owe, who you owe them to, how much they are, how much are you paying back, their interest rates and due dates. This will help you to prioritise the debts to focus on first.

If you have multiple sources of debt, the general rule of thumb is to consider paying the debt with the highest interest rate first. If you choose to take this route, you will help to put a stop to your debts snowballing out of control from high interest charges. The longer you take to repay a high interest debt, the more repayments you’ll have to make and the worse your financial position will become.

Once you’ve made a plan, talk to your creditors. You’d be surprised at how accommodating they may be – even allowing you to pause repayments momentarily or help you organise an easier repayment plan. Loan or credit card providers typically can offer hardship solutions, so pick up the phone and see what’s available.

If you’re still struggling to make repayments, consider looking into whether a debt consolidation loan could provide some breathing room for your finances. This is a type of personal loan that allows you to borrow a lump sum to clear your existing debts with. You will end up with just one loan to pay back, simplifying your budget and hopefully making repayments more manageable. 

Debt consolidation loans

Read more…

The ugly debt

If your mountain of debt has grown into something you no longer believe you can pay, you may want to consider applying for bankruptcy.

ASIC’s MoneySmart website advises that you should only do this if you’ve explored all other options and seek legal advice or financial counselling before doing so.

According to ASIC, bankruptcy is a process in which you are “legally declared unable to meet your debts. When you apply for bankruptcy you will be released from most of the debts you owe, and debt collectors will stop contacting you”.

Once you are declared bankrupt, you are classified as bankrupt for 3 years and a trustee is appointed to look after your affairs.

Bankruptcy can impact your eligibility to get credit in the future. It will be listed on your credit report for two years from the date your bankruptcy ends, or five years from the date you become bankrupt (whichever is later). It will also appear on the National Personal Insolvency Index (NPII).

What you need to know about bankruptcy:

  1. If you earn over a set amount, you may need to make compulsory payments to your trustee.
  2. You may be restricted from travelling.
  3. You may have restrictions on your employment and running a business.
  4. This won’t release you from all your debt – most unsecured debts are covered by bankruptcy, but there are some exceptions. 

Do you need help?

If you’re struggling with financial hardship, you can find financial guidance and advice at the Australian Securities and Investments Commission’s (ASIC’s) MoneySmart website.

This includes access to free financial counselling and MoneySmart’s National Debt Helpline: 1800 007 007.

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Learn more about personal loans

What are the pros and cons of debt consolidation?

In some instances, debt consolidation can help borrowers reduce their repayments or simplify them. For example, someone might take out a $7,000 personal loan at an interest rate of 8 per cent so they can repay an existing $4,000 personal loan at 10 per cent and a $3,000 credit card loan at 20 per cent.

However, debt consolidation can backfire if the borrower spends the extra money instead of using it to repay the new loan.

Can I repay a $3000 personal loan early?

If you receive a financial windfall (e.g. tax refund, inheritance, bonus), using some of this money to make extra repayments onto your personal loan or medium amount loan could help reduce the total interest you’re charged on your loan, or help clear your debt ahead of schedule.

Check your loan’s terms and conditions before paying extra onto your loan, as some lenders charge fees for making extra repayments, or early exit fees for clearing your debt ahead of the agreed term.

How do I consolidate my debt if I have bad credit?

The worse your credit history, the harder you will find it to consolidate your debts, because lenders will be less willing to lend you money and will charge you higher interest rates.

However, people with bad credit histories can make debt consolidation work by following this three-step process:

  1. First, find a lender willing to give you a bad credit personal loan. This process will be simplified if you go through a finance broker or use a comparison website like RateCity.
  2. Second, make sure the interest repayments on your new loan are less than the repayments on the loans being replaced.
  3. Third, instead of spending those savings, use them to pay off the new loan.

What is debt consolidation?

Debt consolidation is the process of rolling several old debts into one new debt, usually to save money or for the sake of convenience.

How can I get a $3000 loan approved?

Responsible lenders don’t have guaranteed approval for personal loans and medium amount loans, as the lender will want to check that you can afford the loan repayments on your current income without ending up in financial hardship.

Having a good credit score can increase the likelihood of your personal loan application being approved. Bad credit borrowers who opt for a medium amount loan with no credit checks may need to prove they can afford the repayments on their current income. Centrelink payments may not count, so you should check with the lender prior to making an application.

What is a personal loan?

A personal loan sits somewhere between a home loan and a credit card loan. Unlike with a credit card, you need to sign a formal contract to access a personal loan. However, the process is easier and faster than taking out a mortgage.

Loan sizes typically range from several hundred dollars to tens of thousands of dollars, while loan terms usually run from one to five years. Personal loans are generally used to consolidate debts, pay emergency bills or fund one-off expenses like holidays.

Can you refinance a $5000 personal loan?

Much like home loans, many personal loans can be refinanced. This is where you replace your current personal loan with another personal loan, often from another lender and at a lower interest rate. Switching personal loans may let you enjoy more affordable repayments, or useful features and benefits.

If you have a $5000 personal loan as well as other debts, you may be able to use a debt consolidations personal loan to combine these debts into one, potentially saving you money and simplifying your repayments.

Should I get a fixed or variable personal loan?

Fixed personal loans keep your interest rate the same for the full loan term, while interest rates on variable personal loans may be raised or lowered during your loan term.

A fixed rate personal loan keeps your repayments consistent, which can help keep your budgeting consistent. You won't have to worry about higher repayments if your rates were to rise. However, on a fixed loan you’ll also potentially miss out on more affordable repayments if variable rates were to fall.

Which lenders offer bad credit personal loans?

Several dozen lenders offer bad credit personal loans in Australia. These are generally smaller lenders that aren’t household names.

What interest rates are charged for personal loans?

Lenders aren’t allowed to charge interest on loans of $2,000 and under. Instead, they make their money by charging a one-off establishment fee of up to 20 per cent and a monthly account-keeping fee of up to four per cent. Lenders might also ask you to pay a government fee.

For loans between $2,001 and $5,000, lenders can make their money in only two ways: a one-off fee of $400 and annual interest rates of up to 48 per cent.

For loans of $5,001 and above, or for loans that have terms longer than two years, lenders can charge annual interest rates of up to 48 per cent.

Those fee caps don’t apply to loans offered by authorised deposit-taking institutions such as banks, building societies or credit unions, although such institutions are highly unlikely to charge interest rates of anywhere near 48 per cent.

Can I get guaranteed approval for a bad credit personal loan?

Few, if any, lenders would be willing to give guaranteed approval for a bad credit personal loan. Borrowers with bad credit histories can have more complicated financial circumstances than other borrowers, so lenders will want time to study your application. 

It’s all about risk. When someone applies for a personal loan, the lender evaluates how likely that borrower would be to repay the money. Lenders are more willing to give personal loans to borrowers with good credit than bad credit because there’s a higher likelihood that the personal loan will be repaid. 

So a borrower with good credit is more likely to have a loan approved and to be approved faster, while a borrower with bad credit is less likely to have a loan approved and, if they are approved, may be approved slower.

How do I find out my credit rating/score?

You're entitled to one free credit report per year from credit reporting bodies like Equifax, Dun & Bradstreet, Experian and the Tasmanian Collection Service. You can also get a free report if you’ve been refused credit in the past 90 days.

Credit reporting bodies have up to 10 days to provide reports. If you want to access your report sooner, you’ll probably have to pay.

What is credit history?

Your credit history covers everything to do with applying for loans. It includes the number of loans you’ve applied for, the amounts you’ve borrowed and your record of meeting repayment schedules.

How do I know if I've got a bad credit history?

You can find out what your credit history looks like by accessing what's known as your credit rating or credit score. You're also able to check your credit report for free once per year.