Ten key questions for consumers to ask themselves before signing up for credit.
1. How much will the credit cost you compared with other similar deals?
2. Is your home being used as security?
3. Is it the best deal and interest rate you can get?
4. Do you fully understand the credit agreement form you are about to sign?
5. Will the interest rate stay the same?
6. Are there extra charges if you repay the debt early?
7. What happens if you miss a payment?
8. What do you have to pay each month and for how long?
9. What’s the total amount that you will pay back?
10. Can you take the credit agreement away to consider at your leisure?
How much does credit cost?
The cost of the loan - the amount of interest you are charged, will depend upon the Annual Percentage Rate or APR. The lower the APR the less interest you will pay over the lifetime of the agreement.
If you borrowed £1,000 at an APR of 25% for 5 years you'll pay back £1,675 (that's an extra £675 in interest). If you borrow £100 at an APR of 30% for 3 years you'll pay back £146 (an extra £46 in interest payments).
What different sorts of credit should I know about?
Types of credit and types of lender
Credit sale agreement: This is where you want to buy one item, such as a hi-fi or PC. The shop will arrange a loan with a finance company and you get the goods straight away. You will normally have to pay off the loan by monthly instalments.
Credit cards and store cards: You will normally have a credit limit that allows you to spend up to a certain amount. Usually, you will be sent a monthly statement, with a minimum payment that you are expected to make, or you can choose to pay off the whole lot, if you can afford it. If you just pay the minimum, or part of the balance, you’ll be charged hefty interest rates on what is left.
Hire purchase (HP): This is mostly used for very big purchases, like cars. The goods remain the property of the HP company until the end of the agreement, and you effectively pay a charge to hire them during this time. If you fall behind in your payments the HP company can repossess the goods, and you won't be able to sell the goods without the HP company's permission. HP is an expensive way of buying goods.
Personal loans from a bank or building society: You'll normally be expected to have a bank account before you can get a personal loan. Here, you are lent money by the institution, and you will usually pay it off in monthly instalments. Many lenders will insist that you make these payments by direct debit from your account, and you must make sure you have enough money in your account to meet the charges. Personal loans will often be at a cheaper rate of interest though.
Overdrafts: Your bank might allow you to overdraw - that is, borrow from the bank by taking out more money than you currently have in your account. However, this can also be an expensive way of borrowing money.
Secured loans: A secured loan means that you undertake to give the lender property you own if you do not keep up the repayments. In return you usually get a lower APR but the security is for the lender, not for you. You could lose your home.
Consolidation loans: Many lenders offer to consolidate your debts in to one single loan with a lower monthly payment. This may seem like a good idea for someone who owes a lot of money on credit cards and personal loans to different companies. However, consumers who might be tempted to solve their debt problems by taking out a consolidation loan to pay off their existing debts, may end up worse off than before. Consolidation loans can be very expensive in the long term, even though a person’s monthly payments may be reduced, and in most cases the lender will require to put up your home as security. If you fail to pay you risk losing the roof over your head, and the longer the repayment period the greater the amount of interest payable!
If you are falling behind with payments on credit cards and other unsecured debts, it is usually easier to come to an arrangement with your creditors if you owe smaller amounts to a larger number of creditors, rather than if you owe a large amount to a small number.
Debt management companies: Debt management companies who sometimes arrange consolidation loans as a solution to dealing with debt problems, often charge fees, increasing a consumers overall debt.
Credit brokers: Credit brokers arrange loans and mortgages, often for consumers who are finding it difficult to obtain credit - for a fee. Consumers should however be aware of those unscrupulous brokers who charge desperate consumers hundreds of pounds when they know that it will be almost impossible to secure credit for them. The law states that Credit Brokers may charge a brokerage or commission fee to their clients or customers, but this is limited to £5.00 if the customer does not enter into the agreement for the credit or hire within six months. It does not matter why the client or customer chooses not to enter in to the agreement.
Warwickshire Trading Standards Service can deal with complaints where a credit broker has kept fees (over £5.00) paid by a consumer, but has failed to deliver a loan.
Money lenders: Sadly, there are many disreputable businesses (loan sharks is what they’re commonly called) who will lend you money, no questions asked, at a very high rate of interest. If you’re desperate this can often be a very tempting thing to do – Don’t!
Interest free credit or 'buy now, pay later' deals: These allow you to pay for the goods in instalments, but at the cash price, or will let you defer payment for a period of time, such as 6 or 9 months. Because these are so attractive it is easy to take on too many of them and over-commit yourself. Remember, you will still have to make the payments regularly, or you could get into debt. Also, if you don’t pay the cash amount by the due date on buy now, pay later deals you will have to pay interest and this will be charged from the date the goods were supplied.
Credit unions: If you join a credit union, you save with them for a set time and then you are allowed to borrow two or three times what you have saved. They work well for many people. To find your nearest credit union, contact the Association of British Credit Unions on 0161 832 3694
What should I look for if I'm interested in credit?
You should shop around, and compare the different interest rates with different types of credit. Do this by looking at the APR (Annual Percentage Rate). Generally, the lower the APR, the cheaper the credit, as you will pay less interest overall. You must make sure that you read the terms and conditions of any credit agreement before you sign it. If necessary, ask for time to read the agreement. Be aware that some companies may advertise loans with low rates interest, but the interest you will pay will depends upon your personal circumstances.
Remember also that it is unlikely that you will be able to cancel the agreement after you have signed it, and never sign a blank credit agreement.
Finally, think really hard about whether you really need the goods that you want, and if so, whether you can save for it and pay cash - this will always be the cheapest option!
Top Tips Do
- Consider whether you really need credit, or whether you would be better off saving up and paying cash.
- If you feel that you need credit, do a proper budget of your income/expenditure, and be realistic about what monthly payments you can afford.
- Shop around and compare deals.
- Always check the Annual Percentage Rate (APR) - the lower the APR the less interest you will pay over the lifetime of the agreement.
- Always read the small print - once you sign on the dotted line, you will have entered into a legally binding agreement.
- If you have a credit or store card, try to keep the maximum credit-spending limit as low as possible so you aren’t tempted to spend, spend, spend!
- If you can, pay off the full balance on your credit or store card every month, to avoid being charged interest.
- Keep a regular check on your credit expenditure, and think carefully before taking out any new credit deals.
Don’t
- Don't take on more credit than you can realistically pay - remember, you are ultimately responsible for the amount of credit you commit yourself to.
- Don’t be fooled by introductory discounts for store/credit cards - always look at what the interest rate is going to be, which can often be very high in this sort of deal.
- Don’t think you can hide from a bad credit history - Credit Reference Agencies keep information about your credit history for years.
- Don't ever sign a blank credit agreement.
- If you fall into arrears, don’t ignore letters from credit companies - most will allow you to reschedule the debt if you are having trouble paying.
- Don’t borrow more money to get out of an existing debt.
- Never use a loan shark or moneylender. They charge extortionate rates of interest and often use threats of violence to get their money back.
- Don’t Panic. If you are in financial difficulty, then seek help.
If you require debt advice, the Citizens Advice Bureau and the National Debtline can help. |