Getting affordable credit
Getting credit is much harder than it used to be, but don't fall for the first lender who offers you cash. Follow our guide to getting the best credit for you.
Before the recession, you probably didn't notice the gap between the end of your money and your next pay cheque too much. Banks were happy to give you loans. Credit card offers landed on your matt every morning. You could even increase your mortgage without much hassle.
Not any more; with less job security and higher household bills, you may feel your need to borrow is even greater now. But as the economy remains weak, ordinary banks and building societies have clamped down on lending to anybody who they see as a high risk. Getting a loan on the high street can be tricky if you're on a low income or have had trouble with debt before.
Iffy deals
If you have been turned away by the mainstream lenders, it's tempting to take the first cash loan you can get. There is no shortage of other kinds of lenders who seem really keen to offer you money. The bad economy has increased numbers of doorstep lenders and companies offering payday loans over the internet. A few minutes online and you can easily get your hands on a few hundred quid without the usual hassle of a credit check and masses of form-filling.
Here's how it works:
- The interest you pay on the amount you borrow will be sky high. While an ordinary bank loan could cost less than 10 APR (Annual Percentage Rate), the interest on a payday loan would be closer to 250 APR or higher.
- This means if you can't settle your debts quickly, you will pay more than double the cost of your loan.
- For example, if you borrow £300 at 246.5 APR and pay it back over a year, you will end up forking out a stonking £884.
These types of loans are legal, but are rarely worth considering.
Think twice before taking on any more debt - unless it's essential, it really may not be worth it.
Loan sharks
The recession has also seen an increase in the number of loan sharks - unlicensed lenders who operate outside the law. These lenders take advantage of vulnerable borrowers by charging extortionate rates of over 1000 APR. So the same loan of £300 would end up costing £3,000.
With such high costs, you could easily never be free of your debt. So if you are unsure about your lender, check that they have a credit license before going any further.
Best options for affordable credit
Credit unions are local financial co-operatives run by their members for their members. There are about 530 of them around the country, each with a membership criteria or 'common bond', which determines who can join. This can be anything from where you live to where you work. Other groups such as churches and trade unions may also have credit unions.
Credit unions were set up to help people save, but they also offer good value loans. By law the rates they can charge are capped at 26.8% but some credit unions offer loans with rates as low as 12.7 APR. That means that if you borrowed £1,000 over one year, you would pay back £1067 in total. Find a credit union near you to see if you qualify.
You can also try Moneylines which are community development finance institutions (CDFIs) set up to help out in deprived areas. They provide personal loans and business loans to people in poorer neighbourhoods who have been turned away by mainstream lenders. The size of the loans can range from £50 to £1,000 for personal loans and up to £25,000 for business loans. But they tend to offer cash only for self-improving purposes, for example, if you need a suit for a job interview or need to do up your house.
What to consider before you borrow
- How badly do you need this loan? Think twice before taking on any more debt - unless it's essential, it really may not be worth it.
- Shop around. The credit crunch may have narrowed your options but the first loan you're offered may not be the cheapest or best. Compare at least three offers.
- Do you know what you are getting into? Don't sign anything until you completely understand how the deal works.
- Have you worked out exactly how much this loan is going to cost you? Figures such as APRs can be confusing and meaningless. Ask the lender how much you will be paying in interest by the end of the deal.
- Will you be able to meet the monthly payments? Work out how the extra cost will fit in with your other outgoings.
- Check how long you will need to make payments for. Lenders often talk in terms of weeks or months rather than years because it seems shorter period of time.
- Ask whether the interest rate will stay the same. Some deals offer eye-popping introductory rates that disappear within six months.
- Is the loan linked to your home? Some loans are secured against your property, so if you don't keep up your payments, you may lose your home.
- What happens if you miss a payment? Many lenders charge steep penalties if you don't pay on time.
- Look out for 'early redemption' charges. That is bank speak for the fees you have to pay if you want to pay your debts early.
Image by volunteer photographer Edmund Myerscough
By Susan Emmett
