(c) Copyright 2002 Welsh Consumer Council: www.consumereducation.org.uk
Related Information:
What is credit?
Consumer Credit Act
How to shop around for credit
Credit Concerns
Getting Credit
On this Page:
There are lots of ways of getting credit. You can buy a bike on hire purchase;
use a credit card to fill up the petrol tank; open a budget account to
buy clothes; take out a personal loan with a finance company to pay for
furniture; take out a loan from a bank to pay for a holiday or take out
a mortgage from a building society, bank or finance house to buy a flat.
Before you try any of them, it's important you know how they work so that
you understand what you're letting yourself in for before it's too late
to change your mind.
Hire Purchase: This is probably the best-known way of buying
on credit and has been around for over a hundred years. This is an expensive
way to borrow. You will usually have to pay a deposit before you take the
goods away with you. You'll have to sign an agreement promising to pay
the rest of the money (the balance) plus interest in regular amounts (instalments)
over a fixed period of time. You may also be asked to pay something called
an "option to purchase fee" which is often added to your last instalment.
Until you make this last payment the goods don't belong to you, they remain
the property of the finance company. You won't be allowed to sell them
to anyone else as if you do, the finance company may be able to take them
back. Here is an example of how a HP agreement for a T.V. might be worked
out:
Cash price £330.00
Less deposit £ 30.00
Balance to be financed £300.00
+ interest £ 90.00
+ option to purchase fee £ 3.00 = £393,00
You are told that if you pay back the £393.00 in 24 monthly instalments,
you'll pay 23 at £16.25 and 1 at £19.25. This adds up to a
total of £423.00 and is called the "total credit price". It's £93
more than the cash price. The A.P.R. on this example is 30.8% and is fairly
typical of many H.P. deals, so ask about the A.P.R. and compare rates between
several different companies.
If you don't keep up payments, the lender (the finance company) may
be able to take the goods away. Once you've paid one third of the total
credit price the lender can't take them back without a court order. If
you find that you can't manage and want to end your agreement, let the
company know straight away. You may have to hand the goods back and make
up any instalments that you missed. You might have to pay up to half the
total credit price and if you've damaged or misused the goods, you may
have to pay for putting them right.
Credit Sale: This is similar to hire
purchase but the goods belong to you right from the start so you can sell
them before you've finished paying for them if you want to. You'll still
have to keep making the repayments because if you don't the finance company
can sue you to recover their money. You may have to pay the whole lot back
in one lump sum, but they can't take the goods away from you or anyone
you have passed them on to.
Credit Cards: A lot of people are using,
or are being persuaded to use, credit cards to buy all sorts of goods and
services. The most popular are Access and Visa. Some of them can only be
used in one shop and signs around the shop will tell you which ones they
accept. Credit card schemes are run by banks, finance companies, shops
or companies that specialise in this type of finance. Interest rates vary,
so find out the A.P.R. before you start and remember, some companies charge
an annual fee. If your application is accepted you will be given a plastic
card, which you can use instead of cash to pay for things. You will also
be given a credit limit and you won't be allowed to spend more than a certain
amount using your card.
Every month, you'll be sent a statement showing what you've bought and
how much you owe. You'll have to pay back some of that amount each month
and your statement will show the minimum you must pay in that month. You
must pay at least the minimum but you can pay more or the whole lot which
is best because you won't have to pay interest. Using a credit card in
this way can be very useful as it gives you a month interest-free credit
and it's much easier to carry a plastic card than cash. Remember, however
that if you borrow cash on a credit card you will pay interest from the
date you take out the money.
If you pay back in instalments, you'll be charged interest on what's
left over after you've made your monthly payment, and that mounts up each
month e.g. you may have a credit card with a credit limit of £300.
In the first month, you spend £200 and when your statement arrives,
it tells you that the minimum you must pay is £10. If you pay the
£10 and no more, interest will be added to the other £190 you
owe. It could be 2% a month, which, on £190 is £3.80. If you
keep spending and just paying the minimum each month, it's very expensive.
Charge Cards: American Express and
Diners Club are charge cards. You pay for things by producing the card
and you'll receive a monthly statement, but you have to pay off the amount
you owe in full each month. You can't take long-term credit even if you
want to. Although you don't pay any interest, you have to pay an annual
membership fee before you can get one of these cards. You also have to
earn quite a high salary before you're accepted.
Budget Accounts: Many shops offer
budget accounts. Sometimes, they run these schemes themselves but often
another company will run the scheme for the store. You'll usually be given
a plastic card and you may well think there's no difference between this
and a credit card. There is.
With a budget account, you agree to make a regular monthly payment of
a fixed amount and in return, you are allowed to spend up to a certain
amount - your credit limit. It might be 20 times your monthly payment.
So if you agreed to pay £10 per month, you'd be allowed to spend
up to £200. As the amount you owe is paid off, you'll be allowed
to buy more as long as you don't go over your credit limit but you will,
of course, be charged interest - it will-be added to your account monthly
and again it mounts up. This can be an expensive way of buying. Unlike
credit cards you will not usually get a short interest-free period. Interest
is paid from the end of the month in which you made your purchase.
Trading Checks and Vouchers: An
agent calls at your home and supplies you with a 'check' for a fixed amount
and you agree to pay him back in weekly instalments. Your repayments will
include interest on the money you owe and you'll pay back more than you
borrow. You can use your 'check' to buy goods from any shop prepared to
accept it (often clothes shops). It's a bit like spending a gift voucher
only much more costly. Shops, which accept trading checks, charge a little
more for their goods than other shops. When larger amounts are borrowed,
the term 'voucher' rather than 'check' is usually used.
Mail Order Catalogues: You choose goods
from a catalogue and pay in instalments over a period of time - often 20
weeks. Usually, you put your order through an agent and pay the agent every
week or month or you may decide to run a catalogue for yourself. It's a
convenient way to shop especially if you live a long way from a large town
and don't get to the shops very often. Although interest is not usually
charged on 20-week credit, catalogue goods are a little more expensive
than those in the shops. Most catalogues will let you pay for expensive
single items over a longer period than 20 weeks but you'll usually have
to pay interest, so find out the APR before you start.
Borrowing from the Bank: All
the banks in the High Street lend money. Whether or not they'll lend to
you may depend on whether you have a bank account with them. If you have,
then there are a number of ways in which the bank may be prepared to do
business with you.
First, there's an overdraft. You can ask your bank manager to let you
spend more than you've actually got in your bank account. You'll have to
agree to a set limit and you won't be allowed to go beyond that. You will
be charged interest on the amount of money you're overdrawn.
Secondly, there's an ordinary loan. Your bank manager may agree to lend
you a lump sum, which you have to pay back in regular instalments over
a set period of time. You will be charged interest on the amount you owe
- but it is variable - so repayments go up or down during the period of
the agreement.
Thirdly, a personal loan. Even if you aren't a customer of the bank,
you can apply for this loan. They're similar to an ordinary loan but rates
are fixed.
On the whole, banks tend to be a cheaper way of borrowing money than
many other types of credit. They don't have to lend you money and they'll
want to make absolutely sure that you'll be able to afford it so they'll
ask you a lot of questions about how much money you're earning and how
much you spend.
Finance Company Loans: Sometimes
a shop may introduce you to a loan with a finance company to enable you
to buy their goods on credit e.g. double-glazing or central heating. You
can borrow a fixed sum of money from the company and then use it to pay
for the work. The interest is usually high and monthly repayments may vary.
If you own your own home the finance company may insist that the loan is
"secured on the property". It means that if you fall behind with your repayments,
the finance company might be able to force you to sell your home to get
back the money you owe them. Think carefully before you agree to anything
like this - don't do it. Approach the building society or bank with which
you have a mortgage - a loan from them would be cheaper.
Some companies advertise personal loans in the newspapers and allow
you to borrow and use money in any way that you want. Don't fall for their
sales talk, although they say that it's a quick and easy way to borrow
cash to spend as you choose or to help you out of financial difficulties,
don't borrow money to get yourself out of debt. You'll only end up deeper
in trouble than ever. If you have debt problems, ask Citizens' Advice or
a specialist Money Advice Centre.
Insurance policy loans
If you have an investment type of life insurance policy, you may be
able to use it as security to borrow money. A life insurance endowment
policy is a method of saving and also ensures that the dependants of the
policy - holder will get money if he / she dies before the policy comes
to an end. You agree to pay a regular premium to an insurance company for
10 or 20 years, and at the end you get a fixed sum possibly with bonuses.
You could sell it back to the insurance company before the end of 10 years
for a cash payment, or you could use it as security for a loan from a bank
or insurance company.
Moneylenders: Moneylenders lend money.
Some will lend to anyone without asking many questions. It can be a quick
way of getting small sums of money. They may not bother to ask too much
about whether you can really afford the repayments and they're more prepared
to take a chance on you than a bank would. But their interest charges are
much higher and you could pay back a lot more than you borrow e.g. typical
moneylenders' A.P.R start at 160%.
Pawnbroker: If you go to a pawnbroker
you have to deposit goods like jewellery with the pawnbroker as security
for the loan. If you fail to repay by the agreed date the pawnbroker has
the right to sell the goods usually at a public auction. If the pawnbroker
makes a profit on the sale you can reclaim it.
Building Society: If buying a house
or flat, a bank or building society is probably the first place you'll
think of going to borrow money. They lend money for house purchase but
always secure the loan on the property you're buying, just like some finance
companies do. This is a called a 'mortgage'. Interest charges vary whilst
you are repaying the loan so the repayments can go up or down. There are
different types of mortgage, so get advice on the best for your needs before
choosing. Most mortgages last for 20~25 years, so it is important that
you make the right choice.
Hiring Goods: When hiring or renting
goods, they never become your property. You have use of them for a fixed
period of time and at the end of this hiring period, they go back to the
owner. Don't confuse hire with hire purchase - they are two very different
things. TV's and videos can be hired. Maintenance and repair services are
usually included in the price and sometimes these can be expensive if you
pay them yourself. Before you say yes..
* Make sure you can afford to keep up the rental
payments
* Consider whether it might be cheaper to buy the
goods than hire them
* Check whether maintenance and repair services
are included in the price
* Check how long you're bound to rent the goods
for before you can get out of the agreement.
Related Information:
What is credit?
Consumer Credit Act
How to shop around for credit
Credit Concerns