Before heading off on an overseas holiday, Sam decided to buy an expensive new camera to document his travels. The camera store offered a ‘buy now, pay later’ option and, attracted by the ‘no interest’ promise of the credit provider, Sam signed up.
All was well at the start and Sam had a great time on his trip. In fact, maybe a bit too much of a good time. On returning home he’d maxed out his regular credit card and, with insufficient savings, he was unable to maintain the required repayments on his separate camera debt.
True to the ‘buy now, pay later’ issuer’s promise, he didn’t have to pay interest on the overdue payments. But he was charged late fees on the repayments he skipped. By the time the standard payment processing and account payment fees were added to those late fees, Sam’s camera ended up costing a lot more than he anticipated.
Plenty of temptation
The number of ‘buy now, pay later’ services is increasing. Afterpay, Certegy and zipPay are three examples. Provided that payments are made on time, this type of service can be a great way to spread the cost of purchases over several months. Just make sure that the fixed fees aren’t too big a fraction of the total loan. For example, if you buy something for $1,000, and over the life of the loan, establishment and payment processing fees total $100, you’re paying 10% more than if you had paid in full at purchase.
Seeing a good opportunity, several banks now offer repayment plans on credit card purchases. These also operate more like a loan than regular credit cards, with a fixed repayment term and regular instalment amounts. Unlike the other ‘buy now, pay later’ operators they may charge interest (although initially, this is usually at a much lower rate than the standard purchase rate). However, if any payments are missed and an outstanding balance remains at the end of the fixed term, interest may be charged at the purchase rate. This is often well over 20% per annum.
Sam now faces a double whammy of a debt trap. While he’s meeting the minimum repayments on his credit card, the outstanding balance is accruing interest at 22% pa. Plus his ‘buy now, pay later’ debt is accumulating ongoing late fees. What can he do?
The textbook method for managing this situation is to take out a personal loan at the lowest rate possible and use this to pay off the debts. While the camera loan may not have an interest rate as such, left too long the fixed fees can add up to a significant percentage of the outstanding loan amount. By consolidating the debts Sam is left with one regular payment, and with a much lower interest rate he can pay off the outstanding balance far more quickly.
But Sam had another idea. He rolled over his credit card balance to a new card with a zero per cent interest rate on balance transfers for 12 months. This meant all his repayments went towards reducing the balance and he was also able to afford normal repayments on his camera loan. Sam knew that if he didn’t clear the card debt during the interest-free period he would again be saddled with high-interest rates, but now being more ‘debt aware’ he was able to get on top of things and was on track to be debt-free within the year.
If you find yourself struggling with debt, have a chat with your financial advisors to help identify the best options to get back on track and be debt-free.
Image credit: rosstomei / Shutterstock.com
More like this
If you like this article, you might be interested to know that we share useful thoughts and information like this in our monthly financial insights email. You can subscribe to that email here. All subscribers receive a copy of our e-book: The 5 Key Pillars of Financial Independence.
General Advice Disclaimer
This article contains general advice only, which has been prepared without taking into account the objectives, financial situation or needs of any person. You should, therefore, consider the appropriateness of the information in light of your own objectives, financial situation or needs and read all relevant Product Disclosure Statements before acting on the information. Whilst every care has been taken to ensure the accuracy of the material, Paradigm Strategic Planning or Sentry Advice Pty Ltd will not bear responsibility or liability for any action taken by any person, persons or organisation on the purported basis of information contained herein. Without limiting the generality of the foregoing, no person, persons or organisation should invest monies or take action on reliance of the material contained herein but instead should satisfy themselves independently of the appropriateness of such action.
Paradigm Strategic Planning Pty Ltd is an Authorised Representative of Sentry Advice Pty Ltd AFSL 227748