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Money is like manure. If you spread it around it does a lot of good. But if you pile it up in one place it stinks like hell. - Jr Murchison

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Your dream holiday paid for by the bank?

Your dream holiday paid for by the bank?

I have been ill all this week with a very heavy cold/flu virus. As a result I’ve spent some time watching TV and see some B grade midday movies and associated advertisements. One ad instantly caught my eye. It was produced by a large international bank that will remain nameless but you’ll soon see the ad if you’re a Melbourne resident. The brand name doesn’t really matter as all the banks try similar tactics at some point. They were advertising for a cheap personal loan to – ” go on your dream holiday or finish your house renovation, buy a car, or a special occasion”, as the screenshot from their website below says.

Citibank

 

 

Cheap low introductory interest rate!

Once you’ve decided to take the family holiday you really shouldn’t take unless you can afford it you can have the low interest rate of  5.9%. When you look closely at the ad though you will realise that the interest rate reverts to a staggering 19.49%p.a. after 2 years. Oh well, I didn’t see that at first (that’s what the bank hopes). Let’s look at a fantastic holiday for a couple. Below I’ve added a screenshot of a local travel website with an advert for cheap holidays. Sounds good doesn’t it? Bali for $915 per person – 9 nights, hotel & flights. That’ll do. So for two people that’s only $1830 – add $500 each for spending money, $2830 total.

Holiday

 

 

 

 

 

 

 

 

Let’s do some calculations. Use the calculator below to add the figures.

$2830 for Loan Amount, 24 for Length of Loan, 5.9 for Interest rate.

Your answer should be Total $3007.20 including interest of $177.20. Ok, you may say. To have an instant holiday I am prepared to pay $177.20 interest for the privilege but what if you are a little lazy (as we all can be) and you don’t pay back the loan within the 2 years.  Let’s say it takes you five years to pay back the loan. With a starting point of now $3007.20, lets add another 3 years to the loan.

$3007.20 for Loan Amount, 36 for Length of Loan, 19.49% for Interest Rate.

Your answer should now be $3995.22, including $988.02 interest. The interest has increased a lot now hasn’t it. Instead of $177.20, it’s gone up to $988.20.

So the totals for the entire 5 years are – $3007.20 + 3995.22 = $7002.42  Interest – $177.20 + 988.02 = $1165.22 

Now your dream holiday is sounding much more expensive!  $7002.42 for loan or $2830 for cash, a difference of $4172.42.

 

Banks love lazy customers

Banks just love it when their customers become lazy and miss payments or extend loans so they can charge them more. Who said they aren’t running a mushroom factory? If they could always keep us in the dark and feed us nothing but manure – I’m sure they would. They make these loans sound irresistible when they first advertise them so customers will come and not necessarily ask too many questions. They offer the cheap introductory interest rate so you’ll take the loan, while hoping you’ll stay long enough to be penalised by the rising rate later. It’s the classic snake oil salesman tactic and they still use it every day.

Use your own money

If you really want to have the fantastic holiday or buy the car of your dreams, please, please, please – save for it. Don’t use a loan.

If you wanted to save for the $2830 holiday and were prepared to plan 12 months ahead, $235.83 saved per month would get you there. That’s only roughly $58.95 per week. Doesn’t that sound better than paying more than $7000.00 for a holiday if you forget to pay back a loan.

If you happen to contract a virus and have to watch midday movies soon. Please have a chuckle with me when you see the loan ads!!

 

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