Need some flex for whatever's next? Be prepared to pay heaps. We mystery shop the current Gem Finance personal loan offer

Alec Baldwin is targeting you

By David Chaston

The advertising is everywhere. And the promotion seems attractive.

12.99% per annum is the promotional interest rate, although the promotion is for a loan of at least $20,000. "Terms, conditions and credit criteria" also apply.

I mystery shopped a Gem Finance personal loan, although to be honest, I couldn't bring myself to apply for a $20,000 loan.

I applied for a $5,000 "debt consolidation" loan, repayable monthly over two years. Because I couldn't find their online calculator (Update: there is one, but crucially its results exclude fees! so it is not realistic. That flaw means it under-estimated my repayments by $28.42 per month), I needed to apply online and then call in to get detail on the anticipated payments required. And because that is their system, salesmanship and respectful pressure to "decide now" comes with the application. They do this by "verifying" your application details in a conversation, and running a credit check while you wait on hold.

In my case, I ended up with a quote of "an interest rate of 14.99%" and repayments of $270.47 per month.

That gave me sufficient information to work out the effective cost of debt, using our handy calculator.

Fees added, consisting of at least an establishment fee of $240, substantially changes the effective cost to 26.2%.

Gem's own example is: A Gem Personal Loan of $16,000 borrowed for three years with a fixed interest rate of 12.99% p.a. would equate to a total amount payable of $19,731.60 (including a $240 establishment fee). On 36 equal monthly payments of $548.10, that results in an effective cost of debt of 14.1%. However it was unclear from "Donna" how you could qualify for the 12.99% advertised interest rate by borrowing less than the promoted $20,000.

The main takeaway from this mystery shop is to know that fees substantially change what you think you are paying as an interest rate.

In fact, in my personal example, I was quoted a payment amount that brought an overall effective rate not too dissimilar to the Gem Visa rate of 25.99%.

The promotion might be "12.99%" but in many cases the effective reality will be more, often much more.

You don't need much information to check attractive credit offers from anyone. You just need four items:

- how much you will start with in your hand at the front of the loan (and this is not necessarily the 'borrowed amount' because that can include fees)

- what your repayment amount is

- how many repayments you need to make

- how often you need to make these repayments.

Enter those details in our calculator. The effective cost of debt is what you really should know before you agree or sign up to any loan. Go in with your eyes open. The only assumption you should make is that the offered interest rate will be less, often substantially less, that what you will really be paying.

Gem Finance is part of Latitude Financial Services, which was created through the purchase of GE Money by investor Värde Partners, private equity group KKR, and Deutsche Bank from US conglomerate General Electric in an A$8.2 billion deal in 2015.

Effective Cost of Debt Calculator
Borrowed Amount
$
Installment Amount
$
Installment Frequency
Number of Installments
The effective cost of debt for the loan is on a per annum basis.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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18 Comments

I fundamentally changed the day I finally worked out how much mortgage debt interest I'd paid out throughout my working life time. It was in the multiple hundreds of thousands of dollars, and even worse in today's money. Yes, we started at about 19.5% (if I can remember properly) but it was 'only' in the tens of thousands in those days. And you young ones think you've got it tough?

So the interest was enough to buy another house? When I first bought my house a few years ago the total interest over 30 years worked out to be more than $400k. It is a lot of money if you don't increase repayments or invest any savings.

That is why Rent, is not Dead Money!
We all have to live somewhere, and we pay The Landlord one way or another. It's just that on many occasions The Landlord is called Westpac or BNZ etc.
Rent is no 'deader' that Interest Paid....

bw,

perhaps it's a generational thing(I'm 73),but I just think about in a fundamentally different way. Fortunately,so do my sons and their wives.
When I married in 1969,it simply never occurred to me-or to anyone I knew-not to buy whatever I could afford. That was a max. of 3 times my salary and no account taken of my wife's income. Yes,I was paying interest to the Building Soc in Scotland,but as long as I kept paying,they couldn't just sell it from under us. I feel so sorry for those who now simply can't afford to get on the housing ladder. Many of them are likely to be poorer in retirement with continuing rental payments,than they would have been with a paid-off mortgage.
For many,rent simply is 'deader' than mortgage interest.

That's your fault for taking out a mortgage back when house prices were the equivalent of a house deposit today (when compared to multiples of income). If you'd saved up and bought the house with cash then you would have saved yourself a bit of money, particularly when the interest rates on your savings would have been significantly higher too.

Wow effectively paying 26% interest ......... no wonder we have people in a debt trap and locked into a cycle of poverty .

We really do need legislation to protect vulnerable people from this type of exploitation .

I have often wondered why this is not a fundamental part of the syllabus in fourth form maths. Very simple and something we all should know how to work out from a young age, before we get a steady income. The end result should be that no adult should need to have this explained to them.

Math deficit is rampant. Yes, folk do not know how to work it out in any way. That you actually can work it out is a new idea to them.
When you go and buy that $1500 fridge, you can usually bargain it down to say $1200. But then in "Interest Free - one week only" Strangely you can't bargain it.
Try explaining that to somebody who thinks they just got a good deal that week. You can't explain it.
Deficit in the 4th form maths syllabus for sure.

I certainly agree that financial literacy should be taught at schools, but not in Maths. Maths should be a very particular and disciplined subject and should not be muddied or confused by introducing other subjects like economics, which is where this subject belongs. I suspect that this sort of thing is being done quite a bit with maths in NZ schools and as our international rankings indicate, we are not improving our position.
Maths skills once mastered are then applied in other subjects, not the other way around. A bit like English
https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11358227

Problem is, the kids most targeted by these folk probably won't be in that class. Or won't be well fed, awake and alert in it.

If you need to borrow $16k (without mortgage topup) it would be cheaper to put it on your Gemvisa card interest-free for 6 months then balance transfer to another card at 0 or 1.9% for 12 months.

You might find they throw in a sneaky "just pay a one time establishment fee" line into the ad to ensure you pay 5% upfront for the 6 months interest free (10% pa) just in case you are smart enough to shift it out in time. Then of course that amount must be repaid before any new purchase balance is touched etc, etc, etc....

Gemvisa has a flat fee of $60 pa. Regardless of your limit.
Then for the btr to another standard cc - Unlike the USA, NZ credit cards charge nothing for balance transfers.

Except most charge an annual fee - and most make you pay interest on all purchases until such time as your zero or low interest BT is paid off. There are exceptions to this... important to read the fine print.

the key is to then treat it like a loan. Pay as much as you would have on the loan and knock it out real quick.
The temptation is to pay only minimum payment, use it to buy more "stuff' and think "available credit' is your own money to spend.
And then the low interest rate expires and away you go again

"............. I couldn't find their online calculator (Update: there is one, but crucially its results exclude fees!......)"
Really ! That little omission should be criminal. Boys in Blue should be around there putting on handcuffs. But oh well, it's probably only going to deceive the uneducated and poor, so no problem.

If you were credit checked for your application you probably just reduced your credit rating even without following through with the loan. Apparently that's how it works.

I think pure maths should be kept as it is but should not be compulsory. Most students would instead move over to doing a practical maths course which is compulsory and always starts with the big picture and then works back. Dare I say it, I just don't think pure maths is helpful to most students.