Planning Finances

When you buy goods and pay for them later, it is known as credit. There are four methods of buying goods on credit. They are: a credit sales contract; a loan contract; continuing credit contract and layby. Using credit to purchase items can be much more expensive than paying in cash. This is because it can involve interest payments and, most likely, fees. It may lead people into debt for long periods of time and that is a good reason for people to plan their finances very carefully before entering into any type of credit contract.

A credit sales contract is where the retailer provides you with the the credit and the goods; for example David Jones/Myer Store Accounts.; ie you can pay for the goods at a monthly rate, plus interest.

A loan contract is where you take out a personal loan from a financial institution, for example a bank or building society and then use the funds to buy the goods. Examples of purchases would be motor vehicles/housing/caravan/boats/business etc. It is the preferred method of payment for large purchases. Sometimes when you take a loan out on these items, you mortgage the goods being purchased. This means if you fail to make all the repayments, the mortgagee will repossess the goods and sell them. The loan may have various features, such as fixed or flexible interest rates, a non-repayment term or the facility to make an online application.

A continuing credit contract is where the person uses a credit card such as Mastercard, Visa, Bankcard etc. There are many different cards with different features. Typical features include low annual fee, low interest rate, interest free days, access to ATM'S worldwide and a rewards program, such as earning points that can be accumulated and exchanged for goods or services.

Layby is where you pay a deposit for a good and then make a regular repayment for a set time. Normally around three months. Layby has the benefit of avoiding interest but the disadvantage is that the shop does not give you the good/s until the final payment is made.

All of the above credit contracts have advantages if your finances are carefully budgeted and you are disciplined enough to make the required monthly repayments or even additional payments to reduce the time frame of the loan, which could result in less interest paid on the goods. If careful planning is not adhered to with repayments it could result in major purchases being repossessed; additional credit charges paid; for example missed payment fees, interest on top of interest; and the loan defaulted.

Interest rates are at a higher rate on a store account and credit cards. As a general rule, short term interest rates tend to be higher than long term interest rates. When you use your credit card or take out a personal loan, you are borrowing money at an interest rate that can change in the short term.

On a loan contract,

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