Before You Borrow

Consumer driven Britain means more of us than ever are now turning to credit. We borrow money for all sorts of reasons, in the form of mortgages, credit cards, store cards and loans. But before you sign on the dotted line, there are a number of things you really should be absolutely sure to check. Here’s a ‘before you borrow,’ checklist:

  1. Is your loan secured or unsecured? This is crticial. Essentially, a secured loan would be one that could be secured against your home whereas an unsecured loan has no such “security,” behind it. If you go into arrears on repayments on a secured loan, you risk losing your home.
  2. Have you read the contract? And I’m not talking about skimming over it. If you are in the bank and the cashier’s tapping her pen impatiently on the table, it can be a little off putting, yes. But don’t feel pressurised to hurry up over signing the contract. Take it away from the bank, read it properly, reread it and get a second opinion on anything you’re not sure about. Don’t sign something you have not fully read and understood.
  3. Will you be charged to repay the debt early? If you were lucky enough to come into some money a year in to your three year loan contact, would you be able to pay it off without incurring any charges? Believe it or not, some lenders do charge for early repayment. It’s worth avoiding those at all costs. Double check!
  4. Is the interest rate static? Some forms of credit have an interest rate that can change! While a reduction in your interest rate would be a welcome bonus, there’s also the risk that the interest rate could rise suddenly, leaving you with a more expensive repayment than you initially anticipated. If you are happy that you can afford the interest rate as it is at the time of signing, make sure you are on an agreement where it cannot increase. This is one way in which thousands of consumers are caught out every year in the UK.
  5. What are the consequences of missing a payment? Obviously, nobody plans to miss payments (I hope!) but because life is unpredictable, you should know exactly what would happen if you were to miss one. It’s critical that you’re full aware of any penalty charges that might apply in the event that you do miss a payment. If the charges are excessive, don’t sign. Excesive penalty charges can result in a slippery slope between one missed payment and some serious debt problems.
  6. Is this the best deal available? Check the competition. Their offering on the same credit deal might be better!
  7. How much will you pay back? One of the most important questions you can ask is how much you will pay back in total. It is easy to be blinded by interest rates and monthly repayment figures and to miss the total amount. If you borrow £3000, for example, how much is the total repayment going to be? If a lender tells you that your monthly repayment will be £100 a month for 5 years and then throws a load of numbers and terms at you, you’d be forgiven for thinking all was well. But when you really add that up, that’s £6000 total repayment! Twice what you borrowed! It’s imperative that you have an exact figure in front of you for what, exactly, you will repay in total.

Signing credit agreements or loan agreements is a big deal. Don’t put pen to paper until you know exactly what the terms are in clear and plain English.

50% of Borrowers Rely on Doorstep Loans

The Office of Fair Trading released some rather shocking statistics this morning. It says that half of all borrowers depend upon high cost loans simply to survive. This information comes just two weeks before Christmas, in what promises to be a very expensive festive period for many.

The OFT’s research found that 52% of people who borrow money are dependent upon some form of doorstep lending, which typically comes associated with astronomical interest rates of anywhere between 50 and 500% and it’s this type of borrowing that has huge potential to spiral beyond any control. A quarter of those people also admit to using doorstep lending on a ‘continuous basis,’ some continuing to lend to pay back what has already been borrowed.

Doorstep loans often involve small loans, usually around £300. These loans are always unsecured and the repayments aremade in weekly installments, to an agent who calls at house of the borrower to pick the money up. The nature of the loans and their often very high interest rates means they often come under scrutiny.

The Office of Fair Trading research also found that 26% of borrowers rely on credit cards and that 19% rely on store cards.

While the overall amount of credit has dropped slightly over recent months, something that suggests that the British consumers are tightening their belts in light of the recession, the number of people using these high cost loans is something of a worry to Consumer Minister Kevin Brennan, who said, ‘I’m concerned that so many people are relying on this form of high-cost lending.’

Christmas, in particular, can be an expensive time of year. Our tips on how to avoid Christmas debt may help to cut your credit need!

Posted on in Loans.