Citizens Advice financial capability resources... · Citizens Advice financial capability ......

©2015 Citizens Advice Intermediate credit handouts/Sep16/v3

Citizens Advice financial capability

APRs explained APR describes the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. Try guessing the typical APRs for the companies listed below:

Barclays Credit card APR?

John Lewis Credit card APR?

Argos Store card APR?

QuickQuid payday loan (based on 30 day repayment)

APR?

Wonga (based on a 20 day loan)

APR?

Loan Shark APR?

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CASH Advantages Disadvantages

Provided by:

• you from your savings

• money borrowed from friends or family

• an insurance payout.

• You don’t have to pay interest, therefore will pay less for the car.

• You may be able to negotiate for a better deal than the advertised price as a cash buyer.

• If it is a private sale that is dodgy you could end up losing all of your money.

• If you don’t have the money saved up you may have to wait a long time to buy a car.

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PERSONAL LOAN Advantages Disadvantages

Provided by:

• bank

• building society

• credit union.

• You don’t have to save up a large sum before buying the car so you may be able to buy the car sooner.

• You may be able to negotiate for a better deal than the advertised price.

• It can help with budgeting because you know what the repayments will be if you get a fixed rate loan.

• If it is a private sale that is dodgy you could end up losing all of your money.

• You will have to pay much more than the advertised price as you will pay interest.

• You may not be able to afford the repayments if your personal circumstances change.

• Interest rates vary so you will need to look around.

• There may be arrangement fees and early exit penalties.

• You may not be credit worthy if you have had problems with credit in previous finance agreements.

• There are some unscrupulous people (loan sharks) who may try to get you to take out a loan with them.



LOAN PURCHASE Advantages Disadvantages

Arranged by:

• the car dealer.

How it works:

• it is similar to a personal loan but you borrow the money from a finance company introduced by the dealer and buy the car from them.

• It may suit some people as it may be less hassle than going elsewhere for the loan.

• It can help with budgeting because you know what the repayments will be if you get a fixed rate loan.

• The consumer can take action directly against the finance company for any breach of contract.

• You will have to pay much more as you will pay interest.

• You may not be able to afford the repayments if personal circumstances change or interest rates change.

• Interest rates vary so you will need to look around.

• The interest rates are usually very high.

• You may have to pay a large deposit.


• You may not be credit worthy if you have had previous problems with credit so you may have trouble getting a loan.



HIRE PURCHASE Advantages Disadvantages

Arranged by:

• the car dealer.

How it works:

• it usually involves putting down a small deposit and signing up to a monthly payment plan which may be reviewed at some point.

• You may have the flexibility of returning the car when the plan is reviewed.

• As you don’t own the car, the finance company, as owner, may be responsible for sorting out any faults with the car.


• You don’t own the car until you have made all of the payments.

• There may be a large final lump sum payment to be made before you own the car.

• You may not be able to afford the repayments if personal circumstances change.

• You will have the car repossessed if you can’t keep up with the payments.

• If you return the car before completing the payments you may still be liable for any damages – even small scratches.


• You may not be credit worthy if you have had previous problems with credit so you may have trouble getting a hire purchase agreement.

• The finance company sometimes sets a maximum mileage and you will have to pay a penalty if you exceed it.



PERSONAL CONTRACT PLAN

Advantages Disadvantages

Arranged by:

• the car dealer.

How it works:

• the buyer pays off part of the cost of the car over an agreed period, then either pays a lump sum (balloon payment) to purchase the car or trades up for a newer model.

• A deposit may not be required with this method.

• The repayments may be lower than a personal loan or loan purchase.

• You can trade the car in for a newer model at an agreed point in the repayment process.

• It can help with budgeting because you know what the repayments will be if you get a fixed rate.

• As you don’t own the car, the finance company may be responsible for sorting out any faults with the car.

• The car has a minimum guaranteed future value.


• The price of the car is usually fixed so you cannot negotiate a better deal.

• There may be a large final lump sum payment to be made before you own the car.

• You don’t own the car until you have made all of the payments.

• You will have the car repossessed if you can’t keep up with the payments.


• You may not be credit worthy if you have had previous problems with credit so you may have trouble accessing this method of payment.

• The finance company sometimes sets a maximum mileage and you will have to pay a penalty if you exceed it.

• You are liable for any damage to the car during the repayment process.



CREDIT CARD Advantages Disadvantages

Provided by:

• banks

• building societies

• another lender.

• It can be a convenient way of getting a little extra time (up to a month) to pay for the car.

• You will have some protection from your credit card company if the deal turns out to be problematic.

• Some credit cards offer interest-free introductory periods for new customers.

• You may be able to negotiate a better deal than the advertised price.

• There might be an extra charge for credit card payments.

• Not all car dealers or car sales outlets accept credit cards.

• If you don’t pay the amount in full you will be charged interest and credit card interest can be very high.

• If you get an interest-free deal on a credit card but cannot pay off the whole balance within the agreed time the interest rate can be very high afterwards.



PART EXCHANGE Advantages Disadvantages

Provided by:

• the car dealer.

How it works:

• If you’re buying a new car, as well as selling your old one, you can do it using a part exchange scheme with a car dealer. The value of your old car is deducted from the cost of the new car.

• It saves you the trouble of trying to sell your old car.

• It may be quicker than trying to sell your old car yourself.

• You may be able to negotiate a good deal with the dealer.

• You will probably not get as much money for your old car as you could if you sold it privately.



0% FINANCE Advantages Disadvantages

Arranged by:

• the car dealer.

How it works:

• you pay a deposit, often 35 to 40% of the car’s price and then there’s no interest on your monthly instalments.

• You are not paying interest on your repayments.

• If you can afford the monthly payments but you don’t have all the money at the time, you can buy the car. This allows you to buy without paying more than the cost of the car.

• You can take action against the finance company for any breach of contract.

• It’s expensive on a monthly basis.

• It isn’t available on all cars.

• You’re unlikely to get a discount on a 0% deal so it could work out more expensive overall.

• Only a small percentage of car loan borrowers qualify for this type of loan.

• You will need to check whether payments are divided equally as there may be a large final lump sum payment to be made.



CAR LEASING Advantages Disadvantages

Arranged by:

• the car dealer.

How it works:

• you choose your vehicle and how long you want it for and state your annual mileage. These three factors determine your monthly payments.

• Good for those who want a new car regularly without the hassle of owning it themselves.

• Monthly payments can be low and there is nothing to pay at the end.

• Generally only a small deposit is required.

• Maintenance may be included in the deal.

• You can take action directly against the leasing company for any breach of contract.

• You normally pay a few months’ rental in advance.

• You have to take out comprehensive insurance to cover damage, which is costly for expensive cars.

• The car is never yours.

• You will be charged for exceeding your mileage limit.

Explaining the Language of Contracts Contract – This is any exchange between two people or businesses. It does not have to be signed, or even written down, to be a contract. Terms – These are the particular parts of the contract that you and the company have agreed to both follow. Duration – The time the contract lasts for. This can be 12, 18, or even 24 months in the case of a mobile phone. Cancellation – This is ending a contract and needs to be agreed by both sides of the contract. Breach – This is when either you or the company, has broken a part of the contract. Execute – This is when the contract has become legally binding. Withdraw – This is when you pull out of a contract that has not been made legally binding yet. Statutory – These are laws and rights passed down by government. You have them no matter what. Rescind – This is the same as cancel. Cooling Off – This is the time you are given to change your mind and return something. Normally you have to rely on store policy if the item is not faulty, as you don’t have a legal right to this. Regulated – Anything that is regulated means it is done by following a particular law or set of laws, which it will normally identify. Antecedent – Anything like this just means something that happened earlier on, or before whatever you’re talking about now. Broker – This is the name of a person who tries to help you with money matters, by either investing for you or by trying to introduce you to lenders.

Factsheet

What is a Credit Check? And what is a Credit Rating? A credit check is when you check your credit rating. A credit Rating is a measure of your financial situation that lenders use to judge whether they will lend you money. The myths

1. There's no such thing as a universal credit blacklist! Every lender has a 'perfect customer' wishlist, so if you are rejected by one, this doesn't necessarily mean you'll be rejected by another.

2. It's all about profit not risk! Lenders aren't obliged to dole out credit, instead decisions revolve around how much money you're likely to make them. This means savvy customers who always repay in full, or shift debt to 0% cards to avoid interest may get rejected as the bank will make no money!

3. Not checking your files can lead to major rejection! You have a right to see your credit files for £2 from the major credit agencies (Experian, Equifax and CallCredit), plus you can do it for free with agencies such as Noddle and Clearscore. Check every detail, people have been rejected because unused but not cancelled mobile contract’s address hadn't been updated after a house move, so be vigilant. Plus check for products that aren't yours in case of ID fraud.

4. Get errors on your file corrected, or have your say. If you disagree with anything on your file, just write to the agency and request it's changed.

5. There are simple ways to boost your score. There are plenty of simple ways to make yourself more attractive to lenders, get on the electoral roll, time applications cleverly, never miss payments, get a landline, update or cancel old accounts and reduce your debts.

Factsheet

Credit scoring is about profit, not risk

Banks pick customers for their own good, not yours, so the scoring process is about profit not risk. Of course, risk plays a part, as those unlikely to repay are a threat to profits. Yet even the most solvent may be rejected if they're unlikely to act in a way that'll generate profit for lenders. For example, credit card companies may reject you for always repaying cards in full. While you feel like a dream punter, for credit card companies you're a nightmare. If they spot this trend, you're likely to be rejected. The most profitable credit card customers are those perpetually in debt, never defaulting, but always meeting the minimum repayment. Pay off in full every month, don't use your credit cards enough, or always shift debt to 0% cards and if they can spot you, they may reject you.

What banks know about you

There are three prime sources of information used for scores.

1. The application form Here, lenders obtain the crucial details of your postcode, salary, family size, reason for the loan and whether you're a home owner. Ensure you fill the forms in carefully.

2. Past dealings with the company

Companies use any previous dealings with you to help assess your behaviour

3. Credit reference agency files

Experian, Equifax and Callcredit compile information, allowing them to send data on any UK individual to prospective lenders. All lenders use at least one agency when assessing your file. This data comes from five main sources:

• Electoral roll information. • Court records. • Previous credit searches, addresses and linked people. • Fraud data. • Account data and bill-payment history.

What banks don't know about you... The following things are not listed on your report that lenders can see:

• Parking or Driving Fines. • Ethnicity or Religion. • Whether you've checked your file. • Salary. • Savings Accounts. • Medical History. • Criminal record. • Child Support Agency. • Information on relatives. • Student Loans. • Declined applications.



Which loan?

What are the different ways I can borrow?

What are the advantages? What are the disadvantages?

Bank or building society

Lower APR. I know how much it will cost me as payments will be fixed.

May not give me a loan. If my situation changes I may not be able to afford the payments.

No application needed, just ask the bank.

Might be refused. APR varies bank to bank.

Immediate credit. Might give me credit when I cannot get it anywhere else. Entitled to discounts on goods.

Making minimum repayments only, means paying a lot of interest. Might be tempted to carry on using it.

Immediate credit. You can pay it back as much or as little as you want (minimum payment required).


Might get credit union loan when I cannot get loan anywhere else.

May need to save for a while before I can borrow.

Get the money straight away Small repayments.

Very high APR.

Get the money straight away. No questions asked.

It is illegal They are very threatening if I can’t repay.

Get credit when can’t get it anywhere else.

Risk of hidden costs and very high APR.

Repay in small amounts. Often more expensive than on the high street.

No interest to pay perhaps. If I don’t pay then I may lose a friend.



Which loan?

What are the different ways I can borrow? What are the advantages? What are the

disadvantages?

Bank or building society

Lower APR. I know how much it will cost me as payments will be fixed.

May not give me a loan. If my situation changes I may not be able to afford the payments.

Overdraft No application needed, just ask the bank.

Might be refused. APR varies bank to bank.

Use a store card

Immediate credit. Might give me credit when I cannot get it anywhere else. Entitled to discounts on goods.


Use a credit card

Immediate credit. You can pay it back as much or as little as you want (minimum payment required).


Borrow from a credit union Might get credit union loan when I cannot get loan anywhere else.

May need to save for a while before I can borrow.

Borrow from a door step lender

Get the money straight away Small repayments.

Very high APR.

Unlicensed money lender (Loan shark)

Get the money straight away. No questions asked.

It is illegal They are very threatening if I can’t repay.

Payday loan Get credit when can’t get it anywhere else.

Risk of hidden costs and very high APR.

From a catalogue Repay in small amounts. Often more expensive than on the high street.

Friends No interest to pay perhaps. If I don’t pay then I may lose a friend.

Explaining the language of Credit Debit cards – Card allowing money to come straight out of your account. Mortgage – A loan for buying property, usually with specified payment periods and interest rates. Arrears – This is the word used to describe falling behind with regular payments. Credit rating – A test of an individual's financial status. Points are awarded on the basis of factors that include income, home ownership, debts and repayment history. Payment protection – An insurance often sold alongside loans, credit cards or mortgages to cover repayments if you are unable to work through accident, illness or unemployment. Repossession – The taking back of an item that has been sold on credit. Loan Sharks – They operate illegally and will lend you money when no one else will. Interest – This tells you the rate at which you will be charged interest. Credit cards – A card which allows the card holder to make purchases on credit. A credit limit is established on an individual basis and interest is charged on the money owed. APR – The fee charged by a lender to a borrower for the use of borrowed money, usually expressed as an annual percentage. Standing order – When an accountholder instructs a bank to pay a specified amount, directly from their account balance, to a specific person on a regular basis. Overdraft – The amount of money you owe the bank on your normal account.

Factsheet

Insurance – A promise of compensation for future losses that may or may not happen. Costs a regular amount. Store cards – A credit card which can only be used to buy goods in one particular shop or chain of shops. Direct debit – When an account holder authorizes a bank to let a company take a variable amount at regular (usually monthly) intervals. Finance agreement – Banks typically provide these. There may be a down payment required up front. When the last payment is made the agreement is fully satisfied.



Real cost of borrowing Your friend is thinking of buying some furniture costing £1000. The store they are buying it from want them to take one of their store cards to pay for it. They charge 25% APR. Your friend is a member of the local Credit Union who would lend them £1000. They charge 15% APR. Using the table below work out how much it would cost to buy the furniture over 1, 3 and 5 years, filling in the boxes for both Store Card and Credit Union. The first box is already filled in for you.

Total repaid – Table of amounts

1 year 3 years 5 years Compare the total amounts you have to repay

AND how this goes up if the loan goes on for more years

Length of loan APR 1 year 3 years 5 years 5% £1027 £1077 £1129

10% £1053 £1154 £1262 15% £1078 £1231 £1398 20% £1102 £1308 £1536 25% £1126 £1385 £1675 30% £1149 £1461 £1815

£1126 £

Store card Credit Union

£

£

£

£

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What other charges might be added? As well as interest, beware of other charges a lender might add to a loan.

Arrangement fee Does the lender charge a fee for arranging the loan? If so, it is usually added to loan amount and you will pay interest on this as well as the loan amount.

Early Redemption fee Are there extra charges if you repay the debt early? Some lenders charge an extra fee if you pay a loan off early. Higher priced goods Are the goods more expensive than you can buy elsewhere? Sometimes the lender will charge you more for goods if you buy using credit. Late Payment charge What happens if you miss a payment? There are often penalty fees if you miss a payment, these fees can greatly increase how much you will have to pay back. Payment Protection Insurance Does the lender sell you an insurance policy to cover your loan repayments if you are unable to earn because of illness or redundancy? Sometimes the cost of this insurance is added to the loan amount and will increase the interest payable.



APR Cheat Sheet Table

Find the APR on the left hand side and follow it across to the number of years of the loan. For example if you borrow £1000 at an APR of 25% for 5 years you’ll pay back £1675, that’s an extra £675 in interest. All figures assume a starting loan of £1000.

Typical APR 1 Year 3 Years 5 Years 10 Years 15 Years 20 Years

5%

£1027 £1077 £1129 £1266 £1413 £1569

10% £1053 £1154 £1262 £1557 £1887 £2248

15% £1078 £1231 £1398 £1867 £2404 £2995

20% £1102 £1308 £1536 £2191 £2947 £3773

25% £1126 £1385 £1675 £2523 £3502 £4557

30% £1149 £1461 £1815 £2860 £4058 £5333

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What's a store card? Store cards are easily confused with credit cards and that’s for one simple reason, they are a sort of credit card and to take them out, you have to be over 18, sign a credit agreement and undergo a credit check. How they work A store card is basically a credit card you can only use with one high street store. It functions exactly like a credit card, you can use it to buy things without spending your own money. Then you need to pay off the bill at the end of the month or else you’ll incur some interest on what you’ve borrowed. You normally get offered a store card at the till when you’re making a purchase, although sometimes an employee of the store may just approach you to offer one. There’s often some kind of ‘hook’ to make it more appealing, for example you might get free delivery or discounts on what you buy. Not to be confused with The most common mistake that is made when it comes to store cards is getting them mixed up with something else.

• A store card is a credit card that just works for that store. • A credit card is a card that works in any store or online. • A loyalty card gets you free points if you swipe it whilst making a

purchase, which you can then redeem for rewards such as vouchers. The reason this is so confusing is that many stores, take Marks & Spencer as an example, offer credit cards you can use anywhere, store cards that only work with their chain and loyalty cards. And they’re not the only one, Tesco, Sainsbury’s, John Lewis and Asda all offer credit cards with the name of the store. These aren’t store cards because they can be used anywhere.

Factsheet

Benefits of a store card There is only one, discounts. You may get introductory or regular discounts, some of which are only applicable to store card members. If you spend somewhere very regularly, then this can be very useful. A lot of high street retailers even offer special store card evenings and offers, a bit like a membership club. Drawbacks of a store card

1. Extremely high rates of interest About 60% of the major store cards on the UK high street charge over 25% interest. When you consider an average credit card, that can be used anywhere, charges less than this. It shows that store cards are rarely competitive. You should always check what the Annual Percentage Rate (APR) is before you sign up. This lets you compare the cost with credit cards from other lenders.

2. High-pressure selling, often targeted at young people

Store cards are often sold by untrained shop staff, who don’t often understand anything about them, sometimes not even that they’re a form of credit at all. They sell them purely to hit targets and sometimes to earn commission. Always remember, sales assistant are not financial experts, so why would you buy a financial products from them?

3. Limited use

You can only use store cards to pay for things within that particular high street chain. Given that at the end of the day, a store card is just a credit card, it would make more sense to simply get a credit card. Often they are cheaper to manage and they work anywhere in the UK, the internet and often overseas.

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