Yesterday on my radio show, Peter from Coogee rang in as he’d heard me say that if your home loan doesn’t have a 3% in it, you’re paying too much. So he went to his bank and they chopped 1% off his home loan and investment property loan.
He was shocked, but said I’d taught him a powerful lesson and, with that in mind, I’m worried that too many inexperienced borrowers are swimming with the sharks that I guess occasionally go to Coogee.
I think history shows that you need to be beware of many players in the finance space, and while the banks are being exposed in the Royal Commission along with mortgage brokers, I am bemused by some of the alternative lenders out there, who look lifesavers especially to young people.
Right now there are lenders dominating TV screens who look cool and groovy, promising to save small businesses desperate for home loans and advising to consolidate your debts into one easy payment but there’s never info about the interest rate.
And when you go fishing on their websites, you get a lot of positive promises about the value of a future relationship but it’s hard to get the ‘price’ of this proposed money hook up.
By the way, when you do, there is an enormous difference between what their advertised rate is and what the comparison rate is. In one case, a personal loan, which is secured starts at close to 13% but, after fees, the comparison rate goes to 14.2%!
That’s a huge cost and makes me ‘advise’ that if you have to cop rates like that, go to a few banks before you sign away your dough to an expensive loan like that.
The interesting fallout from the Royal Commission, which will make banks become tougher on assessing loan applications (which Westpac announced yesterday it’s going to be doing going forward) is that it makes alternative lenders look attractive, because they’ll give young people and small business owners money.
The irony is the banks, who are copping a lot of criticism, were told by APRA a couple of years ago to play hardball with investment property borrowers and foreign real estate players but this made it easier for alternative lenders, who can charge very high rates.
It’s right for the Royal Commission to make banks and the mortgage broking industry weed out its dodgy operators and bad practices but it’s not like lawyers, accountants, tradespeople, public servants, politicians, members of the clergy and so on aren’t maligned by unscrupulous performers and bad actions.
The best advice I can give to young people is to explore all financial options before taking the easy route, where you get money without much hassle. Generally you’ll find that the price is higher than old-fashioned lenders and it can come back to bite you.
If you do your homework, there are credit cards under 12% (one is 9.9%), which are better than personal loans closer to 14%.
Also, make sure you ask your credit provider what the comparison rate is because this is the headline rate plus any fees, so it can be a better picture of what you’ll pay for the loan and that’s why they call it the comparison rate.
I know there is time and hassle looking around for the best financial products but I’d rather try the banks and mortgage brokers first before you have to swim with businesses that in old days would have been called loan sharks.
Mind you, even high interest loan providers have their place because some borrowers need money for a good business reason and conventional lenders won’t give them money but young people need to explore opportunities before taking the convenient but expensive alternatives.
So many people are lazy when it comes to money and it gives them a one way ticket to the poorhouse!