Eastbourne Citizens Advice Bureau

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Eastbourne Citizens Advice Bureau Financial
Literacy
BORROWING
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Types of borrowing   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 student
loans credit cards credit agreements
interest free credit store cards hire
purchase consolidation loans mortgages.
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Who do I borrow money from? 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   UK consumer borrowing amounts to
1.24trillion as of October 2011.   The CAB deals
with 8910 new debt problems everyday.   Citizens
Advice has seen a 44 per cent increase in the
number of people seeking help for debt problems
over the past six years.
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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
500 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 an 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, eg standing order, cash payments,
cheques etc and the date each month when you must
pay. Lets look at some examples.
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Borrowing example 1 You want to borrow 1,000 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 gives you the
following figures
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Borrowing example 2  These figures are examples
only. Loan amount 1,000 typical APR 17.8
Term 12 months Initial repayment 90.91
Subsequent monthly repayments 90.97 Total
amount repayable 1,091.58 Loan amount 1,000
typical APR 17.8 Term 18 months Initial
repayment 62.93 Subsequent monthly repayments
63.10 Total amount repayable 1,135.63 Loan
amount 1,000 typical APR 17.8 Term 24
months Initial repayment 49.18 Subsequent
monthly repayments 49.20 Total amount
repayable 1,180.78
These figures are example only
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.
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Annual percentage rate (APR) The annual
percentage rate (APR) of the total charge for
credit 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 1 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.
Payment protection insurance is normally optional
but some credit arrangements make it compulsory.
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Payment protection insurance 2  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 per cent 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. 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. It has
recently been discovered that many customers were
mis-sold payment protection insurance by their
banks. As a result the banks have been forced to
pay back millions of pounds in compensation. It
is advised that when borrowing money you look
closely at the terms and conditions, particularly
regarding PPI.
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Overdrafts An 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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Overdraft example 1 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?  
Account balance 600 200 - 275 625
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Answer When your wages are paid in, your account
balance is 625 minus any interest charges. Many
student accounts dont charge interest on
overdrafts.
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Terms and conditions for an overdraft
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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Overdraft example 2 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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Overdraft example 3   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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Charges for exceeding an overdraft limit
The terms and conditions also show what happens
if you were to exceed the agreed overdraft limit.
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Student Loans Student loans are a simple way to
pay for university fees, living costs and any
equipment you might need for the course, such as
books. It is provided by the Government and
through the Student Loans Company. A student
loan differs from a normal loan in many
ways. Firstly, if you are using the loan to pay
for tuition fees, it will go directly to the
university, rather than you having to deal with
it. Secondly, the interest rates are much lower
than other loans. Thirdly, students are given
much longer to pay back their loans. For most
cases loans will not have to be paid back until
you are earning more than 21,000 (as of 1st
September 2012).
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Student Loans 2 All students are eligible for
tuition loans and maintenance loans. The tuition
loan amount depends on the type of course and the
university. The maintenance loan amount is
dependent upon where you are studying. Some
students may also be eligible for maintenance
grants however these are dependent on the annual
family income. If things get really tough,
money wise, there are other options. There is
the National Scholarship Programme that helps
students with family income of less than
25,000. Also some Universities have their own
bursaries or funds that can be applied for. To
apply for student loans, visit either Directgov
or the Student Loan Company.
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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
that shows each item of spending the total
balance the interest charged the minimum
amount you can repay this month, usually 5 per
cent of the total balance.
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Credit card statement 1
This is a credit card statement from a high
street lender. Most statements are sent out
monthly.
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Credit card statement 2
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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Credit card statement 3
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 interest on the
balance 2.42. So 177.74 - 50 127.74
3.42 charges this month 131.16 left to pay
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Paying off the current balance 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 12 March you receive your credit card
statement on 20 March and the balance shows 50
the minimum payment is 5 to reach your
account by 2 April you pay 50 on 29 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 cent) per month
how much would your total balance be next month?
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Answer   45 x 1.36 0.61 interest. Total
balance 45.61
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Current balance example 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?
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Answer   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.   Repayments are 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 dont 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 nine months
interest free option is offered which is very
different from interest free credit.
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Interest free credit offer Here is an example of
an interest free credit offer from one high
street electrical retailer
Buy Now Pay 2006 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 1,270.23. 29.5
typical APR. Interest calculated from date of
agreement.
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Example from a catalogue retail store   Here is
an example from a catalogue retail store
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
discounts and privileges.   A store card
generally   is considered as another payment
method amongst others such as cash or credit
cards has a lower credit limit than a credit
card 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 but 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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Card Comparison
Debit Card
Credit Card
Store card
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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 doesnt
have to sell the repossessed goods to reduce your
debt.
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Hire purchase
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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
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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 1 per
cent per month.
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Pawnbrokers   Pawnbrokers 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 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, 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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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 dont make payments on time.
Consolidation loans are usually secured
against your home and therefore are only
available to homeowners. 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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Consequences of borrowing 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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Getting into debt People get into debt for a
variety of reasons and it is not always their
fault. Sometimes reckless spending or bad
budgeting is the cause of debt. Sometimes it
is 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. For more information visit Your local
Citizens Advice Bureau www.citizensadvice.org.uk D
irect Debtline telephone [phone]
www.directdebtline.com National Debtline
telephone [phone] www.nationaldebtline.co.uk
Financial Services Authority www.fsa.gov.uk
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Activity 1 How would you like to pay? Consider
the advantages and disadvantages of different
ways of paying for items. Which would you
prefer? The following items have various payment
options
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Activity 2 A new games console is released in a
weeks time at 150. Although you want one you
decide to save up to buy it. You save 10 a week
so it will take you 15 weeks until you can afford
it. Your friend decides to buy one today with a
credit card. He pays 18 per cent APR and pays 40
a month. In four months time he has paid 150
plus 5.57 interest a total of 155.75. After
three months you see the price has come down to
125. You buy the games console at that
price. Who gets the better deal?
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Borrowing End