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The difference between safe credit and dangerous credit

Unexpected expenses can happen in everyday life. You may have to dip into your savings to repair a car or buy a new fridge. But if you don’t have the cash to, sometimes a small loan can help. If that’s the case, you need to be aware of dangerous credit traps that can make a stressful situation worse.

Before applying for any type of loan, think about whether it is possible to postpone the expense. Also think about what life will be like if you are trying to meet repayments. Will it make your budget too tight? Will it be hard to cover bills like rent and food?

Consider these elements and decide if you are sure that you need a loan. When you are looking for a loan you should assess if it is Safe Credit or Dangerous Credit. One way to tell is to judge the transparency and reliability of the loan provider. Is there a lot of fine print? Do they make the fees and interest really clear so you know what your are paying? Calculate what the cost of the item will be with all fees and charges included. Safe credit usually offers loans without increases in fees or interest over time.

Good Shepherd’s No Interest Loans (NILs) is a safe and reliable program that allows you to borrow up to $1500 for essential items and repay them at no additional cost within one year. NILs providers  provide Safe Credit loans. They will go over your income and expenses to ensure it is the best and most affordable option.

Another form of safe credit is a Centrelink advance payment. Most people on a Centrelink benefit can get an advance payment, which is  a loan with no interest, fees or charges.

The main problem of so-called dangerous credit is how the loan providers operate.  They sound fast and easy, but they have fees and penalties that can really add up. These quick short term loans are often referred to as payday loans. They are a common form of dangerous credit.

They may look like a quick fix, but payday loans have high fees and charges, that are not always obvious. The amount you have to pay back often increases due to dishonour fees, missed payment fees, or default fees and charges.

For example, to pay back a $2000 payday loan over one year, the total repayments can be as much as $3360. That equates to $1360 more than you initially borrowed.

And what’s worse is that payday lenders target people with limited options. They prey on their vulnerability and offer easy access to expensive and harmful debt. Dangerous debt leads to many problems, and not all of them are financial. Debt may lead to stress, depression, other health issues, and in some cases, even suicide.

Currently, Australian’s owe $1 billion to payday lenders. The best strategy to avoid dangerous credit is to always check the terms and conditions thoroughly. Taking time to analyse the information contained in the contract can determine your future.

For more information and handy calculators, visit the MoneySmart website

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