Living in a very consumer driven society with pressure from peers, social media and advertising there is the temptation to spend money on the latest tech or brand-name clothes. If we don't have enough ready cash to pay for that exciting purchase, we may be tempted to borrow money so that we can have it immediately. Before you do it's best to find out about the different types of borrowing and credit with the associated risks so that you can make an informed decision when you need to.
First of all, you won't be able to get any form of credit until you are 18, though it's worth knowing how it works. If you are not careful you can very quickly run up a large debt which may cost you more in the long run. Credit, quite simply, is when we receive goods or a service and make a promise to pay for it later. Debt means that you owe someone or a company. If you buy a lot of things on credit you run the risk of accumulating a lot of debt.
There are different types of credit that you can have.
Credit card - This allows you to borrow money from a bank or financial institution to make a purchase or get cash, which you then pay back at a later date. The institution will give you a pre- set spending limit and if you pay back the full balance by the due date on your statement you won't pay any interest. If you don't pay off the balance in full you will be charged interest and may also incur a missed or late payment fee. If you pay less than the minimum amount you are considered to be behind with payments and be charged with default or late payment charges, interest will also be added on to the balance. The typical late payment fee is £12 although some card providers may have different fees or tiered systems. There is no single standard credit card interest rate with the average currently being 30-35%. For someone with good credit it can be 18-19% Annual Percentage Rate (APR) and with bad credit it can be over 34%. (APR). Many cards offer promotional offers. This can include:
• a 0% interest rate for a fixed amount of time before going back to a standard rate.
• balance transfer which allows you to transfer the balance from a different credit card usually for a 0% interest rate for a fixed amount of time. You would need to pay a balance transfer fee of 2-4% of the amount you are transferring. This amount is added to your new balance.
• money transfer-this is where you move money from your credit card, up to your credit limit, directly into your bank account. This transaction will usually occur a fee and may offer 0% interest for a fixed amount of time.
Secured Loan
This is a loan that is secured against a valuable asset that you have, like a house or car. If you fail to make the loan repayments, known as defaulting, the lender has the right to take possession of the item to recoup their losses. Because this type of loan has this form of security it is often easier to obtain with lower interest rates.
Payday Loan
This is a short-term loan for a small amount of money, intended to cover expenses until a borrower is paid. This type of loan is often available online on from high street shops, have very high interest rates and can lead to uncontrollable debt if the borrower doesn't manage it carefully. These are aimed at people who want to borrow a small amount, between £50 and £1000, and are meant to be repaid in a few weeks. Anyone over the age of 18 can apply for a payday loan and if you have a low credit score are less likely to be approved. There are some lenders who will accept you if you have a low credit score, but you would most likely have to pay even higher interest on the amount you borrow. This can be an expensive way to borrow money; however, the overall cost is capped by the Financial Conduct Authority (FCA). This law means that you'll pay up to 0.8% interest per day. This means that if you borrow £100 for 30 days the most you'll pay in interest is £24 and if you were late repaying the most you'll be charged is £15. This cap also means that you'll never pay back more than twice what you originally borrowed. Though this type of loan is aimed at short term borrowing and an interest rate of 0.8% a day doesn't sound very much. If it was translated to an Annual Percentage Rate (APR) it would be around 1250% to 1,500% interest on the loan.
Personal Loan
This is a sum of money borrowed from a lender, which is usually a bank or building society which you repay in fixed monthly installments over an agreed time period, usually with interest. These loans are not secured against any property or possessions and are a way of borrowing large sums of money for significant purchases such as a new car or home improvements offering a way to spread the cost over a set number of months or years.
