Methods of Borrowing

(c) Copyright 2002 Welsh Consumer Council

Methods of borrowing 
Businesses associated with credit 
The Consumer Credit Act 

Methods of borrowing

1. Hire Purchase


You 'hire' the goods until you have paid the full price. The goods become yours when you buy them at the end of the agreement. The price is divided into equal weekly instalments that you pay over a time, usually from 6 months up to three years and until you have paid off the money you owe, the goods are owned by whoever is providing the money, usually a finance company. Some large department stores can afford to run their own hire purchase schemes.

Important Points:

    * You can't sell the good until you have paid the last instalment
    * Interest rate will vary from shop to shop
 

2. Bank


Borrowing from a bank can be cheaper than buying on hire purchase or using a credit card, such as Access or Barclaycard.
 

a) Overdraft

The bank will tell you the maximum amount you may overdraw and agrees not to bounce (refuse to pay) your cheques unless you exceed that figure. The interest rate on your loan can vary, but you pay interest only on the amount you overdraw. If you have a large overdraft, you may have to pay a fee as well, and it is usual to agree how quickly it will be paid off.
 

b) Bank loan

Ordinary loan - this is cheaper because you usually provide security for the loan. This is usually given for home improvements, and is for an agreed length of time and repaid by the bank deducting an agreed amount from your current account each month.
Personal loan - this is more expensive than an ordinary loan, but still cheaper than buying on hire purchase and you do not have to provide security. Usually you pay over two years by the bank making monthly deductions from your current account, and there is a fixed rate of interest.
 

c) Finance company personal loans

You may want to borrow a lump sum to buy something. If you cannot pay the monthly instalments, you can sell the good and use the money to repay the loan. You repay the loan over a period of up to three years, and the rate of interest is fixed. If you buy goods using a personal loan you become the owner immediately and you can terminate the agreement and hand the goods back. Some finance companies have branches on the high street where they cash cheques, but they always charge more than banks.
 

d) 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 an immediate cash payment, or you could use it as security to get a loan from a bank or from an insurance company.
 

e) Credit cards

Goods and Services are paid for by producing the card and signing a sales voucher. The dealer sends the voucher to the company and receives payment. The credit card company debits your account and each month they send you an account and a request for payment. Some companies e.g. American Express expect full payment immediately whereas others e.g. Barclaycard and Access allows you to pay in instalments. Interest is charged on the amount outstanding at the end of each month.
 

f) Mail order

If you buy goods by post, from a mail order catalogue or a newspaper advertisement, you may be able to pay by instalments. They frequently offer 'interest free' credit but it usually means that the cost of credit is included in the price of the goods.
 

g) Moneylenders/pawnbrokers

They charge extremely high rates of interest because they tend to lend to high-risk borrowers. 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.
 

Businesses associated with credit

Credit brokers

    * Tries to find you credit, because you find it difficult to get credit yourself
    * You have to pay the broker a fee or commission which is high

Credit insurers

    * It is possible to take out insurance to cover your credit repayments
    * It provides for the repayment of instalments which you cannot make because of loss of income through unemployment or sickness, and repayment of the whole debt if you die
    * You pay the premium for the insurance policy as well as repaying the debt

Debt collectors

    * They 'buy' bad debts from finance houses for a small sum and then try to recover the debt themselves
 

Debt counsellors

    * Advise you if you have difficulty in repaying debts
    * They charge a fee for this
    * They may give you advice or negotiate on your behalf with creditors e.g. to get the repayment period extended
 

The Consumer Credit Act

Requires the lender of money to have a licence e.g. banks, finance houses, moneylenders, estate agents who arrange mortgages and TV rental companies

    * Lenders must show the buyer the true cost of credit
    * Gives protection against unfair deals, and asks the Court to reduce 'extortionate' rates of interest
    * Enables people to claim compensation if the goods are faulty
    * Gives a 'cooling off' period if you make a credit agreement at home. You usually have seven days and the good can be kept as security until the lender has repaid you. You cannot cancel agreements for loans less than £30, or loans arranged by post or telephone
    * Ensures that if you pay off a loan early you get a rebate.

If goods are faulty:

    * The dealer who sells a faulty good is liable to compensate you. The buyer is protected by the Sale of Goods Act.
    * If you borrowed money to pay for the good you could also claim against the finance company, which lent you the money.
* With hire purchase goods the dealer sells the goods to a finance company, which then hires or sells them to you, so the finance company is both the supplier and the lender and is responsible if the goods are faulty. 

Source: The Welsh Consumer Council (c) 2002 www.consumereducation.org.uk

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