Managing debt. It s easy to get into, harder to get out. Inside... debt. Think before you borrow. Know your options. Make a debt repayment plan

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1 debt Managing debt It s easy to get into, harder to get out. Inside... Think before you borrow Know your options Make a debt repayment plan brought to you by the retirement commission

2 Think before you borrow Borrowing money is called getting into debt. There are many ways to get into debt credit cards, hire purchase, car loans, personal loans, mortgages, student loans... Getting into debt is easy. Paying back the debt (the money you borrowed) is much harder. It s good to be able to borrow money to buy a house or get an education. A house usually increases in value, and a qualification will help you earn more. But some things are not so good to go into debt for. n Be careful about borrowing for things which don t increase (or even decrease) in value, like appliances and cars. n Try not to borrow money for things which have no financial value after you pay for them, like a night out or a holiday. Ask yourself do you really need to borrow money and get into debt? Could you wait and save up the money you need instead? If you can wait it will cost you a lot less over time. If you need to borrow money to pay for groceries or your power bill, get help straightaway from a budget adviser. Work out how quickly you could save the money so you don t have to borrow it. Use the Savings calculators on Trouble repaying your debts? If you have trouble paying back your debts, try to keep making the payments, and tell the lender (the person who lent you the money) as soon as possible. They may be able to work out a new repayment plan with you. Get help from a trained budget adviser from the NZ Federation of Family Budgeting Services. You can call them free on 0508 BUDGET ( ).

3 Know your options If you decide you need to borrow money, make sure it costs you as little as possible. Even a small change in interest rates can make a big difference to the total you pay over time. Check out all the different places you can borrow money for example, it may be cheaper to get a loan from a bank than borrowing through a store or car yard. Once you ve decided on the best borrowing option, work out how much you can afford to borrow, and how quickly you can pay it back. You need to think about: n How much you want to borrow. n How much interest (and other charges) you will pay. n How much your repayments will be. n How long you will be paying back the debt. n How often you will make repayments. Look at the total cost of the loan (which the lender must tell you by law). Are you sure that you want to take on this debt? Paying back a debt with a high interest rate? Ask your bank if you can put all your debts into a lowerinterest loan. This is called debt consolidation and it can save you money because you will be paying less interest. Try to make your new repayments the same amount you were paying before so you can pay off your debt faster (and save on interest). Know the full cost before you borrow Use the Get out of debt calculator on sorted.org.nz to work out how much interest you ll pay by the time you pay off a debt.

4 Get out of debt fast The longer you take to pay off debt, the more it will cost you. So you should try to get out of debt as fast as possible. Check your budget to see if you can add more money to your debt repayments. If you have several debts, pay off the debt which has the highest interest first (such as credit cards and hire purchase). Get out of debt calculator The Get out of debt calculator on sorted.org.nz will help you work out how to pay back your debt faster. Make a plan to reduce your debt n Make a list of all your debts and the interest rate you re paying on each one (the interest rate is in your loan agreement or credit card bill). n Work out which debt has the highest interest. n See if you can make bigger repayments to pay off this debt quicker. When you have paid off that debt, start paying more off the debt with the next highest interest rate. Use the worksheet inside this booklet or try the Get out of debt calculator on sorted.org.nz Complete your debt repayment plan What is interest? Interest is the money you pay in return for using someone else s money. For example, if you borrow money from a bank you pay the bank interest. Do you have a mortgage? Make the repayments as high as you can afford and shop around for the lowest interest rate. This will pay off your mortgage faster and save you money. Visit our Mortgages section Do you have a student loan? Student loans are different from most types of debt. If you are living in New Zealand, you won t pay any interest on your student loan. This means you won t owe any more money if you just repay the minimum amount. Get your debt

5 Kiwi story Joe gets on top of his debts Joe has lots of different debts and although he makes regular payments, none of them seem to be reducing fast. At the rate he s going, Joe feels like he can t see a future without debt. While he knows roughly how much is owed on each of his debts, Joe has never given much thought to the interest rates he s paying. He finds out the different interest rates on each debt by looking at the agreements he d signed for each loan. Then he puts them in order from highest to lowest interest. His top priority debt is his hire purchase (which he used to buy an LCD TV) followed by his car loan. Joe takes another look at his budget and realises he could afford to spend another $20 a week on debt repayments. He contacts his hire purchase lender and explains his situation. The lender agrees to let him increase his repayments by $40 a fortnight to $78 more than double what he had been paying. Although Joe will have to pay a fee for paying his loan off early, it will be worth it. Joe uses the Get out of debt calculator on sorted.org.nz and works out that the increased repayments mean he can pay off his hire purchase in 10 months rather than almost two years and he ll also save just over $190 in interest. More importantly, once he s got rid of that debt he plans to add the money he was paying on hire purchase to his car loan repayments. Get your debt

6 Debt repayment plan 1. List your debts Name of lender How much you owe Interest rate Repayment Total $ 2. Now list your debts in order of highest to lowest interest rate Name of lender

7 3. Look at your budget and see if you can find some extra money each month for debt repayment Note that amount here $ 4. Add this amount to your repayment for Debt 1 My new repayment amount for Debt 1 is: $ n When Debt 1 is paid off, add the repayment amount to your repayment for Debt 2. Then when that is paid off, add the amount to Debt 3, and so on and so on. n If your lender won t accept higher repayments, increase the repayment for the next highest-interest debt. n If you are unable to spare extra money for debt repayment, wait until one of your debts is paid off then add the repayment amount for that debt to the highest-interest debt. Get your debt

8 Where to now? Borrowing only what you need? Know your borrowing options? Made a debt repayment plan? Next step: e.g. talk to your lender to see if you can increase your debt repayments. Sorted booklets Order from sorted.org.nz/ordering or call 0800 SORT MONEY ( ) Sorted 017 November 2009