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Using credit wisely
Personal Loans
There are a number of ways to obtain a personal loan, over the Internet,
replying to a letter received in the post offering credit, general
advertisements or a visit to your local bank branch. Shop around and look for
the best rate of interest and bear in mind that the longer the term of the loan
the more you will pay.
Overdrafts
If you need to temporarily overdraw, it is essential that you get approval from
your bank before you do so, to avoid higher interest rates and charges for
unauthorised lending - typically £25.
Credit Cards
Even though they are very convenient they promote the feeling that you are not
actually paying money for something you buy on a credit card. This means you can
spend what you like, when you like as long as you do not exceed the agreed
credit limit. However, as you approach your agreed limit, you may find that the
credit card company informs you that your credit limit has been raised
substantially, instead of warning you that you are nearing the limit.
If you do not pay off the balance in full each month, you will be charged
interest. As time goes by, you will be paying less of what you borrowed and more
of the interest as well as being charged interest on the interest allocated to
your account in the previous month. Therefore after a period of time a large
amount of what you owe will be accumulated interest.
Store Cards
Store cards work in the same way as credit cards but usually attract a higher
rate of interest. Unless you receive other valuable benefits from having a store
card, you would most likely gain from using a credit card instead.
Interest Free Credit
Before signing an interest free agreement, make sure it is exactly that. It is
possible to obtain interest free goods where the total value of the item you are
buying is split over a period of time and you only repay the value of the goods.
However, some agreements have an interest free period only for a short time and
then revert to interest bearing. To be sure, it is best to ask for a quote for
the total amount repayable before signing.
Hire Purchase
The main difference between other forms of borrowing and hire purchase is that
with other forms of borrowing the goods belong to you straight away, whereas
with HP they become legally yours only when you have finished paying for them.
If for some reason you stop paying for the goods, they can be repossessed if you
have paid less than one third of the total or you can be taken to court to pay
the balance. This form of credit is usually more expensive than for example a
loan from your bank, also if your circumstances change for the worse during the
agreement, you may lose both your goods and the money you have already paid.
Catalogues
Many people who buy goods through catalogues pay for the items they purchase on
a monthly basis. The risk with a catalogue is that during the time you're paying
for the items you already have, a new catalogue will arrive and you will be
tempted to buy items you don't really need.
Secured loans and Unsecured Loans
One of the main factors in determining the rate of interest you will be charged
when you borrow is whether your loan is secured
against one of your assets - usually an item of significant value e.g. your
house. If you fail to repay, the asset can be forcibly repossessed by the lender
or at least they can make you sell the asset so that the amount can be
reclaimed.
A secured loan is when you offer such an asset
as security to the lending organisation. The advantage here is that you will pay
a much lower rate of interest than with an unsecured loan. However when
balancing this out against the fact that you may lose your home if you fail to
repay, the disadvantages can be huge.
Think before taking on new commitments
Most people fall into debt through no fault of their own - often as a result of redundancy, illness or relationship breakdown etcetera. But it may be that you simply took on more credit card borrowing or interest-free loans than you could afford to repay. If so, resolve to do things differently in future. Having an up-to-date budget showing your income and expenditure will show what money you have available. Check carefully to ensure that any new commitment really is affordable before you sign up for it.
Better still, try to save up for the things you would like to have. Don't buy on impulse.
When it comes to the wise use of credit, being able to afford the repayments
is not the only consideration. It is also important to match the repayment
period to the 'useful life' of the thing you are buying. For example, if you are
taking out a loan for a holiday, you don't want to be paying for it in 3 years
time!
Next - Contacting creditors
A Registered Charity www.cccs.co.uk
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