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"If you want something you've never had, you must be willing to do something you've never done"

Guest Post: Structured Debt Through Personal Loans

Today's Guest Post is written by Sean Hamilton. Maori Millionaire is honored to have Mr. Hamilton here again. You Can see his other posts here:


Credit Cards


Understanding Banking


Money in; Money Out


Saving for wealth, not just a rainy day


Borrowing Money on Overdraft


Disclaimer: The information in this article is provided as general information. It is not intended as financial advice for the purposes of the Financial Services Legislation Amendment Acts 2019 (FSLAA). No investment objectives, financial situation and particular needs of any particular person has been taken into account in the publication of this article. Professional advice should always be sought before taking out any financial product.


 

Structured Debt Through Personal Loans

By Sean Hamilton


When it comes to debt, there are two high level categories; structured and unstructured debt. We’ve examined some types of unstructured debt already in this series, through credit cards and overdrafts. When it comes to structured debt, the two main types that everyday people come across are home loans and personal loans.


A personal loan is a specifically structured loan that is typically taken out for personal use, such as a car, holiday, wedding, household items, consolidating debt, etc. The loan is taken for a specific term of time, agreed between borrower and lender, with payments made regularly over the term of the loan. Loan payments come from an everyday account at the set frequency, unless paid manually to a separate account, as set by the lender.


Personal loans are defined by being set up in a way to allow regular repayments that are consistently the same each time a payment is made. The frequency of payment may change and be set to the personal circumstances of the borrower and agreed to by the lender, such as weekly, fortnightly, monthly, etc. These types of loans are usually always advanced (paid up front in one lump sum) once, at the beginning of the loan being given to the customer. There isn’t an on-going ability to draw on more money from the loan, unless a redraw system is in place on the loan. This is where money that has been repaid can be taken back again by the borrower.


Personal loans can be secured or unsecured. Usually banks in Aotearoa don’t have secured loans, but other financial institutions, what can be known as second tier lenders, can offer loans secured by property. The range of lenders covers banks, peer-to-peer lenders, credit unions, co-operatives, building societies, and finance companies. Given the wide availability of this type of lending product, there can be nuances to be aware of with each different type of lender. The good thing to know is that they are all covered by the same law and must abide by it in the same fair and transparent way, or risk being fined by the Commerce Commission or Financial Markets Authority.

The variety of lending institutions can also be good in driving competition for customers. This means that when it comes to interest rates, someone looking for a personal loan has a lot of choice. Taking a quick look at a local financial website, interest.co.nz shows that interest rates can vary from 6% to 18%. The interest rate that applies can depend on factors like how much is being borrowed, the time the loan is being taken out for, the borrowers perceived risk position, if there is security and the lenders own internal pricing criteria.


The difference between a secured loan and an unsecured is an important point to consider. When a loan is secured that means the borrower offers some form of collateral, which the loan is offered against. If the loan isn’t paid back, or the borrower comes into difficulty to repay the loan, then the lender can take possession of what was being used to secure the loan. A good example is a car loan. If the loan isn’t repaid, then the car is taken back by the lender instead of the amount of money that was lent. This scenario doesn’t apply to an unsecured loan.


It's always important to make sure any lending is repaid in agreement with the terms the lender has offered. The result of defaulting (not making the agreed repayments) on the lending can be devastating. Not only will this reflect on a personal credit report that everyone in Aotearoa has, it could impact the ability to take out other financial products. Setting up phone accounts, electricity accounts and other utilities could also be affected. It could also generally impact your ability to build wealth.


It makes sense to take debt seriously and personal loans can be a good way to manage borrowing, when its necessary, to ensure you make regular affordable repayments. This is the type of structure that many people prefer when it comes to Home Loans, which is the next topic we’ll cover in this series.


Nga mihi,


Sean Hamilton


Disclaimer: The information in this article is provided as general information. It is not intended as financial advice for the purposes of the Financial Services Legislation Amendment Acts 2019 (FSLAA). No investment objectives, financial situation and particular needs of any particular person has been taken into account in the publication of this article. Professional advice should always be sought before taking out any financial product.


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