Interest rates

Any organisation that lends money will charge an interest rate. This is the price you pay for borrowing the money. Interest rates are shown by how much you have to pay back over a year. This is called the annual percentage rate or APR.

The APR may be the same for the duration of the loan (called a ‘fixed rate’) or can change during the course of the loan (called a ‘variable rate’). You use the APR to compare the cost of borrowing money.

How the APR works

If you borrow £1,000 with a fixed APR of 10%, and you pay the whole amount back in one go after a year, you will end up paying back the whole loan, and an additional 10% in interest: that’s the £1,000 loan, plus £100 in interest.

If you borrow £1,000 with a fixed APR of 10%, and you pay the amount back in monthly instalments over the year, you will pay less than £100 interest in total. This is because each month you reduce the amount you owe (so, if you pay £100 of your £1,000 loan back in January, in February you’ll owe £900, so the interest will be £90).

Hidden charges

Generally, the lower the APR, the less you will have to repay. However, always find out if there are any extra charges that may not be obvious. For example, some companies may charge you for paying a loan back early, for going over your credit card limit, or for making a late payment.

Types of borrowing

There are two main types of borrowing – secured borrowing and unsecured borrowing.

Secured borrowing

This is when you borrow money against some kind of security (asset) you have. For example, if you take out a loan to buy a car, the loan could be secured against that car. This means that if you can’t repay your loan, the lender could take away your car. The interest rate on a secured loan is usually lower than an unsecure loan because the lender doesn’t have to worry about getting their money back if you can’t make repayments.

Unsecured borrowing

This is when you borrow money but not against any security (asset) you have. An unsecured loan is usually more expensive than a secured loan. This is because the lender takes more of a risk by lending you the money as they can’t guarantee that you’ll be able to pay it back. If you can’t afford to pay back the loan, you could be blacklisted. This means that other lenders will be told that you can’t repay your debt, making it harder for you to take out another loan.

How to borrow money

Credit cards

A credit card allows you to use credit (money belonging to the company issuing the card) to buy things and pay back the amount you owe over time. Your credit card company will send you a credit card statement each month, showing the amount you owe them (the balance).

If you can afford to pay all this balance at the end of each month, you will not pay any interest charges, and this can be a cheap way of borrowing money. However, credit cards are an expensive way to borrow money if you can’t pay all the balance at the end of each month. This is because the interest rates are high and there are also hidden costs.

A typical credit card APR is around 17%. However, if you have a poor credit history (if you’ve had trouble paying back previous loans) you could be charged as much as 28% APR. Your credit card may also have an annual fee. Check this when you sign up.

If you’re late making a payment or miss a payment, the credit card company may charge you between £20 and £25. They will also charge you a similar amount if you go over your credit limit.

Personal loans

You can get personal loans from banks, building societies, the post office and even supermarkets. The APR generally depends on your personal circumstances, the amount you are borrowing and whether the loan is secured or unsecured.

Apart from borrowing from banks and building societies, there are  doorstep lenders. However, you should think very carefully about considering this option as the APR is extremely high – up to a massive 177%.

Unlicensed doorstep lenders (also known as loan sharks) charge an even higher interest rate than licensed doorstep lenders. Even if you do not think you can get another kind of loan, it’s very important that you get more advice from your housing officer or your bank before getting a loan like this. With such high interest rates, you could end up spiralling into a debt that could become almost impossible to repay.

Crisis loans

If you have an emergency or a disaster that leaves you unable to pay for basic living costs, you may be eligible for a crisis loan. Crisis loans are paid out by the Social Fund at Jobcentre Plus and are interest-free. They are usually repaid by deducting money from your benefit payments. You may not qualify for one, or you may not get all the money you want.

You don’t have to be on benefits to apply for this loan. The amount you get will depend on your personal circumstances, whether you have already borrowed from the Social Fund, and whether you still owe them money. Before you get any money, you will have to agree how you will repay the loan.

Budgeting loans

A budgeting loan helps you to pay for one-off expenses, such as furniture or household equipment, home improvements or maintenance, or repaying hire purchase or other debts. The loan can also help to cover the cost of the things you need to help you look for work or start a new job. As with crisis loans, budgeting loans come from the Social Fund, at Jobcentre Plus.

You will only be considered for a budgeting loan if you or your partner has been receiving Income Support, income-based Jobseeker’s Allowance (JSA), Pension Credit, or payment on account that is a combination of these benefits for at least 26 weeks. Whether or not you get a budgeting loan will depend on your personal circumstances, such as how long you have been on benefits, the number of people in your household and your savings.

You cannot get a budgeting loan for less than £100 or for more than £1,500. Before you get any money, you will have to agree how you will repay the loan to the Social Fund. Repayments are usually taken off your Income Support, income-based JSA or Pension Credit.

Store cards

Many store cards give you a discount on the cost of your goods, which can make them look like a good option. However, many store cards actually have interest rates as high as 30% APR, meaning they are not as good a deal as they seem. You may end up paying more than the original price.

Mail-order catalogues

Mail-order catalogues are a popular way of buying goods – allowing you to pay for something over several weeks. Although weekly payments may look small, catalogues are rarely a cheap way to buy on credit. The APR of one of the most popular catalogues is actually 30%. There are also extra costs for late payments, non-payments, transfer of balances, or if you decide to reduce the time you originally planned to pay back the money you owe.

Credit unions

Credit unions offer their members savings and low-interest loans. This is cheaper than borrowing from doorstep lenders, high-street stores, or even from banks or supermarkets. Credit unions encourage members to save regularly, provide loans at fair interest rates, and give members help and support with managing their finances if they need it. They also cover members with life insurance so if a member dies, their loan is paid off.

Becoming a member is simple: you must provide proof that you live and/or work in your credit union’s area and pay a minimum of £1 to open your savings account.

To find out whether there is a credit union near to you, contact the Association of British Credit Unions Ltd:
Telephone: 0161 832 3694
Email: info@abcul.org or by visiting www.abcul.org.uk.

You will need to save regularly in the union (as little or as much as you wish) because members’ savings form a common pool of money from which loans can be made. The interest on loans is usually about 12.68% APR.

More advice

For more advice on taking out loans or budgeting, contact Credit Action:

Telephone: 01522 699777

Email: office@creditaction.org.uk

Website: www.creditaction.org.uk

For more advice on crisis and budgeting loans, contact your local Jobcentre Plus office. Or if you need immediate debt and money advice, contact the Consumer Credit Counselling Service Helpline:

Telephone: 0800 138 1111

Website: www.cccs.co.uk

Citizens Advice

Free information and advice on legal, money and other problems: www.citizensadvice.org.uk or www.adviceguide.org.uk

You can also contact us for more advice.