Buying a car is one of the biggest single purchases you can make. Many people cannot afford to pay for their car straight away and therefore opt for a car loan. However, like any type of financing, car loans carry a certain amount of risk if your financial situation changes. As with any loan, you should consider your personal circumstances carefully before you apply for any type of car finance.
To avoid falling into debt, ensure that you only borrow what you can afford to repay. A lender should advise you if they feel that you have requested a loan amount that is higher than you could reasonably be expected to repay. Most lenders will ask you to set up a direct debit so that repayments are automatically taken each month from your current account; you should ask for the deduction to be made after your main monthly income is deposited. By doing so, your loan payments are effectively taken directly from your main income. However, if you do not have the required funds to cover the direct debit payment, the payment will be declined by your bank and you may incur penalty charges.
Free advice agencies such as the ASIC`s MoneySmart and the Department of Human Resources offer advice on managing debt, dealing with debt collection and negotiating repayment schedules on your behalf.
Organise Your Finances
Organising your finances is key to managing your debt. This should be done with the whole of your financial portfolio in mind, not simply your car loan. Each loan payment, credit card, mortgage repayment, overdraft and debit card, as well as savings accounts and other bank accounts and investments should be considered within your overall debt management plan.
Debt Consolidation
If you have a number of different loans, debt consolidation could help by merging them together into one larger loan; this means that you make one manageable repayment instead of several different unmanageable ones each month. However, debt consolidation loans are often considered a last resort, because debt consolidation companies apply their own fee, meaning that you will pay more in the long run. In addition, although the interest rate may be lower, the loan period is usually extended, which will also increase the cost to you. Alternatively, if you are a home owner you may wish to consider debt consolidation by remortgaging, which releases the equity in your home to help pay off your debts. For more details see Debt Consolidation By Remortgaging.
Plan of Action
The most important first step to clearing your debt is to tackle it with an effective plan of action. The rule of thumb is to pay off the debt which is earning the highest interest first, such as credit cards and high-interest loans. These are the most likely to exacerbate your debt problem and are the ones that represent the greatest long-term cost to you.
If you fear that you may miss a repayment but the problem is short-term, you should inform your lender of the situation. If you have a good record of repayment but, for example, have just been made redundant, informing your lender may allow them to waive the late repayment charge if you agree to pay within a few days. You should also ask yourself whether a family member or friend may be able to pay off the debt that is earning the most interest.
Alternatively, if you took out Payment Protection Insurance (PPI), you may be eligible to make a claim. PPI covers your repayments if you are unable to afford them due to redundancy, accident or illness that results in your inability to work.
Debt Management Companies
If you are unable to manage repayments on a car loan and require further help, you can seek advice from a number of debt management companies. These organisations, also referred to as 'money advice agencies' can negotiate with your existing or potential lenders to reduce a loan's interest rate, or help you to apply for a loan if you have been refused in the past. The Australian Securities and Investment Commission (ASIC) MoneySmart website will guide and direct you on how to best deal with debt issues as well as direct you to free debt management services.
Alternatively, in return for a fee, you can consult a debt management company. These provide professional advice and develop strategies for clearing your debt. Many will also consolidate your debt into one manageable monthly repayment, based on how much you can afford. Proportions of this payment are then paid to your creditors, beginning with the debts that attract the most interest.
There are drawbacks to using debt management companies who charge a fee. Although they can help clear you debt in the long run, you may find that you pay more; they take a small proportion of your payment and use it to fund their own business operations, which means that not all of the repayment goes to your creditors and thus to clearing your debt. Free debt charities are sufficient for most people.
Nevertheless, debt management companies may be able to negotiate interest rate reductions on your car loan. This would help clear your debt much more quickly, as the interest charge is lower and thus, more of your repayment goes towards clearing the debt, rather than paying off the interest charge.
If you are having difficulty managing your debts and need some help, then request assistance and we will refer you to an appropriate provider.
