Debt Consolidation, Debt Solution, Debt Relief

EVERY Victorian has responsibility for the huge state government debt, translating to about $10,000 per person.

State Government Debt has rocketed by $4.4 billion over the past year, and now totals $56 billion.

Auditor-General Des Pearson has warned the state’s ability to service that debt is diminishing.

The Auditor-General’s report tabled in State Parliament yesterday, revealed that the state’s wages bill had swollen by $1 billion.

“The renegotiating of expiring major enterprise bargaining agreements will likely further increase employee expenses,” Mr Pearson said.

“This will impose additional cost pressure on the net result as employee expenses have historically grown at a rate above CPI.”

Over the past five years, inflation  has increased by 15.3 per cent, but public sector wages have soared way beyond that level, by 35.6 per cent.

Mr Pearson said  that State Government’s debt was becoming less sustainable because it was growing at a faster rate than economic output.

As a proportion of gross state product, debt represented about 9 per cent of the state’s annual output in 2006-07. By 2010-11, it had doubled to about 18 per cent.

Victorian level of debt grew last year to fund schools and transport.

Most people applying for debt consolidation help are looking for a personal loan to consolidate their unsecured debts such as credit cards, store cards, other personal loans etc. However few take the time to consider that their cheapest debt consolidation solution may be to consolidate these debts into their home loan. While debt consolidation into your mortgage will increase the size of your home loan it should reduce your monthly repayments thereby making your current debt level more affordable.

Having said this, debt consolidation into a home loan is not for everyone. First of all you must have sufficient equity in your property to qualify. That means that after you add your current home loan amount together with your unsecured debt amount the overall figure must be notably less than the value of your home. Some people do not understand that you can not consolidate debts into a new home loan with no equity.

Example 1: Property Value :$500,000,

Home Loan balance  $350,000

Other Debts : $50,000.

In this scenario your new mortgage would be $400,000 for a property worth $500,000 – that is an 80% loan and providing your income position is satisfactory, it can be done and should offer savings.

Example 2: Property Value : $500,000

Home Loan   $450,000

Other Debts : $50,000

Here the current mortgage is already at 90%. A refinance beyond that would not be possible. To consolidate unsecured debts into the mortgage, a 100% home loan would be needed – this is not available.

There can be other reasons why debt consolidation into your mortgage may not be possible or cost effective. One such reason would be where your income level has dropped and you can no longer sustain the loans you are holding. even if you have equity in your home, loan affordability determines if this is possible.

Another reason may be that you have acquired defaults since taking out your home loan. Consequently your original home loan may be with a bank at a low rate, whereas debt consolidation will necessitate refinance to a specialist lender at a higher rate, making the new home loan more expensive rather than offering you a saving.

Nonetheless sometimes a mortgage at at a higher interest rate than you are paying today, may still offer the benefit of lower monthly repayments once other debts are consolidated.

A new study reveals that one in seven Australian adults is under such financial strain that they are unable to afford insurance cover for their homes and cars, a new study shows.

It seems that over 2.6 million Australians would not be able to find $3000 in an emergency and many have no access at all to basic banking services,

The study, conducted by the National Australia Bank and the Centre for Social Impact, said those who couldn’t raise funds were less likely to have insurance cover, leaving them exposed to large costs.

The study found that just 46.4 per cent of severely financially strapped people had home contents insurance and only 59.2 per cent of them had cover for their cars.

NAB chief executive Cameron Clyne said adults who are unable to qualify for loans due to low income or bad credit history are more likely to experience escalating debts with no relief. These are the people who end up resorting to high costs short term loans offered in the unregulated finance arena.

Finance companies offering high volume, low value credit products, such as credit cards, will need to refer to specific financial obligations of the borrower before qualifying the application.

Responsible lending obligations under the new credit law require all finance providers to verify to the best of their ability that the loan application they are considering, will not place the applicant in a position of financial hardship.

The Ombudsman’s view is that generic financial data can omit the particular needs of the borrower, such as additional medical and pharmaceutical expenses, voluntary commitments, such as school fees, and additional transport costs for people in remote locations.

The Ombudsman said: “Without an assessment of individual circumstances, financial service providers can offer a credit limit which the consumer cannot afford.”

The Ombudsman said NCCP accepts the need for low-doc lending “if adequate inquiries are made and the statutory provisions regarding responsible lending are met.”

“We understand that there is a place for low-doc loans to cater for those self-employed clients who are unable to provide more traditional evidence of their income. However, in our view, low-doc loans should not, as a general rule, be granted to PAYG borrowers.

“We anticipate [that any] no-doc lending on the level previously experienced is unlikely to be sustainable, given the new obligations.”

A loan will not be unsuitable if it meets the consumer’s requirements and objectives, and the consumer has the capacity to repay the loan without experiencing substantial hardship.

Lenders need to consider the stability of all sources of income of the borrower and their length of employment.
ASIC expects that inquiries into the consumer’s fixed expenses, repayments to other loans, variable expenses, credit history, age, number of dependents, assets, and any foreseeable change to the consumer’s financial situation are made by the prospective lender.

ASIC’s position is that the credit provider’s obligations are “scalable”, which means their obligations will vary with the circumstances.

The Ombudsman said that, as a minimum, the credit provider would have to see evidence of capacity to pay, such as verification of income by reference to payslips or, in the case of the self-employed, tax returns and bank statements.

According to the bi-annual Debt Study conducted by Veda Advantage, 21% of Australians are experiencing difficulties with debt management, with one in five people interviewed admitting not being able to keep on top of their Debt Obligations.

These figures represent a 2% increase from the information collected six months ago.

Of the 21% who confirmed to experiencing difficulty with debts, 2% did not know how they would resolve their debt problems.

Of the 21%who were already struggling with debt, Veda said 28 per cent were likely to apply for more credit in the next six months.

It is a real concern that many borrowers who are already experiencing financial hardship are intending to deal with the problem by taking on more debt.

If and when positive credit reporting may be introduced, it will prevent people already with debt problems getting themselves further and further into debt.

The report found concern about the rising cost of living had increased markedly since September 2010 and people were worried about transport and petrol costs which rose 10 per cent over the period.

The new credit code came into effect at the beginning of 2011. This legislation imposes strict guidelines on lenders to prevent loans and credit from being extended to applicants who do not have sufficient income to service the debt. Credit reporting had been under review since January 2006

The Federal Government is intending to implement Positive Credit reporting in Australia in mid 2012. This will assist in identifying credit applications from borrowers who are already struggling with existing debts.

The study found that 57 per cent of people were managing their debts, although 47 per cent had cut back on groceries to repay debt, up from 43 per cent six months before.

The Australian Debt Study Report is conducted in March and September over the phone by Galaxy Research Omnibus.

This is the eighth report, which interviewed 1036 Australians.

Is debt getting you down? Bills keep piling up? Afraid of bad credit? It is important to get some professional advise to understand your options.

If you feel like your debt situation is getting progressively worse – the first thing to do is cut down your spending.

If what it takes is the shredding of credit cards then this is what you should do. At the very least stop carrying all the cards around with you. You may be surprised to know that credit card use in Australia is actually growing at its slowest pace in more than a year but the average credit card balance in December 2010 was still $3314.

However this does not apply to everyone, and many Australians are still spending more than they can afford.

There is a clear difference between good debt and bad debt. Good Debt is your mortgage or your investment loan – ie. debt that is actually generation an income or equity for the investor. Credit card debts and other lifestyle debts are known as ‘bad debt’ as they do not generate wealth.

Your home loan can be defined as essential debt, not one that you will be able to reduce in a hurry but hopefully one that you are able to afford. While good debt is tax-deductible and includes loans for income-producing investments such as real estate or shares, credit card debt will include your entertainment expenses – nice to have but not essential.

Pay off bad debt such as credit cards first, as they usually have the highest interest rates. If left to spiral out of control, they can cost a person thousands of dollars in interest over many years.

DEBT CONSOLIDATION

If you have several cards that have gone over the limit, it may be cheaper to roll these over to a single secured loan or a low rate credit card.

Remember that consolidating debts only works if your monthly repayments under the new loan are lower than your existing ones.

ESSENTIAL DEBT

Interest rates on secured loans such as home loans are much lower than other unsecured loans, this type of debt should be repaid only after your unsecured debt is paid.

“The most effective way to save interest on your home loan is to make extra repayments each month. Increasing the frequency of your repayments can also reduce interest.

By increasing your repayment just $200 to $2368 a month on a $300,000 loan, with a 7.25 per cent interest rate, you’ll save about $80,600 in interest and have your loan paid off in 20 years instead of 25 years.

DEBT AGREEMENTS

Debt Agreements are not an easy way out. They are a milder form of bankruptcy and should only be considered where no other solution is available.

BALANCE TRANSFER CREDIT CARD

If you’re like the majority, your card balance will be in desperate need of reduction.

Remember that lenders will first apply payment to the initial balance of a balance transfer credit card, rather than the new spending which attracts a higher interest rate.

As a general rule, you need to know the promotional rate, when it expires but more importantly the rate you’ll pay after expiration. You MUST NOT use your balance transfer card for further purchasing.

According to a recent survey by Mortgage Choice, almost twenty percent of recent homebuyers are carrying unsustainable levels of debt - some as much as $100,000 in addition to their mortgage.

Some of this extra debt has gone on to their credit cards, some into home renovation and some into the purchase of a car.

Many people breathe a sigh of relief once they get their home loan approved and some begin to take on additional obligations which they can ill afford.

The number of people saying they had accumulated significant extra debt was 15 per cent higher than a year ago, with 45 per cent saying they had spent more than $20,000.

Five per cent added more than $100,000 within the first two years of home ownership.

Eight per cent of the 803 people surveyed said they may need to sell their home as they are not able to afford all their debt obligations.

The same number said they would consider selling up if interest rates went up by one percentage point.

The two biggest issues for 2011 were rising interest rates (47 per cent) and cost of living, such as utility bills and clothing (24 per cent).

The main concerns were being committed to large financial commitment for so long (48 per cent), followed closely by not being able to afford repayments (46 per cent).

Despite these concerns, only 29 per cent of respondents had mortgage protection insurance, 28 per cent income protection issuance and 32 per cent life insurance.

While most of the people surveyed have only had their home loan for two years or less, 28% did not know what interest rate they were paying on their mortgage.

Teenagers and young adults living in the Hunter Valley are racking up huge bills and defaults with many facing bankruptcy.

It seems that the young have poor money management skills and can not keep up with the set repayments for mobile phone bills , credit card debts as well as car loans.

Easy access to small loans and the lack of responsibility and financial education is creating a generation a potential bankrupts.

Often parents step in to rescue their children from thousands of dollars of debt which they easily qualified for but are now are unable to repay.

It is to easy for the young to rack up huge mobile phone bills.

Close to 30%  of 18 to 24 year olds in the Hunter Valley have a credit card with a fast accumulating balance.

Financial Literacy has been introduced into the schools to address this issue. As the young are never off the phone, a pre-paid mobile is the best option for them.

Car loans is also a serious problem. Young people seem to enter too easily into very expensive car loan contracts without understanding fully the ramifications of these.

Examples included buying a car for $20,000, ending up with a loan for more than $30,000 once the interest and fees were calculated and the car being worth $2000 within a few years.

Despite this the debt still has to be repaid. A person finding themselves in this position often has no option but to declare bankruptcy.

It is hoped that better finance education in the schools will reduce the incidence of debt problems experienced by young adults going forward.

If you are permanently juggling credit card bills, increasing card balances, opening new credit cards to transfer balances from old – you need to STOP NOW!

Credit Card use can be very addictive. If you are someone who has a history of credit card misuse, it is important to solve the problem rather than just address the symptom.

It is important to start by reducing the number of cards you currently hold. Debt consolidation can offer such a solution. Consolidate all other cards into one and then start by working on reducing your debt balance.

Remember that Reward Programs are there to entice you to spend more, rather than give you something for nothing.  Therefore it is best to concentrate on the cheapest credit card not one with all the bells and whistles.

According to Dun & Bradstreet (D&B) debt research data, 38 percent of women are paying their bills on credit. This has increased by 3 percentage points year-on-year (comparing 12 months to September 2010) in contrast with men’s 1 percentage point rise.

This means that not only are we relying on our cards more heavily for the occasional big spend, but we’re guaranteeing ourselves higher debt with each monthly bill. Unless you are someone who clears your debt balances off credit cards at the end of each month – such spending habits are dangerous and not for you.

If you have a home with equity, do yourself a favor and consolidate your credit card debt into your mortgage. While the mortgage balance will increase somewhat , your monthly repayments should drop significantly.

If you still crave for a card you can carry in your wallet – take on a debit card. This will prevent you from spending money you do not have.

One in five women will be applying for a new credit card in the coming months, D&B found, so if you do find yourself comparing rates for a new lifestyle, make it count by remembering why you promised yourself to quit the bad habits this year.

The Insolvency and Trustee Service Australia provides information for those with unmanageable debt.  If you are not a property owner and are finding that you simply can not meet your monthly unsecured debt obligations – a debt agreement may be the solution for you. These agreements are regulated by Government and offer debt relief to those considering bankruptcy.