Borrowing

  • Borrowing Money
    • As essentials like council tax, utility bills, and insurance continue to soar, and disposable income decreases, many British households begin to feel a strain in their budgets. According to Credit Action, the national money educational charity, the average consumer borrowing during 2012 stood at £3,185 per year.

      The Bank of England reported that as of May 2012, the total consumer borrowing figures exceeded £730 million. Borrowing money is becoming more and more common, and unlike in the past, consumers are turning to this solution in order to cover everyday expenses.

      In the UK, the most common types of borrowing include:
      - Personal loans
      - Credit and store cards
      - Payday loans
      - Mortgages
  • Tips and advice on safe borrowing
    • According to a recent survey carried out by Which? magazine, one in three people who were interviewed admitted to suffering from stress and anxiety due to money problems. It is important to keep in mind that borrowing cash should improve -and not worsen- your financial situation, so ensuring that borrowing is done in a safe manner becomes crucial.

      Borrowing should be approached with caution. Consumers are advised to carry out extensive research on the options available, as rushing into the first offer available could be costly in the long term. The following aspects should be taken into account when choosing a lender:

      - When taking up a loan, decide whether your circumstances allow you to borrow against the total value of your home or not. If the answer is yes, you might consider a secured loan; otherwise an unsecured loan would suffice

      - Don't be enticed by interest-free loans until you have read the terms and conditions. Usually, this type of loan requires that full repayment is made within a relatively short period of time. When the deadline is not met, the interest-free element is overridden and extremely high rates of interest apply

      - Similarly, don't feel tempted to take up a loan or credit card just because it has a low APR rate. Som consumers try to take advantage of low APRs by paying only the minimum monthly amounts. However, that may mean that it will take longer to repay a debt and therefore, the total repayment amount will be higher than if a shorter repayment period with a higher APR rate had been chosen

      - Linked to the above, it is recommended not to stick to minimum monthly payments for too long, as this could result in higher repayments over time. Instead, aim to repay 10% of the debt every month

      - Although interest rates in payday loans is notably higher than in personal loans, the rates should not exceed 20 per cent

      - Variable or fixed-rate mortgages? In any case, the larger the initial deposit, the lower the interest rate will be. In general, fixed-rate mortgages suit better first-time home owners and those who may be concerned about job security. If in doubt, think about the worst case scenario (a 2 per cent increase on the interest rate), and consider whether your budget could afford repayments at that level or not

      - Additionally, home owners should be wary of unusually low variable-rate mortgages (also called discounted variable mortgages), as these are not linked to the Bank of England's rate, and lenders may increase the interest rates anytime they wish

      - Following the payment protection insurance scandal, consumers should ensure they only sign up for schemes that are really necessary and suitable to their needs

      Above all, it is recommended that consumers avoid borrowing money to repay existing debts.
  • Regulations governing money borrowing in the United Kingdom
    • The majority of borrowing transactions in the UK are governed by the Consumer Credit Act 1974. The Act requires that all lenders are licensed to operate by the Office of Fair Trading, and that borrowing agreements include detailed information on the amount borrowed, the repayment deadline, the total repayment amount, any additional charges, the applicable APR rates, how often payments must be made, and which are your cancellation rights. According to the Consumer Credit Act, after a credit agreement has been signed, borrowers have 14 days to cancel the contract.

      Prior to signing the agreement (which must be signed by both parties in order to be legally valid), consumers must be given written information on the terms and conditions of the credit contract, and on the legal consequences that may arise from non-payment.
  • Useful contacts and organisations
    • There are several organisations that offer free and confidential advice on borrowing. These include the following:

      -Citizens Advice Bureau http://www.adviceguide.org.uk/
      -Credit Action http://www.creditaction.org.uk/
      -Step Change (formerly the Consumer Credit Counselling Service) http://www.stepchange.org
      -Financial Ombudsman Service http://www.financial-ombudsman.org.uk/
      -PayPlan UK http://www.payplan.com/
      -Citizens Advice Consumer Service (same website as the Citizens Advice Bureau; advice is also available on the phone on 08454 040506)