The snowball method & 5 other strategies you can use to get out of debt ASAP.

Car loans, unexpected medical expenses, personal loans, credit cards, too much shopping with Buy Now Pay Later services - there are so many ways to easily fall into debt. The way we see it: Debt is borrowing money from your future self. Dan shares his wisdom with 6 strategies on how you can tackle your debt, become debt free and get closer to financial independence. Tune in to be equipped to tackle debt- your future bank balance will thank you for it.

The following is a transcript taken from episode 23 of the We Talk Cents podcast. The transcript is created by AI software so it might not be perfect - please forgive any imperfections or grammatical errors.

Blaize Pengilly  00:09

Personal Finance budgeting cash flow and investing don't have to be scary words. The We Talk Cents podcast is here to help you learn more about money and take control of your personal finances.

Blaize Pengilly  00:26

We Talk Cents podcast is not a financial advisor. This podcast is made for entertainment and educational purposes only. All information shared is of a general nature and does not take into account your personal situation. You should consider whether the information is appropriate for your needs and where appropriate seek professional advice from a financial advisor.

Dan Jovevski  00:45

For more information, please check out wemoney.com.au/disclaimer.

Dan Jovevski  00:51

Hello, and thanks for joining us for Episode 23 of We Talk Cents This podcast is produced by a WeMoney a new Australian smart management app helping people take control of their finances. I'm Dan you finance expert.

Blaize Pengilly  01:03

And I'm Blaize a former payday to payday kind of gal. Reformed payday to payday kind of gal. I'm doing better now that I'm learning more about money. So today on We Talk Cents, we are looking at tackling debt, how you can do it why you'd want to do it ways to get rid of debt faster. But before we get into debt, let's take a look at the news. So if you aren't interested in what's been making headlines related to personal finance this week, totally fine. skip ahead a couple of minutes. But Dan, what is it? What is there anything this week, that's personal finance related that sort of caught your attention

Dan Jovevski  01:39

was a few things Blaize  think the one that sort of really standing out is the sharing of your mom and dad's Netflix account is is no longer going to be a thing given Netflix is now cracking down on sharing. I don't know how if you've been affected by this sort of you're you're using your mum's account, please. But certainly there's heaps of other people that will be crying that they've lost access or losing potential access to Netflix now, which basically means I'm going to cough up

Blaize Pengilly  02:11

 I mean, it makes sense. It's a good business decision by Netflix to crack down on the old sharing of accounts. But you know, Dan, I've got to say I'm not much of a Netflix watcher, I'm not really much of a stand person, I don't really watch a lot of things. But I do occasionally have a guilty being. And it's gonna be really sad saying goodbye to my back in 2018, I lived with a Englishman in Sydney, and his cousin, Lois in back in the UK. Yeah, it was unknowingly willing, like lending me her password. And you know, it's been, I think two or three years now of me using her password without her knowing about it my ex housemates cousin from the UK. So I think she'll probably be happy that she's no longer sharing her account. But I'm not going to be very happy that I probably have to make my own subscription. So that's definitely going to impact my finances, but as my subscriptions that will be going up. Something else that will be going up for me, and I'm sure many, many other Australians is my private health insurance premiums. Have you got the email as well, Dan, as you're getting the price hike?

Dan Jovevski  03:18

Yes, sir. The university the price hike Blaize, I  think it's an average now, because 2.61% is the average price increase that Australians will face. And whilst the health insurers say that for loss on record in the last 20 years, what they forget, they obviously told you, of course, is that there was a price increase in October last year. So there's a double whammy up where the price increase? I know, I know. So. Obviously, the relying on people's apathy to not look at what the percentage differences and for some people, it could be in excess of five 5% blows. And some of the core reasons that we've seen is that the the amount of people that are claiming on health insurance now is going up, and therefore the costs have to be passed on somebody on the chain and consumers are bearing the brunt. But Blaize What can what can people do? What are you doing? Are you are you walking around, he's staying with your fund, what's How you going to mitigate this price hike?

Blaize Pengilly  04:12

Well, I do need to add, I need to look around and see if I can get see if I can get a better price for the value that I get. I'm pretty happy with my cover at the moment because it's a good price. it's manageable. And I use all of the extras on my current cover. Because I found in the past, you know, you get so excited when you sign up, you sign up and you're like, Oh yeah, I'll totally use three different types of homeopathy massage or whatever it is. And really all I use is physio and glasses. So yeah, and then having textures is really helps to keep my costs low but I think I will be shopping around because I don't want to be paying the loyalty tax. So yeah, I think that's that'd be my approach doing a little shop around making sure that if I do switch that I will still be covered because um, you know with health insurance is usually waiting period. So sometimes you have to wait two, 6-12 months, whatever it is to be covered for something. So just make sure that I don't plan any injuries or illnesses before I make the switch you know.

Dan Jovevski  05:12

Of course, of course.

Blaize Pengilly  05:14

All right, and enough of enough of price hikes, let's talk about getting rid of cost and talk about tackling debt. Now, I don't know if we have the licensing for this. But you know what, I'm a terrible singer. So I don't think we're gonna have to pay any royalties. So here we go. Let's talk about debt. Let's talk about debt, then. Let's talk about debt. I couldn't help myself. Oh, it's

Dan Jovevski  05:42

so good. I love this alternate career choice that you're pursuing.

Blaize Pengilly  05:46

Thank you. Thank you. Thank you. Can you can say, let's talk about debt Blaizey. Because Yes. Right. Well, let's talk about debt. Now. I know there's lots of different types of debt. And some people may be in a little debt, or a lot of debt, cough cough up my hex debt. But I would love to know, what are different ways that we can tackle debt? Why should we talk about debt is all that bad? Like what remind me the difference again, of good debt and bad debt?

Dan Jovevski  06:19

Oh, boy is very simply, good debt is the debt that you over the example build wealth over time, things like getting student loans, that helps you get an education to increase your income over time, things like mortgage where you get to put up equity in your home and wonder I fully paid off and have a nest egg where if you want to sell that home, you can reap the rewards of the mortgage that you pay over a very long time, or things like a business line where you're actually investing into a company that can create wealth over time and provide you any constraint into the future. Better, on the other hand, refers to things like credit cards, or the consumer debt as little do to improve your own financial outcome. So this might be things like increasing discretionary spending, you know, buying, you know, all sorts of things at the shops that you may not need, that, you know, racks up a massive credit card bill that often people and young people for the traps of where they can't get out of that. That's a high level overview of the different types of displays,

Blaize Pengilly  07:15

Wouldservices, like, buy now pay later, like me buying multiple costume wigs and fundings for parties using then appellative services. I'm guessing that would fall into bad debt, but then buy now pay later could also fall into good debt if you're buying things that are unnecessary, like groceries or if you don't have the money to scrounge together.

Dan Jovevski  07:36

Yeah, but it's often a slight different view, I think they will I think we sort of often sort of ignore, and we sort of want to shame people in using credit cards and other other forms of debt products. But I really think that people have to live their life. And there has to be sort of a balance here and what you're spending your money on. We don't want to classify everything as being sort of bad debt. But if we think about maybe from from people's own personal situations is can you afford it? Is it something that's within your domain. So if you go back to the principle of looking at your discretionary spending, or your, you know, your fan account, blow account, whatever you want to call it, you can use whatever part of your life to make that purchase. And I think sometimes in the real savvy people, why pay interest on a credit card, where you might be able to use buy now pay later, purchase, not paying the interest for two months, get the thing that you want, and then pay it that suits you? Well, that's actually pretty smart as to it for months of earning interest on our hydro savings account, there could be more money in your pocket as opposed to somebody else's. So I think it's all relative to where people are in life. But I think the big no go zone for a lot of people is don't let debt accumulate to levels of it's unmanageable. It's not required, and also can have huge, massive downstream consequences in your life, like potentially getting into a situation where you can't pay for your debt, defaulting on your credit cards, your lines, and then ultimately, potentially having a credit default set against your file, which basically means that your credit excluded for up to five years potentially with mainstream lenders.

Blaize Pengilly  09:08

Wow. Yeah. Yeah, that's, you know what that is? So you've mentioned loans. You've mentioned the credit cards, and we've talked about student debt and buy now pay later products. What other types of debt Can you be in

Dan Jovevski  09:24

All this heaps of other debt that people can be in buys, but I think the thing the ones that probably people don't sell, think about the masters. You know, when you have like a medical emergency, you need to get access to a short term loan, you might be going in a short term learning provider that might have excessive interest rates. In Australia, the statutory cap for short term loans is 48% per annum, which could obviously compound very, very quickly into a state where it's on manageable. You could also have, you know, there's a whole slew of these different, what you call demand pay applications, where you can press a button We can access a lot of 50 to 100 bucks. I think it's an emerging safe right now that a lot of people looking at especially the regulators, on sort of saying, The ease and access obtaining money, is that going to pull people into worse financial situations, but you can get your loans and one thing actually blows it off saying is that literally anything that become bionaire highlighted these becoming bionet highlighted, I walked in my dentist, by an app highlighter, your your dental stuff, walk it to auto masters to get car service bang. Bicycle by peloton literally every, every single where I look, you cannot avoid having some type of financial arrangement with a merged provider. I know what you're saying. But I think it's absolutely exploding. And to be frank, I think it's getting out of control.

Blaize Pengilly  10:44

Yeah, I've seen it. I have noticed that in a lot of places as well, in saying that, like full services like dentistry, or like mechanical services, that can be pretty expensive. And those are things that sometimes you can't wait until you've saved up enough for them. So I think it's pretty cool that it makes more accessible. But yeah, it definitely comes down to, you know, are you spending within your means? I mean, you're probably not going and going, I'll get a feeling this week, I'll get another feeling this week. I'm just we're just for laughs I'll get another for the week after that, like you're not going and getting excessive treatments. But um, yeah, it's it definitely comes down to how you manage it, I guess. But so those are the those are the types of debts. And I understand getting into debt can it can happen to anyone, especially like you said, if there's like a medical emergency or something unexpected that happens. And what if you want to consolidate or start getting rid of debt, or you've got different types of debt piling up? What are the different methods that you can use to tackle it.

Dan Jovevski  11:44

So the most common method a lot of people get themselves into is when you've got two or three different debt accounts. So you might have a credit card, you might have a small personal loan, you might have another obligation that you need to pay for a webinar hide a loan that you took out. And what people often do ablaze is that once once things start becoming unmanageable, you forget the due dates, and you're not sure when what needs to be repaid. People often look at, say, a debt consolidation loan to basically combine all their debts to what is in those repayment. So if you look at the example of saying my personal was doing on the 15th of the month to pay $200, I've got a buy now pay later, you know, did the tanker after $1,000. And I missed my last payment. And I've got a, you know, a late fee that sort of coming on there. And also a credit card, which is Apple limit, and you know, there's four and a half 1000, you know, outstanding and I've got a $5,000 limit, what you could do is you could consolidate all those accounts into one easy to manage repayment, and then just pay that loan off over time. And that's where a lot of people find the help and assistance of getting to the discipline of actually just making one payment, as opposed to thinking about all the things that you're responsible to pay and remembering all the due dates.

Blaize Pengilly  13:00

So in that instance, where you do have multiple types of different debt, you would be taking out a small, like a personal loan to pay off all of those things in full and then you're only paying off the one personal loan, is that how it works. So you're sort of taking out a loan to get rid of all the other debts? And then you're just paying off that one loan, which has all the other sounds lumped together? Is that right?

Dan Jovevski  13:21

That's correct. And there's many ways that you can go about doing this. And in the most easiest and effective ways, probably the person one option. And there's a lot of other providers that offer that type of approach. And while it will use the Stats are people don't sort of know this but that 50% of every single person that is taken is for the purpose of debt consolidation. And wow, it provides people access to a better outcome, but also the things that are able to watch out for these concerns. Because once you consolidate your debts and you get a lower repayment, what actually happens is, is that people end up having more money left over on their account because they reduce the repayments, and that might serve as further consumption of debt or maybe excessive spending. So it's one thing to think about filing your debt. But I think having a plan to pay down your loan as quick as possible and they'd be not considered debt for things that you don't need. As a viable alternative to a better financial life will be something that people should consider. There's other methods players very quickly to consolidate debt. Another popular option is that if you think about people that have a mortgage, you've been in your home for about 10 years, you may build up sufficient equity in your home, there may be an option to actually consolidate your debt into your mortgage and pay a lower rate. So for example, a typical personal loan right depending on your credit score could range anywhere between say 6% all the way up to 20%. But mortgage might be at the rate of say two or two and a half percent and What that basically means is that you can really leverage your assets to help you consolidate your debt, in order to pay off your debt faster. The only pitfall that plays if you think about a typical mortgage, it's over 30 years. And if you are adding to your home loan or redrawing for your home law, just remember that while the right lobby law, you could be paying that consolidation, say if you had lines of about $20,000, against your house for a period of say, 20 or 25 years, right. And when you add in 20 years on 2%, the actual total average interest that you pay maybe like 10 to $15,000, over the term of that line. So you've just got to be careful that if you are using your home as a method of consolidating debt, is that consider actually making interest repayments as if you're the parent that lives over two to three years, and that way, you can clear up that $20,000 in a much more shorter, shorter timeframe.

Blaize Pengilly  16:07

So with the home loan that's really interesting about the home loan, because of course, I didn't think of the power of compounding and that the interest that you pay could really, really rack up to be quite a large sum. Because when you think about it, you know, homelands are pretty much the lowest interest rates on the market. So especially at the moment, they're, you know, around 2.2%, at the moment, which is so crazy. So that compared to six to the 20%, that could be paying on a personal and does seem like a much more tempting offer. option. But yeah, if you are dragging it out over 20-25 years, that is that is really going to rack up. So you can consolidate all of the your debts into like a personal loan, that's one option, you can consolidate and then re draw on your mortgage. What's another way to tackle multiple debts if you're if you're really wanting to get out of debt,

Dan Jovevski  16:56

Plus another very, very popular option that people were doing that's actually a really, really deep behavioural psychology is that if you find the hassle of actually going through and refinancing your lines, you know, eligible for whatever reason, you've got a loss for payments, and no other bank wants to take you on. Fear is the method where say, if you've got a very small deal, or have I piloted it to bet $1,000, you've got a credit card that 5000. And you get another Lifeline, say personal loan of $10,000. What studies have shown is that if you pay off your lowest balance first, and just clear that out of what's known as the Debt Snowball method, basically, what you're doing is you're achieving something and you're giving yourself a dopamine release, and a sense of elation of achieving something. And what that does actually spurs you in the motivation to achieve another bigger item. So if you think about it, in this example, pay off my bat by now piloted it, you know, $1,000, depending on how long it takes you to pay off, it could be a really quick win, and then you tackle the next credit card, which you pay that off as $5,000. And you just have the bigger person line a bit later, that will be stage three. And along those methods, you having those two awesome quick wins is something to celebrate, and to keep you motivated in your journey. And we find a lot of people that AWS in the Debt Snowball method, end up actually paying off more of their outstanding debts and try to tackle every single last and final payment to pay a little bit here and there might just be good to clear out one debt paid off completely moved to the second and the third biggest one. And as the snowball, as you end up rolling down the hill, it gets bigger and bigger, bigger, and then you end up paying off all your debts.

Blaize Pengilly  18:36

This is like a snowball method is super attractive because nothing beats getting to the end of a work day, pulling out my notebook, getting out my highlighter and crossing off all of the tasks I've done and going Ah, God That was good. So I can totally understand the psychology behind the snowball method. Now and the swear word snowball method is a familiar because that's how we talk about compound interest. I've heard of another style that avalanche is that is is avalanche just another name for snowball or is it a different method altogether?

Dan Jovevski  19:12

There are a few variations on this one belies the avalanche method is when you already get debts from the highest loss in terms of interest rates. And you make the minimum repayments The more that you pay off the debt with the highest interest rate first. So this might be a more advanced strategy. So somebody that's looking to get down and dirty with the numbers and sort of uncover you know what you just write people paying first. Look, there is no right or wrong method here are the main two go gold skin and jet. But you could potentially pay off more debt and pay less interest if you use the avalanche method where you pay off an item that has the highest interest rate first. In the previous example, we hit the bottom a pallet of $1,000 a credit card of 5000 personal loan of 10,000 if the credit card had arrived, say 25% the person will have a right have 15% and you bought it didn't have the right role but said the late fees were, you know, something small like six 6% $6, it may actually help to pay off the credit card first because that interest expense is obviously the highest of those three different products. And so you could tackle the credit card first move to the personal one, and also tackle the wider pile as well.

Blaize Pengilly  20:23

All right, so that one that one's sort of makes more sense financially, because you're you're cutting out extra costs, but it doesn't really have the psychological benefits of going on, you don't really have those quick wins, like you say, so interesting. What have you really got one didn't like, say a credit card debt? How can Is there a way you can tackle that quicker? Or is there something smarter than just paying it off? or putting all your extra money towards it? Is there different ways you can tackle just a single, outstanding debt?

Dan Jovevski  20:53

Yeah, totally. And I think it will come down to the interest rate charged. So for example, applies. What I don't know if this practice still behind us, I hope it doesn't. But you know that there were days we used to walk into a bank, and the bank would give you say, a $15,000 credit card at the age of say 2021 42. Right.

Blaize Pengilly  21:15

I'm glad that did not happen to me.

Dan Jovevski  21:18

100% and as we can always tell that if people have available credit, it's always very easy to be lulled to a sense of yield, put on the credit card or pay for it later. But you know, at the end of that situation, I think most most people know how the story goes, they went up a massive, huge amount of debt. Now, if that, as a post example, if the interest rate is say 25%. And you wanted to reduce that right, you could pay more money on your credit card, but probably the more effective solution is to save you can consolidate that car loan, refinance that credit card debt into a personal loan, which will allow you to pay that over time. The reason why this is very important is when you look at a credit card and how you want to pay that off. I'm not sure if all credit card bank statements to have this but there is a payoff time period, if you make the minimum repayment, it might take you 30 years to pay off the car. So people aren't going to get ahead in that type of scenario, you'll be willing to your grace by that point. And considering your retirement village options as opposed to thinking about enjoying your life. And plays, I think the opportunity for people to really understand, if I've got this credit card and are paying a huge amount of interest, can I reduce that right? another provider and if my current score is really good, reduce that rate to say from 1520 25%. So something goes six to 7%. And that will allow you to reduce your repayments, but then also keep the discipline of making repayments on time. And you can use those extra savings in the difference of the interest rate paycheque every single month to increase your contribution to pay that loan off faster. So it actually helps you get out of debt quicker, if you can be disciplined on using their savings to pay off that loan very, very, very, very quickly. The other method, which is probably not recommended is taking a 0% balance transfer card balance transfer, as a very, very high level concept is when you transfer your debt on your credit card to another credit card that has a 0% offer. So if I've got that credit card and the pay 25% rate of interest, I can move that towards 0% credit card, which might have an offer for say 18 to 24 months, that allows me to stop paying interest on my debt, it doesn't get rid of the debt. It doesn't make you pay off your debt faster. It does save your use expense. But as we all know, you know, the banks in our silly, they're pretty smart, they know how to make a coin. Hamilton alarm is you not making your payment when that zero balance transfer credit card offer expires. And in some cases, what ends up happening is that the interest that you pay gets backdated to the point of what you have that balance transfer credit card offer. Yes, it is quite disastrous on the transparency in this space. And you know, people often say it's too good to be true it often often is. And you've got to think about it, can you be disciplined enough to use the bank's money, not paying the interest and pay off your credit card balance in full. And the reason why that product is offered is because the banks know that people will simply let that roll over and then pay a higher rate of interest after the fact. So do your balance transfer offers. Look to be honest. I think in some cases, it may make sense if you're super savvy, but you know if you can avoid at all costs. Please don't get yourself out of there quicker and don't just kick the can down the road with with a product like a zero point balance transfer.

Blaize Pengilly  25:02

It sounds like the kind of products that really lulls you into this false sense of security. Because, you know, you certainly saw a problem and then you go, Oh, I'd have to pay interest. So I don't have to worry about it for a while. And then, you know, as humans, we are creatures of habit. And I'm speaking from my own personal experience here, I know that I'm likely to just keep doing the same things that I've always been doing. So if you've, if you don't make that behavior change, and you're sort of relying on the same product that got you into debt in the first place, it does sound like a bit of a recipe for disaster that method

Dan Jovevski  25:32

100% Blaize

Blaize Pengilly  25:35

So there's that's the six strategies for how to get out of debt ASAP different ways that you can attack it. What are the things when you are looking at getting out of debt sooner? Or if you're looking at consolidating what are the things you should watch out for?

Dan Jovevski  25:49

I think there's a quite a few things that people should watch out for. The first one is there's a lot of people out there like credit repair doctors or people that are offering you the ability to do debt consolidation, where they're entering what's known as part nine debt agreements. And partner agreements, just to be clear, is an agreement that you're entered into prior to entering into bankruptcy. So we're not suggesting that if you throw my hand your payments, so you consider, but just be aware, there are providers out there that offer these services to people that are quite vulnerable. Sometimes it can be useful, but it is really one of those lead Maxim's caveat emptor buyer beware, do all your research, speak to other people do a lot of Google reviews before entering into any type of arrangement with a third party service that is going to help you in your debt consolidation. There are some really genuine companies out there that do do this. But there's also a lot of what you would call unsavoury practices that charge a lot of fees in order to help you save money, which I don't know how I feel about that one place. But you've just got to be careful when you when you go down this journey, if you end up using a third party company to help you with this process.

Blaize Pengilly  27:04

Well, this and you know what we refer back to this episode so many times, and I think it's because it provided so much valuable information. But our chat with Saurav Dutta from Curtin University, where he talked about the four common debt traps, it was I think it was maybe a fifth episode in. And if you are in debt, or you are worried about falling into debt, it's really, really helpful episode and serve as a knowledge of fountain of knowledge. But it reminds me of what he was saying that, you know, a lot of people fall into debt when they're trying to get out of debt, because they're asking for help with their debt. And something that I remember him mentioning was that if you need help consolidating your debt, there are so many free services out there that can help you. And so if you can use a free service, that's definitely a better way to go then going somewhere where you're going to be charged another fee, which will just be helping, you know, amounting to that already existing debt. And there's also the free national debt helpline. So if you are struggling with debt, that is a free number you can call for, for financial help. So I will check that number for the national debt helpline in our show notes as well, so you can reach out if you need it.

Dan Jovevski  28:09

Thanks, I would also have a look at to see the comparison rate. And for those who don't know what a comparison rate is, is that are the rate that you see advertised. Typically you see interest rate advertised, which say, for example, a personal loan might be say 6.95%. And then you have something called a comparison rate, which might be say 7.36%. And the reason why those rates are different is because comparison rate represents all the total costs of that loan product, which already includes the ongoing fees, upfront fees and exit fees, they're all lumped together to give you an overview on an example, situation where if you'd have borrowed typically for personal I say $15,000 was actually the true cost of credit. And sometimes a lot of these deals that are offered out there, which you know, you may be interested in, but you just have to double check if the right for you, is there not some type of introductory rate where you get charged a low fee to begin with, and it becomes a higher fee later on. Or there's a lot of other monthly fees, annual fees to consider, which actually might put you in the same position in terms of what right you're currently paying and what repayments account you have or even higher. So that's one thing to look out for. The other thing is do your research before you switch you know changing your mind on multiple loan applications can news really impact your credit score. So you've got to really consider the option where you're applying to a loan provider and you know with a some degree of certainty that you are going to be approved for that. And while we whilst we can't always know it, you should do your research thoroughly their provider given the call if you're unsure to see whether or not the criteria that you have matches what they will underwrite for before you apply. Again, we know this from our previous episodes talking about credit scores, the more times you apply for credit in a short period of time, the more one Your score is to decrease. So avoid that as much as you can

Blaize Pengilly  30:03

it Dan, I thought of something else that might be worth considering. But it I feel like it's pretty obvious, but I'll chuck it out there anyway, if you are refinancing or consolidating, it's probably worth checking what the actual repayments will be if you were to do so, if you're consolidating multiple different loans into one, can you actually afford those repayments or is having the staggered repayments of the multiple loans actually more accessible for you. So say, you know, you have something on the first week of the month, and then saying on the third week of the month, maybe that actually works better for you, because of the way your pay cycle works. Maybe consolidating all into one loan, where it really like a large lump sum comes out one time might not be better. So yeah, definitely checking to see if you can afford the repayments. Is there anything else that you need to do if you are looking to switch or save or consolidate?

Dan Jovevski  30:56

The last thing Blaize, is protecting your home and your assets. This is particularly important if you want to switch from an unsecured debt, unsecured debt and you may be risking your house, your car, your boat, or a really treasured possession if you're putting that up as collateral to take out a loan. So just be careful. If you find yourself in a really precarious spot, it may not be something that's worthwhile embarking on

Blaize Pengilly  31:21

I wish I had a boat to to risk but yes, it has been what is you mentioned unsecured debt or a secured debt? What are the differences between those.

Dan Jovevski  31:34

So unsecured debt basically means that a secured against nothing the bank or financial institution is taking a complete risk on you and your ability to repay and there is a good faith, great over time, both you and the financial institution that you make your payments on time, when they told you why this is different than a secured loan where a secured line use your that against a house or a car or an asset is when you think about it if I own something, and if I have the chance of potentially losing it, I'm more likely to probably fight to what to keep that particular asset and therefore more likely than make more repayments. And so what you'll see plays typically is that the interest rate differential on say, securing something against a car or a boat, or jet ski, for example, might be a low rate of interest, compared to say something that's completely unsecured. And I think for people with really good credit, they can choose, they can select which type of Avenue they want to go down to. But if you don't have great credit, maybe the only other option is to consider a loan where you actually secure something that you are right as proof collateral, so you can hostel it can feel safe, that you have people in your life for repayment.

Blaize Pengilly  32:51

So it's the old if you can't make it, I'm taking this for me. So yeah, it's giving you that motivation to pay. And it's also giving the insurance to the credit provider. All right, I'm assuming as well before, you know, if you are if you do get into debt, and you are looking to switch, you could could you talk to your providers like they would I'm sure places would offer financial hardship clauses or is there something you can do directly with your current lender to see if you can get yourself ahead financially?

Dan Jovevski  33:22

Absolutely. I think the the avenues that you speak to existing lender, particularly in the case of hardship is certainly one option that people can pursue. And to be honest, I've you know, we often sort of talked about how the financial system may not be perfect all the time buyers. But one thing that's happened to Rick COVID is that there had to have been a huge investment from a lot of banks and financial institutions, on beefing up their hardship and recoveries teams, to the point of where they have a really sort of human based approach to dealing with people in difficult situations. Whereas prior to COVID, to be frank, things were dealt with a really automated way, if you didn't make your payments, after 90 days, boom, you were sent over to the collections, people now deal with you in a different different aspect. But today, banks via institutions have recognized that, you know, we're dealing with real human people with real lives. And we have to create a more humane approach to helping people out. And what you'll find is, is that if you go your back and you're experiencing hardship, you're more likely to get some type of concessions or some type of linear unsee in your repayment of your obligations to give you more time extended to potentially reduce your interest forgive your interest etc sightseers only people can explore if they find themselves in that situation.

Blaize Pengilly  34:36

Can you mentioned debt collectors? Do they exist? If they are they're not something that just happens in the movies where there's you know, to beefed up guys in long jackets carrying handle bars about to pummel your kneecaps in debt collectors exist. And what happens when it gets to that point? Is it like the movies do you have to run and hide for your life or is it more civil?

Dan Jovevski  35:00

Well, there's a variety of them. So maybe using one of the spectrum, the baseball bat knocking on your door, and then the other end of the spectrum, everything robocalls on your phone, if you have missed payments on any certain items like a utility bill or a phone plan or things like that, and a lot of people are actually moving to this type of more automated solution. Look, one thing that's often not talked about, I think we should probably do a deeper episode on this topic is that roughly about three to 4 million Australians find themselves into some type of financial difficulty a year. And when you think about the number 34 million, and the population in Australia being resident 26 27 million, it's actually watched a massive portion of the population that falls into that category. And we all do, we're all human, we make mistakes and the things that happen outside of our control. But I think the short answer is that there's a variety of different places where people can end up in debt collection, ranging from an automatic response all the way through to in home visits in home visits, not as scare Ellison as shooting in here. They're very rare. I think that would only happen for things like not paying a mortgage over time and not respond to any phone calls. And I don't think I've even heard of this practice that are taking place for low loan amounts, because it doesn't make sense for these big companies to send a personality home and sort of check how things are going. So.

Blaize Pengilly  36:33

So the movies are lying to me, all right, fine, fair enough. I can't I can't trust what I see on TV, I get it

Dan Jovevski  36:38

The 80's have moved on. But I think there's much more graceful ways that people are approaching hardship now where they actually give you the option up front via some type of login portal where you can go in there and actually decide what you want to repay. And when you can, what you can afford, as opposed to trying to get into a conversation because to be honest, please if you're underneath I just 30 I think I've said this before people would rather have a root canal their anaesthetic, then speak to the person over the phone. So yeah, hopefully the industry will change for the better.

Blaize Pengilly  37:16

Yeah, well, that's a relief, it's good to say that they're moving to different ways. Dan, do you have any final wisdom you'd like to share on the lovely topic of tackling debts?

Dan Jovevski  37:27

With I feel like the way that the modern era financial products have been constructed in our lives is that we have different requirements, different times in our life, if you think about the evolution of what you start on from, say graduating high school. So to go into uni, thinking about buying a car, buying a home, buying a family buy an investment property, as you can see buying a family. Baby that will exist to someday for the for those people that want to having a family, having a family,

Blaize Pengilly  37:59

Buying a family?

Dan Jovevski  38:01

for those people that want to have a family. All these big stages of life require some type of financial consideration where you might have to get involved, just remember, every single time you have one of these big critical life events that occur, it's an opportunity to look at potentially saving money already existing products and making sure that you'd better outcome, because what ends up happening when we mentioned that stat at the top of the show 50% of all applications that go for a personal loan end up being for debt consolidation, right. And the reason why that's the case is because people have taken out these odd little lines here or there, then they snowball and they get to a place where they may not be manageable. So if you're in that situation, consider of debt consolidation is appropriate for you. Or if you are considering another stage in your life where a finance refinance is required. do consider looking at all your other debts at the same time, so you can get the best and most efficient outcome rather than kicking the can down the road, you know, one more year or two more years and potentially pay more than you need to,

Blaize Pengilly  39:02

I suppose getting out of the best way to get out of debt is avoid getting into it the first place if it's not avoidable, definitely changing your lifestyle and putting, you know, setting up good money habits and where possible building up an emergency fund. You know, if we had the emergency fund or the sinking funds set aside for when these unexpected life events Come come, I think it would really help avoiding the need to take out credit or to get into debt to move forward. Now if you are in a position where you need help, please call the national debt hotline. If you are in a position where you need help or would like some advice about debt, you can call the national debt helpline. It is free. The number is one 800 double 07 double 07 the free confidential advice so that's really really helpful tool that you can use totally for free that the government provides. So pretty, pretty good. Good on your schema pat on the back for that one.

Dan Jovevski  40:08

So We Talk Cents is produced by WeMoney, a smart money management app, which you can download for free. And one of the features that we have in the WeMoney app is his ability to have authentic conversation with real people navigating through life. What have you seen this week in the way medic community that's caught your eyes?

Blaize Pengilly  40:24

Dan, I am looking through the screenshots of everything I found this week that I really, really like. And unsurprisingly, last week, my conversation was about booze this week. It's about food, baby. So I am so inspired by so many people making awesome home meals. You know, food is the biggest groceries are the second biggest expense in Australian households after accommodation. So seeing people just make these incredible looking dishes from scratch out of random leftovers. I have things I have in their pantry. There's this delicious looking chicken burritos. There is a bunch of leftover Fritters by aussie debt free girl, there is an incredible looking brunch. So yeah, that's really inspired me to cook more from home and also something I saw, which is a total money win. If you recall a few episodes ago, we had bargain boss, join us to talk about how you can score yourself a free risk Chuck and how to save on your groceries. And one of those ideas she had was the scanning prey scanning policy, which is where if you take it an item to the checkout, and it scans at the wrong price that was advertised for you get the first item for free. So inside outlet mate, they had a huge win this week. They got a Australian pork belly rose that should have been $30 for free because the scan for the wrong price. So that is an incredible win. And I love pork belly. So yeah, that's what caught my eye this week.

Dan Jovevski  41:54

Amazing. But

Blaize Pengilly  41:55

if you want to take a look at the WeMoney community, all you have to do is download the WeMoney app which is free to download and you can get it from the Apple or Google Play stores.

Dan Jovevski  42:05

Thanks for tuning into We Talk Cents.

Blaize Pengilly  42:07

If you want to get in touch Feel free to hit us up via Instagram we are @getWeMoney. Please provides review on Apple podcast or wherever you listen to your podcast to help others find the show. And this is an adios for now. But not forever. We are taking a two week break of Easter so we'll be back in your ears on the 12th of April. We can't wait to chat to you then. 

Disclaimer:

The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.