How to deal with rising loan repayments

THE RESERVE BANK OF AUSTRALIA HAS INCREASED THE OFFICIAL CASH RATE 300 BASIS POINTS FROM 0.10 IN APRIL 2022 TO 3.10 IN DECEMBER 2022.

We all know that interest rates are on the rise — anyone with a loan or those who have applied for finance in recent times has had to deal with ballooning monthly payments. As lenders pass on those monthly rate rises to borrowers, those monthly payments are only becoming larger with no end in sight (yet).

Thankfully, there are ways to take control of the situation before it’s too late. So, what can borrowers do to alleviate the impact of these increased loan payments and not be overburdened with debt?

Know the difference between good and bad debt

Not all debt is created equal. While all debt is taken out with a specific purpose, some debt is better than others. For example, any loan used to finance something that can offer a positive investment return is good debt. Any debt that is tax deductible and/ or has a low interest can also fall under the category of good debt.

On the other hand, bad debt is defined as exactly the opposite — that could mean a debt for an investment providing a negative return, a debt that is not tax deductible and/or a debt that is at a very high interest rate. Generally, the worst types of debt are credit cards and payday loans. It’s important that these bad debts are paid off first. If possible, aim to pay these off as quick as possible and try avoiding them if you can.

Cut your losses

If you are carrying equipment that is not profitable, then now may be the right time to cut your losses and sell the equipment. It may be better to turn a poor performing asset into cash to pay down debt or reinvest into more profitable assets.

In order to do this, business owners should analyse their equipment to get an understanding on how they are performing. Those that are not hitting the mark, should be turned into cash and redeployed.

Get your pricing right

Pricing is one of the most powerful tools in a business owners toolbox. Used correctly, it can help you build your business, used incorrectly and it can take your business away. As the cost of business increases, you need to consider your pricing strategy or be prepared to lose margin.

Perform a spending audit

A short-term solution to handling higher loan repayments is to assess your discretionary spending. It is important to document your spending. Starting with any money that has been paid for rent or paid off debt, add to this list details of

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This exercise will provide a good overview of where hard-earned money is going and will be a useful benchmark for setting a monthly budget. It will also identify areas where cuts can be made on spending or to shop around for better deals.

Also, there is no law that locks borrowers into their current mortgage for the full 25 or 30-year term. Shop around and find an alternative provider that can offer a lower rate. Even a one per cent reduction can make a huge difference in terms of reducing the monthly loan payment.

Lastly, don’t forget about those balloon payments on your equipment finance. It’s easy to forget about those large balloon payments if you negotiated them a couple of year ago. As part of your spending audit, go through your finance facilities and identify any large payments that may be coming up so you can plan around them and refinance if necessary.

Make sure you invest in having a good accountant that can help you keep more of what you earn so you can manage the increasing debt repayments that everyone is experiencing.

Forecast

Make sure you have a cashflow forecast that you update at least monthly and that you refer to when making decisions on what equipment to purchase next. When done right, your forecast will tell you the future. It will tell you if you can expect to experience negative cashflow at certain times of the year and it can be adjusted to see how changes to your strategy will impact your cashflow.

The forecast can then be used to help you plan and address the challenges you may be facing now and those you potentially will face along the way. It is an invaluable resource when it comes to your decision-making process.

Finally, don’t overextend yourself, get advice and build a cash buffer if possible. If you follow these steps, then you will be on your way to dealing with the rising loan repayments.

Make sure you are not paying too much tax

Making profit takes a lot of hard work — don’t pay more of it in taxes than you need to! Ask questions and speak with your accountant about your situation. Make sure you have an efficient structure for your business and be wary of the additional tax that can come from drawing funds from your structures.

If you’d to like to learn more about HLB Mann Judd and how we work with members of HRIA, EWPA and TSHA please visit our website www.hlb.com.au/locations/ sydney/hire-rental-industry-hria/