KEY POINTS:
January can be a month of highs and lows. The weather is getting warmer, but the bills also start romping in, just when you are least equipped to pay them.
For those who have said yes too often in December, it's a time to face facts and sort disparate debts in to some kind of single personal loan on a reduced interest rate.
While indebtedness might be something associated with low-income families who rely on deferred interest payments to solve their money problems, debt consolidation is actually more appropriate for higher income brackets, says Raewyn Fox, CEO of the New Zealand Federation of Family Budgeting Services.
And there are plenty of high earners in dire straits in January and February. According to the finance industry, single people under 30 earning $50,000, $60,000 or $70,000 but with no real assets regularly get into trouble with debts. Because the employment market is buoyant, they take on a number of deferred interest purchases during the year. These, paired with credit bills and normal expenses, can prove too much.
And the spending is not letting up. According to the Reserve Bank, consumer debt has gone up by close to 5 per cent to a sizeable $13 billion in 2006. A concrete statistic this may be, but whoever you are - a divorced father with two kids or a lawyer with a penchant for Jimmy Choo shoes - debt is not a topic you like to talk about.
The $10,000 or $50,000 you owe is not something to bring up at dinner parties. But it is something that you worry about late at night. And that's when the finance companies advertise their seductive offers to sort out your life and release you of the burden that stops you from sleeping.
All too often people go to accessible 0800-number finance companies, who are charging rates of up to 30 per cent. They go to them not because that's their only choice, but because they are too embarrassed to tell their bank about the mess they have got themselves into, and these players don't ask too many questions.
Even if the finance companies are offering competitive rates - and some of them are - they'll often get you with upfront fees, charges and insurance, which can run into the thousands. You'll pay them without thinking; anything to get this hellish load off your mind. If you choose to solve your problem online, you may end up dealing with a broker who will charge you for their trouble, and then you'll have the charges from the finance company on top.
Another trap people fall into, says Fox, is that they consolidate all their loans across all of the debts they are defaulting on, some of which are not interest bearing. For instance, they might put a month's rent and an overdue phone bill into a loan that they are not currently paying interest on, rather than talking to their landlord about delaying a rent payment.
Debt consolidation, if you take this route, doesn't have to be as hard or as expensive as some people make it. As well as some reputable finance companies who make their fees and charges transparent, the credit unions and the main banks are offering highly competitive deals now. Why? Because there is more debt than ever before, and it's not showing any signs of going away. It is simply a customer service.
The credit unions, who are especially recommended by the Consumers' Institute, have an interesting stance on refinancing. They act a bit like an alcoholic's sponsor in that they hold their customer's hand throughout the personal loan period. They are not out to make huge amounts of money. They charge either no fees or low fees, and in the case of Invercargill-based Southland Credit Union, their personal loan interest rates start from 10 per cent, depending on whether the loan is secured or unsecured. And when they set up a loan to put the consolidated debt into, they ask their customers to set up a savings account.
"Because we are member-owned, we like to think we are lot more interested in the long-term success of the individual," says Andrew Leys, Southland Credit Union general manager. "There is no gain in it for us to fleece people, it would be like ripping off our owners. We have a bit of pride in saving people money. We won't do debt consolidation unless we know that that person is saving money." Leys is so concerned about his customers' debt problem that he has set up a money management services operation that gives advice on budgeting and planning.
One of the challenges, he finds, is that customers don't believe the deals they can get from him. "We had an example where someone wanted to borrow $8500, and they were going to go to a large finance company like GE Money. We managed to do the same loan and save the person $11,000. The problem is, it's unbelievable," he says.
One of New Zealand's largest credit unions, PSIS, is offering personal loans at 14.5 per cent and will be running a debt consolidation campaign in February and March. David Murray, general manager of marketing, says the company's research has found that indebtedness is rife in New Zealand.
Some people in their 20s and 30s have $50,000 or $60,000 of unsecured debt because they have been "buying stuff". Interest free deferrals are huge, he says. He is concerned that people are putting debt on to their mortgages: "It is OK to do it for so long. A lot of people now are leveraged up to the hilt. If they are continually doing that, they are going backwards at a rate of knots... How are they going to get ahead?"
There are ways for people to avoid nasty surprises at certain times of the year, he says. They can arrange to pay bills in fortnightly instalments rather rather than annually or monthly.
"At the end of January, they get the credit card statement, then there are school fees at about the same time. If they are a home owner, they get a rates bill. It's not one big thing, it's a bunch of small things." PSIS is working with the NZ Federation of Family
Budgeting Services to produce a family finance management product to help customers understand their way through the kinds of problems that impact everybody.
The banks, meanwhile, are dipping their toes in the water of this area of finance. ANZ launched a debt consolidation loan in March last year to help customers simplify their personal borrowing. "We believe this helps them gain control of their finances," says the company. The current interest rate is 14.95 per cent, and a $200 application fee applies.
Westpac is another, offering headline rates of 16.35 per cent for an unsecured loan or 13.65 per cent for a secured loan. Senior product manager, personal lending, Fiona Douglas says this is far better than the rates some finance companies offer.
"One of the differences between banks and financial institutions in general is what you pay in fees. They are less with the bank. Financial institutions are very quick to charge the fees."
Douglas agrees that there is not enough assistance for people struggling to balance their finances. "We would be happy to sponsor some kind of financial advisory programme. I think that's very necessary. People are not so savvy."
ASB's advice to people worrying about their ability to meet commitments at this time of year is to tell their bank early on about their worries. "It is one of those things that you can leave and leave. If you can be pro-active, you will be in a much stronger position," says Jonathan Symons, ASB's head of marketing.
People are more comfortable about debt. "It is part of people's lives," he says. ASB's loans are set at 13.95 per cent, and if secured they are 11.95 per cent.
Appealing though these terms are, some people still go to finance companies because they want to keep their debt separate and because the companies will ask fewer questions as well as make the whole process easier.
While the banks and credit unions encourage their customers to come in and talk through their financing problems, this advice doesn't work for the "sweep it under the rug" brigade.
For these people, finance companies like Hopscotch Money, who organise consolidating loans over the phone, are the preferred option.
The finance company's rates are competitive, ranging from 12 per cent to the early 20s.
Lance Riesterer, general manager of sales at Hopscotch, says the finance company has benefited from people's recalcitrance to talk face to face with their own banks about their money problems. The banks' appetite for consolidated loans is still very limited, he says: "Banks are looking at moving into the market but only for top end blue-chip clients." Riesterer says it's not the low income owners who get into trouble.
"We all know people like that who are on good money, and we know that they are not saving anything."
He warns people to watch out for hidden fees and charges from finance companies that they find on the internet.
According to Acumen financial expert Lisa Dudson, debt consolidation is not really the answer. She says some of her clients need a certain level of pain to motivate themselves to pay off debt, and in those cases she advises against debt consolidation. It can give them a false sense of security.
"If a higher interest rate makes them more likely to pay it off, I'd rather they put in the effort. I look at the client, their motivation levels, how much their interest rates are and the surplus income they could have," says Dudson.
Consolidating debt does not deal with the actual problem, which is consistent overspending.
Debt consolidation should be seen as the first step. Budgeting and planning must happen alongside it, she says.
- HERALD ON SUNDAY
