Do not borrow to overcome debt

08/12/2020

Beware of short-term credit, and debt ‘fixes’

The economic impacts of COVID-19 restrictions on businesses and employment have been significant. In the early days of COVID-19, the Government responded to the health and economic ramifications by increasing welfare support to eligible individuals and businesses.

This included Newstart benefits being increased in March 2020 with the JobSeeker coronavirus supplement, and the JobKeeper Payment scheme to help businesses pay eligible employees where business was affected by COVID-19.

These income supplements were recently reduced. The JobSeeker supplement has been extended to 31st March 2020 but was reduced from $550 to $250 a fortnight for a single person with no dependants and likely to fall to $150 over this period. The JobKeeper payment has been extended to 28 March 2021 but with reductions to the payments over this period.

 

Will the reductions result in more debt than you can afford to repay?

Repayment holidays and reductions in repayments introduced by many lending institutions and utility providers to assist with financial hardship at the beginning of COVID-19 may now need to be renegotiated. You may have ended up with more debt than you can reasonably manage to repay. It may be tempting during this time to look for short term solutions to alleviate the repayment stress, such as borrowing more money or using more credit to pay bills or use to pay down existing debt. This often results in a debt-spiral with borrowers being worse off than before.

 

Where can you seek help?

We strongly recommend that you seek help to manage the debt you already have rather than borrowing more. A valuable avenue for assistance is a free Financial Counsellor. Financial Counsellors assist people in financial difficulty by providing information and support to help you deal with your financial problems, manage your debts and alleviate the stress of being in financial hardship. Often Financial Counsellors will advocate and negotiate on your behalf with your lenders. You can find your local Financial Counsellor at the Financial Counsellors Association of NSW or at MoneySmart.

You can contact Marrickville Legal Centre online or call on 02 9559 2899 to request an appointment for legal advice, especially if your lender has threatened to, or has started legal action against you to recover money owed.

 

Debt traps and loans to avoid

Drop down selection

Payday lenders

Many clients contact Marrickville Legal Centre because they have resorted to ‘payday’ loans to try and alleviate their debt problems, or they have unintentionally got into too much debt by using buy-now-pay-later schemes.

There are many organisations that offer short-term easy credit, including readily lending to people with ‘bad’ credit histories. To many, these payday loans may look like an attractive option, or their only option. You may be tempted by promises of quick approval and fast money in your bank account but this is only a temporary solution that attracts more fees and potential problems than meets the eye.

While payday loans may look like a convenient quick fix, compared to loans from mainstream lenders, they are far more expensive. They come with a lot of fees that when stacked up can increase the original loan amount significantly. We have had many people contact Marrickville Legal Centre who have ended up defaulting on their repayments and not being able to pay monthly fees. Often borrowers end up having to take out another payday loan to pay off their previous payday loan.  Consumers then fall into a debt spiral.

MoneySmart have a resource that warns against payday-type loans

Buy-now-pay-later services

Buy-now pay-later services have become increasingly popular in the last few years, but like payday loans, the repayments can easily pile up and so attract hidden fees and charges. Some examples include ‘Afterpay’ and’ ZipPay’.

As the name suggests, these services allow you to buy a product up front and pay off the amount over a specified period of time. While interest-free, fees may add up quickly. These fees can include late fees if you miss a payment or pay late, monthly account-keeping fees, payment processing fees and establishment fees. Fees may also extend to outside of the service including bank fees such as overdrawn fees if you don’t have enough money in your account to cover the repayment or interest fees if you are paying by credit card.

It is easier to overspend when using these services, and people may use multiple buy-now-pay-later services at once. As a result, your payments will add up and the fees can become overwhelming. It may also be harder to keep track of payments if you sign up for more than one service.

 

These services seem attractive and can provide short term assistance when money is tight, but beware of unforeseen circumstances. Buy-now-pay-later debts are taken into consideration by prospective lenders when you apply for other credit such as a car loan or mortgage. Late repayments may be listed on your credit report and this may affect your ability to borrow money in the future.

If you find yourself overwhelmed with payments, your provider will most likely have dedicated complaints and hardship services you can contact.

 

If you are struggling to make repayments, contact the Debt Crisis Legal Service at Marrickville Legal Centre for help.

The Debt Crisis Legal Service is funded by the Office of Responsible Gambling NSW.
This factsheet is not legal advice. The legal information contained on this page is current as at 8 December 2020.