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Consumer Affairs
Monday, August 18, 2014 - 02:16
Avoiding all the tricks

When it comes to obtaining credit for that new car you’ve always wanted, consumers often fall for bankers debt tricks. For example, advertisements and promotions promising attractive offers such as 0% interest or cash back after paying three months of your new car instalment, which is tempting at first but can have consequences in the near future.

According to Wikus Olivier, debt counsellor at DebtSafe, several consumers who request help have experienced various debt tricks, which purpose is simply to push them deeper into debt. Most of the time when banks offer you a low interest rate or discount on your initial payment, you will end up with higher instalments or paying back your loan for a longer period of time.
Here are some common debt tricks when purchasing a new car.
1] Lower interest rates than the current rates. We often see this with car dealerships that have regular specials where for example, if you purchase a car in the month of June you will pay only 2% interest rate on your payments. The banks will not provide these interest rates without receiving something in return and therefore often the original price of the car is higher than it is actually worth. When you decide in two years’ time to trade the car in at another dealer you will find you will not receive as much money back as you expected.
2] Only pay in six months. Another trick often used by car dealers is the opportunity to drive your new car for the first six months for free. All this actually means is that your payments in the following the six months will be higher due to the interest from the ‘free’ six months being added to the outstanding balance.
3] Zero deposit, or low instalments. The advert in the car magazine states ‘no deposit and low premiums’. This is a very tempting offer. However, after the five-year payment deal comes to an end and you are due to pay your final instalment, you will receive an invoice for a lump sum to make up for the discounted rate over the past 60 months. This leaves you in a situation where you think you are almost debt free but actually the debt has just begun.
4] Interest rates go up but instalments don’t increase. Should the interest rates go up instalments on your loan will more than likely increase. However, to avoid this you can either increase the term of the loan by adding a few more payments - paying back the loan on your car over 52 months instead of 50 - or increase your interest rates right from the start to guarantee that instalments remain unchanged.

Best advice is, do not borrow more money, and if you have loans, try to consolidate them into one lump with the help of a debt counsellor and work on eroding that debt, rather than letting the bank or retailer erode your financial security. A good way to start is by adopting a “spending freeze”, and cut up all those retail credit cards.
In its June Quarterly Bulletin, the Reserve Bank noted that the ratio of household debt to disposable income edged down slightly in the first quarter of 2014 to 74.5% from 74.6% in the previous three months. But it is still far too high. And we need to bring it down.
Olivier notes that, “While not a long term solution a spending freeze does encourage people to take a closer look at their finances and see where they are spending money and where they can realistically cut back.” He says that while it is not possible for people to cut all their spending for a few weeks (bills such as electricity, petrol will still need to be paid) people can stock up on necessary items such as food and healthcare so that they do not need to visit the shops during the “spending freeze”. This will keep them away from all those silly impulse purchases and buying sales items you don’t really need.
“Of course, people will still incur costs that need to be paid during this time. However, the theory is that by cutting out any additional spending, someone can really assess what their priorities are in terms of spending.” This enables you to identify where you can realistically cut back, and perhaps make you realise how easy it is to do without unnecessary purchases.
He suggests borrowers can implement the following steps:

Draw up a budget. Before you embark on any spending freeze, you must take an accurate look at your finances. Work out where you are spending money each month and where you can cut back.
By doing this, you can separate the items that you ‘need’ to buy from those that you ‘want’ to buy. Then revise your budget to only account for those items that you need and you’ll see how much you can save in just a few weeks.

Stock up on essentials. Check your cupboards and your freezer and see what foods you are likely to need. If you already have lots of pasta and rice then aim to use this up during the time rather than shelling out on even more foods. It may be advisable to set a small portion of money aside to purchase perishables such as milk and vegetables.

Decide where the extra money will go. At the end of the two week period you will have saved a certain amount of money, so decide what you are going to do with this before you start. This could mean putting it into your savings or paying off some of your debt.

Fill up and pay up. Fill your tank with petrol so you’re not tempted to go and spend money at the service station – and consider filling an extra can if you need more than one tank over two weeks. It is also advisable to pay all of your bills before the Spending Freeze so that you are not tempted to spend anything extra.

Copyright © Insurance Times and Investments® Vol:27.8 1st August, 2014
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