Eastbourne Citizens Advice Bureau

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Eastbourne Citizens Advice Bureau Financial
Literacy
BORROWING
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• Many of us will need to borrow money sometimes
  and there are several ways to do this some ways
  cost a lot more than others.
• In this unit we will look at how borrowing money
  works in various forms including
• Loans
• Overdrafts
• Credit cards
• Credit agreements
• Interest free credit
• Store Cards
• Hire purchase
• Consolidation loans
• Mortgages

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You could borrow money from a friend or family
member, in which case the arrangements for paying
the money back are entirely up to you. Although
friends and family are less likely to charge you
interest and will probably be more flexible with
repayment, borrowing money from people close to
you can sometimes put a strain on your
relationship. In comparison, borrowing from a
bank or building society is a business
transaction with clearly defined rules to follow.
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Fact In April 2013 the Bank of England announced
that the amount of money borrowed by UK consumers
had reached 1.4 trillion pounds. Thats1.4
million million pounds In the years 2011-2012
Citizens Advice has seen a 23 increase in the
number of people seeking help for debt problems
from the previous year
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LOANS When you borrow money from a bank or other
lender you enter into a contract with them which
governs the repayment. You have to be 18 years
old to be able to enter into such a
contract. Say, for example you arrange to borrow
1000 from a bank The bank will offer you a
period of time over which you can repay the money
usually stated in months eg. 12, 18, 24 months
etc. The bank will tell you what their interest
rate is stated as Annual Percentage Rate or
APR. They will tell you how much interest is
charged per month and how much your monthly
repayments will be. They should also total these
figures up so you can see how much you are
paying in total. You will also agree the means of
payment e.g. standing order, cash payments,
cheques etc and the date each month when you must
pay. Lets look at some examples
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You want to borrow 1000 as a loan and you
compare the price of repayments over 12 months,
18 months and 24 months. The interest rate is
17.8 APR The bank give you the following
figures
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These figures are example only
Loan amount 1000.00 Typical APR 17.8
Term 12 months Initial repayment 90.91
Subsequent monthly repayments 90.97 Total
amount repayable 1091.58
Loan amount 1000.00 Typical APR 17.8
Term 18 months Initial repayment 62.93
Subsequent monthly repayments 63.10 Total
amount repayable 1135.63
Loan amount 1000.00 Typical APR 17.8
Term 24 months Initial repayment 49.18
Subsequent monthly repayments 49.20 Total
amount repayable 1180.78
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These figures are example only
Loan amount 1000.00 Typical APR 17.8
Term 12 months Initial repayment 90.91
Subsequent monthly repayments 90.97 Total
amount repayable 1091.58
As you can see from these figures, although the
monthly repayments are lower, you end up paying
more to borrow the same amount of money over a
longer period of time
Loan amount 1000.00 Typical APR 17.8
Term 18 months Initial repayment 62.93
Subsequent monthly repayments 63.10 Total
amount repayable 1135.63
Loan amount 1000.00 Typical APR 17.8
Term 24 monthsInitial repayment 49.18
Subsequent monthly repayments 49.20 Total
amount repayable 1180.78
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The Annual Percentage Rate of the total charge
for credit (APR) is a standard way of measuring
the real cost of credit to the customer,
expressed as an annual rate. The APR is different
to a flat rate of interest and more accurately
reflects the true cost. The formula for
calculating the APR is very complex, but
basically the interest and all other charges made
for granting the credit (the total charge for
credit) are totalled and then expressed as an
annual rate.
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Payment Protection Insurance When you borrow
money most lenders will offer you a form of
payment protection insurance. This gives you
protection in case you are suddenly unable to
pay, for example due to ill health, an accident
or loss of a job. It can cover car finance,
personal loans, credit cards and store cards,
catalogue debts and mortgages An amount for
insurance is added to your monthly repayment.
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PPI can be very expensive and it may not be
suitable for you or you may have other ways to
cover the repayments if you need to, so stop and
think about whether you really need it before you
agree to take it out Always check the terms and
conditions of the policy very carefully. There
will often be lots of exclusions, which means
there may be lots of circumstances where you
won't be covered if you want to make a claim If
you have a loan which includes PPI and you feel
you were mis-sold this product, you may be able
to get a refund.
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Payment protection insurance is normally optional
but some credit arrangements make it compulsory.
Most payment protection insurance agreements pay
only a part of the balance each month, for a
limited period. The most common amount paid is
10 for ten months. The amount paid off is
always equal to or more than the minimum monthly
payment required by the credit card or store card
company.
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If you are sick, lose your job and become unable
to make your monthly payments and you have
Payment Protection cover you should contact the
lender and make a claim as soon as possible.
Check the details of your credit agreement for
further information.
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OVERDRAFTS Overdraft is an agreement with your
bank to take out more money from your current
account than it currently contains. For example,
if you have an overdraft limit of 200 on your
account you can spend all the money you have in
the account plus another 200. An overdraft can
be a good way to borrow money short-term or to
have some funds available to cover emergencies.
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For example you need 800 to put a deposit on a
flat. At present you only have 600 in your
account and your pay goes into your bank account
in two weeks time. You arrange an overdraft of
300 with your bank. You write a cheque for 800
for the deposit. When the cheque is cashed your
account shows a balance of - 200. This gives you
up to 100 to live on until your wages go into
your account. You spend an extra 75. Your wages
of 900 go into your account What does your
account balance show now? Click to show the answer

• Account balance
• 600
• 200
• -275
• ?

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For example you need 800 to put a deposit on a
flat. At present you only have 600 in your
account and your pay goes into your bank account
in two weeks time. You arrange an overdraft of
300 with your bank. You write a cheque for 800
for the deposit. When the cheque is cashed your
account shows a balance of - 200. This gives you
up to 100 to live on until your wages go into
your account. You spend an extra 75. Your wages
of 900 go into your account What does your
account balance show now? Answer When your
wages are paid in, your account balance is 625
minus any interest charges. Many student accounts
do not charge interest on overdrafts.

• Account balance
• 600
• 200
• -275
• 625

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This is a copy of the terms and conditions for a
typical overdraft for a current account.
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The interest rate is shown as 1.36 per month
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Interest rate 1.36 per month. In our example you
were overdrawn by 275 Your wages of 900 were
paid into your account. Therefore you would be
charged 3.74 interest for the first month. The
balance minus interest charges after one month
would be

• Account balance
• 275
• 900
• 625
• Interest charge
• 3.74
• 621.26

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How much would the charges be if you remained
overdrawn by 275 for 6 months? Answer 275 x
1.36 3.74 x 6 22.44 assuming no other
transactions were made on this account.
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The terms and conditions also show what happens
if you were to exceed the agreed overdraft limit
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• CREDIT CARDS
• Credit Cards give you a separate account from
  which you can borrow money. You can use the card
  to pay for goods or services in shops, by phone
  or via the internet.
• When you first obtain a credit card you will have
  a credit limit. This is the amount of money you
  can borrow.
• Each month you will be sent a statement which
  shows
• Each item of spending
• The total balance
• The interest charged
• The minimum amount you can repay this month,
  usually 5 of the total balance

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This is a credit card statement from a high
street lender. Most statements are sent out
monthly.
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• Here you can see
• the amount left over from the previous month.
  The amount paid since the last statement
• The amount spent with the card since the last
  statement
• The current balance
• The minimum payment due
• Please note the small print

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A second sheet shows the transactions and charges
on the account since the last statement. Here you
can see The balance from the previous statement
177.74 The amount paid into the account since
the last statement 50 Payment protection
insurance 1.00 Interest on the balance
2.42 So 177.74 minus 50 127.74 plus
3.42 charges this month 131.16 left to pay
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If you pay off the current balance within one
month you pay no interest on what you borrow.
This way using a credit card to pay for things
can become a handy alternative to using cash.
For example Your current balance is zero. You
buy a jacket for 50 on 12th March. You receive
your credit card statement on 20th March and the
balance shows 50. The minimum payment is 5 to
reach your account by 2nd April You pay 50 on
the 22nd March No interest charge. Balance now
zero. If you paid only the minimum amount of 5
you would incur interest charges on the remaining
45. If the interest rate is 1.36 per month how
much would your total balance be next month?
Click to see the answer
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If you pay off the current balance within one
month you pay no interest on what you borrow.
This way using a credit card to pay for things
can become a handy alternative to using cash.
For example Your current balance is zero. You
buy a jacket for 50 on 12th March. You receive
your credit card statement on 20th March and the
balance shows 50. The minimum payment is 5 to
reach your account by 2nd April You pay 50 on
the 22nd March No interest charge. Balance now
zero. If you paid only the minimum amount of 5
you would incur interest charges on the remaining
45. If the interest rate is 1.36 per month how
much would your total balance be next month?
Click to see the answer 45 x 1.36 0.61
interest total balance 45.61
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In this example if you continued to pay only the
minimum amount of 5 each month how long would it
take to pay for the jacket priced 50? Click to
see the answer
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In this example if you continued to pay only the
minimum amount of 5 each month how long would it
take to pay for the jacket priced 50? It would
take 10 months to pay off the balance and you
would be charged 3.33 total interest. Total cost
53.33
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Charge cards The difference between a charge card
and a credit card is that the amount borrowed on
a charge card must be repaid in full at the end
of a given period, usually a month. Interest is
not charged on the amount but you may have to pay
an annual fee for the card. American Express and
Diners Club are the two major operators.
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Credit agreements Under credit sale, you buy the
goods at the cash price. You usually have to pay
interest but some lenders offer interest-free
credit. Repayment is made in instalments. You are
the legal owner of the goods as soon as the
contract is made and the goods cannot be returned
if you change your mind. The supplier cannot
repossess the goods if you fall behind in
repayments but can take court action to recover
the money owed if you dont keep up the
repayments. Credit sale agreements are now more
common than hire purchase agreements and it is
important not to confuse the two.
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Interest free credit This is potentially a good
way to purchase goods though it is not often
available. You do not pay any more than the cash
price but have a period of time to pay for what
youve bought. Read the small print carefully.
Sometimes a way of paying called 9 months
interest free option is offered which is very
different from interest free credit.
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Here is an example of an interest free credit
offer from one high street electrical retailer
Buy Now Pay Later on everything over 299
Cash Price 699.99. No deposit required. Either
pay 699.99 within 10 months of the date of
purchase, total amount payable 699.99, no
interest charges paid. Or 39 monthly payments of
32.57 commencing 10 months after the purchase
date. Total amount payable 1270.23. 29.5
typical APR. Interest calculated from date of
agreement.
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Here is an example from a catalogue retail store
Typical example. Spend 195 on a 6 month Buy Now
Pay Later agreement on your Store Card. Pay
nothing for 6 months (although you can if you
wish) and then settle the cash price at that
point. Total payable 195. Or choose to spread
the cost over a longer period, paying a minimum
3 or 2 each month (whichever is the greater)
and if you only ever pay the minimum the total
payable would be 524.36 (25.9 APR). Includes
deferred interest from the Buy Now Pay Later
period.
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As you can see from these examples Interest Free
Credit can be a good deal if you pay the full
amount after the free period. If you dont pay
the full amount in time you could end up paying
more than twice as much for the item.
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• Store Cards
• Store cards are the cards that many major
  retailers offer their customers as a convenient
  way of buying goods in their stores, often with
  incentives attached such as special discount and
  privileges.
• A store card generally
• Is considered as another payment method amongst
  others such as cash, credit cards etc
• Has a lower credit limit than a credit card, and
  
• Can be used only at the issuing retailer store
• Store cards operate similarly to a credit card
  with a monthly statement being sent to all
  customers with the requirement to pay off at
  least the minimum payment.
• When considering a store card, you need to weigh
  up the costs and benefits in the same way as you
  would for other forms of credit.

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• Store cards - tips
• Before signing up for a store card consider the
  following
• Do you really need a store card?
• Do you have other ways to get credit such as
  credit cards or an overdraft?
• If so which has the lowest interest rate?
• Discounts sound tempting only if you pay off
  the full balance
• Is there is an interest-free period? If so how
  much will the interest be when it ends?
• Check all terms of the agreement - APR, interest
  free period, penalties for default and late
  payment
• If Payment protection Insurance is offered is it
  worth having? Read the terms and conditions
• Beware of persistent shop assistants who try to
  persuade you to sign up for a card.
• Dont be rushed into it. If in doubt take the
  paperwork home and read it before signing
  anything.

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Hire purchase (HP) Under a hire purchase (HP)
agreement, you hire goods until you pay the final
instalment. You will not own the goods until
then. This means that you can end the agreement
and return the goods at any time. However, you
will owe any overdue instalments and, if less
than half of the total price has been paid, you
may also have to pay the difference. The company
which has made the loan (the lender) may be able
to take back (repossess) the goods if, for
example, you fall behind with payments. The
lender does not have to sell the repossessed
goods to reduce your debt.
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Hire purchase
Advantages Disadvantages Conclusion
Allows you to buy more expensive items on credit It may be easier to get a Hire Purchase agreement than a bank loan or credit card You do not own the goods until you have paid off the full amount. The Hire Purchase company can take back the goods if you do not keep up with payments. If the goods are taken back you may still owe money on them. HP can be more expensive than a loan or a credit card. You can return the goods and end the agreement any time as long as you are up to date with your payments. Its worth considering other forms of credit first.
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Mail order Mail order shopping is usually
arranged through a catalogue and is normally
interest free, the customer paying only the price
of the purchase in instalments. However, goods
bought in this way may be more expensive.
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Mail Order catalogue goods on credit
Advantages Disadvantages Conclusion
Small weekly repayments It might be easier to get catalogue credit than from other lenders Only borrow the price of goods you buy Catalogues may be more expensive Can be higher interest rates Compare with prices in shops before buying, Compare interest rates with other forms of borrowing before buying.
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Doorstep sellers Selling or promoting goods or
services on credit by calling at peoples homes
is illegal unless the company has a licence to
sell credit outside trade premises. Common
examples are double glazing or home improvements.
Any agreement that is made illegally may not be
enforceable. It is a criminal offence to try to
make a cash loan outside trade premises unless
the visit is made to your home in response to a
written and signed request. Any agreement that is
made illegally may not be enforceable. If you
have signed an agreement of this type seek
advice.
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Credit Unions... Saving and borrowing to meet
your needs What are they?
Credit unions are mutual financial organisations,
which means they are owned and run by their
members for their members.
Credit unions A credit union is a self-help
co-operative whose members pool their savings to
provide each other with credit at a low interest
rate. If a member fails to repay a loan, the
credit union can seek repayment through the
courts. Credit unions encourage people to save
what they can and only borrow as much as they can
afford. After you have been saving with the
credit union for a few months you can apply for a
loan. The maximum interest charge is 2 per
month.
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PawnbrokersPawnbrokers lend money against the
value of property left with them. They must give
a receipt known as a ticket. Pawnbrokers agree to
keep the property for at least six months but you
can get it back at any time during that period by
paying off the loan plus interest. The period can
be extended by paying the interest only and
re-pledging the property.
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Loan sharks lend money to people who are usually
unable to borrow from other sources. They charge
very high interest and are not concerned by your
ability to repay. They may force you to take out
a second loan to repay the first. If you get
behind with payments a loan shark may threaten
you. This is illegal and you If you have entered
into an agreement with a loan shark or an
agreement with excessively high interest you
should seek advice.
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Payday Loans Payday loans are short-term loans
for small amounts of money. They are available
from high street shops and internet sites.
Payday loans can be easy to get but interest
rates are very high. There may be other ways for
you to sort out your short-term money problem so
think about the alternatives before you
borrow. If you are having problems paying back
the loan the lender may offer you longer to pay.
This is known as a loan extension or deferral.
Beware of doing this. If you extend the loan you
will have to pay more interest and there may be
extra fees.
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Consolidation Loans A consolidation loan is a
loan to pay off all your existing debts from
whatever source such as credit cards, loans,
overdrafts etc. From then on you only make
repayments to the new creditor. The advantage of
this is only one payment to remember. The
disadvantages can be higher interest rates and
consequences if you do not make payments on time.
Consolidation loans are usually secured against
your home and therefore are only available to
home owners. If you fail to keep up the payments
you could lose your home. You should think
carefully before taking out a consolidation loan.
There may be better, cheaper ways to pay off your
existing debts.
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There are several types of mortgage available.
The most common are-There are two main types of
mortgage   repayment mortgage, where your
regular repayment goes towards the amount you
borrowed (the capital) and the interest so that
the whole loan is paid off by the end of the
mortgage   interest only mortgage, where your
regular repayment goes towards the interest only.
At the end of the mortgage you repay the capital
in a lump sum. Usually this will be from savings
or an insurance policy you took out at the same
time as the mortgage. For example, an endowment
or pension. Islamic mortgage. This is a mortgage
in which none of the monthly payments includes
interest. Instead, the lender makes a charge for
lending you the capital to buy your property
which can be recovered in one of a number of
different ways, for example, by charging you
rent.   The cost of the mortgage depends on the
interest rate. There are lots of different types
of interest rates such as fixed rate or variable
rate. It's worth taking some time to compare
types and decide what suits you best.
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Before borrowing money you should consider the
full cost of paying it back and how this will
affect your budget. Can you afford the repayments
over a period of time? You should compare
interest rates and opt for the lowest. Borrowing
money can mean you can buy things now rather than
having to wait to save up the same amount of
money. Do you really need to buy it sooner rather
than later? With so many people getting into
problems as a result of borrowing money do you
want to be another part of this growing
statistic? Do you know what the consequences can
be of borrowing money and getting into debt?
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People get into debt for a variety of reasons and
it is not always their fault. Sometimes wreckless
spending or bad budgeting is the cause of debt.
Sometimes its just bad luck and unexpected change
of circumstances. Debt is something that can
affect anyone at anytime. If you find you are
having trouble meeting your payments dont panic
and dont ignore the problem. Get to grips with
your finances, review your budget and take action
before it gets out of control. Contact lenders
and tell them about the problem. If in doubt seek
advice.