BORROWING

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					     Epping Forest Citizens Advice Bureau
     Financial Literacy

                           BORROWING




                               I haven’t got enough in my
                                     Piggy Bank to
                                   buy that new IPOD.

                                    What shall I do?




Borrowing                                                   1
     Epping Forest Citizens Advice Bureau
     Financial Literacy

                   WHICH IPOD WOULD YOU BUY
      WHITE                            BLACK
      80GB                              80GB
      20,000                           20,000
      songs                            songs




             Total cost £200                Total cost £235
                                        Bought with credit card
            Bought with cash
                                    borrowed amount £200 paid back
                                    over 24 months at £10 per month
                                   (5% min repayment) at 16.32% APR

Borrowing                                                             2
     Epping Forest Citizens Advice Bureau
     Financial Literacy

                       DEBT – A NATIONAL ISSUE
            DEBT is becoming a problem for an increasing number of
            people in this country. Take a look at the selection of
            newspaper headlines below.




             In November 2004 the Bank of England announced that the
             amount of money borrowed by UK consumers had reached
                            1 Trillion pounds
Borrowing                                                              3
     Epping Forest Citizens Advice Bureau
     Financial Literacy

               WHAT DOES 1 TRILLION POUNDS MEAN?

                                          That’s:

                    £ 1,000,000,000,000
                     Total amount borrowed by UK Consumers in 2004


            3 years later in Sept 2007 that figure has increased by 37%

                    £ 1,370,000,000,000
                       (as reported by THE TIMES Monday Sept 24th 2007)



               Over a third of clients visiting Epping Forest
            Citizens Advice Bureaux come to us for help with
                              Debt Problems.
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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                           DEBT – A NATIONAL ISSUE
                                       •When interest rates rise as they have done,
                                       many borrowers start to get into difficulties
  THE TIMES Monday September 24 2007
                                       •There is evidence that Banks are battening
                                       down the haches amid rising bad debts &
                                       escalating wholesale borrowing costs –
                                       especially as a result of the Northern Rock
                                       crisis.

                                       • In Aug 2007, half a million Barclaycard
                                       customers have have seen their credit limits
                                       reduced & the bank is rejecting half of all
                                       applications for new cards as well as
                                       monitoring card-users closely for signs of
                                       trouble.


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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                     SHOULD YOU BORROW MONEY?
            •The first question to ask. If possible it is always better to pay
            cash. Why? The answer is simple. When you take a loan, you
            are charged interest. Although this interest may not seem like
            much, it definitely adds up as we’ve seen on the IPOD
            examples.

            •If you pay with your savings, and your savings gives you
            interest, you do lose the interest your savings would have
            earned over the three years. However, most loans charge
            higher interest than savings accounts pay out to you.
            •That said, everyone needs to borrow money at one time or
            another. Most people don't have enough spare cash to pay for
            major purchases, such as a home, car or school/college fees.


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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                 WHEN SHOULD YOU BORROW MONEY?
            •RULE 1 -The item you finance should have a useful life at least as
            long as the time it takes to repay the debt. If it takes you three years
            to pay for a car, your car should least at that long.
            •RULE 2 - Do NOT borrow to pay for your routine day-to-day
            needs. Do not routinely carry unpaid credit card balances to pay for
            your groceries, clothes, entertainment, and other such non-durable
            items. You must cover this spending with current income (If you
            cannot, you need to revise your budget.)
            •RULE 3 – Have a Budget - essentially a plan for the future use of
            your money. As such, it needs to account for two things: money
            coming in, and money going out (including borrowing costs).
            The first goal of a budget is to know what you're doing. You can't plan
            or manipulate your finances if you don't understand them. You can't
            invest money if you can't find a way to save it. Many have asked,
            "Where did all my money go?" when they ran out days before their
            next salary or payday.
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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                 WHAT’S THE BEST WAY TO BORROW?

            •You could borrow money from a friend or family member, in
            which case the arrangements for paying the money back are
            entirely up to you.

            •Although friends and family are less likely to charge you interest
            and will probably be more flexible with repayment, borrowing
            money from people close to you can sometimes put a strain on
            your relationship.

            •In comparison, borrowing from a bank or building society is a
            business transaction with clearly defined rules to follow.



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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                    BORROWING, IS IT GOOD OR BAD?




            •Debt is a fact of life, and there’s no point in preaching that
            you should try to avoid it. A more practical approach is to say
            that you should be sensible about debt.

            •There is a further module in our Financial Literacy series
            which goes into the consequences of debt and how to budget
            your income & expenditure
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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                    BORROWING, IS IT GOOD OR BAD?

                  •The first thing to understand with debt is that there
                   is good debt and bad debt.

            •No organisation lends money out of the goodness of their heart –
            they’re in it to make money. But some would like to make significantly
            more money than others – they just see pound signs when they look
            at people.
            •The most important thing to understand before you take out any kind
            of loan is the Annual Percentage Rate (APR). The APR is the
            amount of interest you will be charged each year. More about what
            that means later.
            •Generally speaking, good debt will involve borrowing money at fairly
            low APR: maybe around 6 to 7%. Most credit cards, for example,
            tend to have an APR of about 16%. Store cards can have an even
            higher APR.
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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                        BORROWING – THE LENDERS
            Now you will be introduced to different organisations that lend money.
            You will have to consider what each offers and think about which you
            might approach if you wanted a loan. So it seems that many of us will
            need to borrow money sometimes and there are several ways to do
            this – some ways cost a lot more than others.
            Let’s now look at how borrowing money works in various forms
            including:

            1. Loans                            5. Interest free credit
            2. Overdrafts                       6. Hire purchase
            3. Credit cards (inc Charge &       7. Consolidation loans
              Store Cards)
                                                8. Mortgages
            4. Credit agreements


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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                                         1. LOANS
            •When you borrow money from a bank or other lender you enter into a
            contract with them which governs the repayment. You have to be 18 years
            old to be able to enter into such a contract.
            •Say, for example you arrange to borrow £500 from a bank: The bank will
            offer you a period of time over which you can repay the money usually
            stated in months e.g.. 12, 18, 24 months etc.
            •The bank will tell you what their interest rate is stated as Annual
            Percentage Rate or APR.
            •They will tell you how much interest is charged per month and how much
            your monthly repayments will be. They should also total these figures up
            so you can see how much you are paying in total.
            •You will also agree the means of payment e.g. standing order, cash
            payments, cheques etc and the date each month when you must pay.
            •Lets look at some examples:
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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                               1. LOANS

            You want to borrow £1000 as a loan and you
            compare the price of repayments over 12 months,
            18 months and 24 months.
            The interest rate is 17.8% APR
            The bank give you the following figures:




Borrowing                                                     13
                                                               These figures are example only

            Loan amount: £ 1000.00       Typical APR: 17.8 %
            Term: 12 months
            Initial repayment: £ 90.91
            Subsequent monthly repayments: £ 90.97
            Total amount repayable: £ 1091.58

            Loan amount: £ 1000.00       Typical APR: 17.8 %
            Term: 18 months
            Initial repayment: £ 62.93
            Subsequent monthly repayments: £ 63.10
            Total amount repayable: £ 1135.63

            Loan amount: £ 1000.00       Typical APR: 17.8 %
            Term: 24 months
            Initial repayment: £ 49.18
            Subsequent monthly repayments: £ 49.20
            Total amount repayable: £ 1180.78
Borrowing                                                                                14
                                                               These figures are example only

            Loan amount: £ 1000.00       Typical APR: 17.8 %
            Term: 12 months
            Initial repayment: £ 90.91
            Subsequent monthly repayments:           £ 90.97
            Total amount repayable:               £ 1091.58        As you can see
                                                                       from these
            Loan amount: £ 1000.00       Typical APR: 17.8 %      figures, although
                                                                      the monthly
            Term: 18 months                                        repayments are
            Initial repayment: £ 62.93                              lower, you end
                                                                   up paying more
            Subsequent monthly repayments:          £ 63.10          to borrow the
            Total amount repayable:               £ 1135.63       same amount of
                                                                     money over a
            Loan amount: £ 1000.00       Typical APR: 17.8 %       longer period of
                                                                          time
            Term: 24 months
            Initial repayment: £ 49.18
            Subsequent monthly repayments:          £ 49.20
            Total amount repayable:               £ 1180.78
Borrowing                                                                                15
     Epping Forest Citizens Advice Bureau
     Financial Literacy

                          What does APR mean?
            •The Annual Percentage Rate of the total charge for credit
            (APR) is a standard way of measuring the real cost of credit to
            the customer, expressed as an annual rate. The APR is different
            to a flat rate of interest and more accurately reflects the true
            cost.

            •The formula for calculating the APR is very complex, All
            Financial Institutions have to stick to the same calculation
            methods, but basically the interest and all other charges made
            for granting the credit (the total charge for credit) are totalled &
            then expressed as an annual rate.
            •As all lenders calculate APR exactly the same way, it enables
            you to make direct cost comparisons between lending products


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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                    Payment Protection Insurance
      •When you borrow money most lenders will offer you a form of
      payment protection insurance. This gives you protection in case you
      are suddenly unable to pay, for example due to ill health, an accident
      or loss of a job.
      •It can cover car finance, personal loans, credit cards and store
      cards, catalogue debts and mortgages
      •Payment protection insurance is normally optional but some credit
      arrangements make it compulsory & an amount for insurance is
      added to your monthly repayment.




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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                               2. OVERDRAFTS
        •A overdraft is an agreement with your bank to take out more money
        from your current account than it currently contains. An overdraft can be
        a good way to borrow money short-term or to have some funds available
        to cover emergencies.
        •For example, if you have an overdraft limit of £200 on your account you
        can spend all the money you have in the account plus another £200.




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            This is a copy of the terms and
            conditions for a typical overdraft for
            a current account. Interest on
            overdrawn amounts usually charged
            monthly to your account




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            The interest rate is shown as
              1.36% per month with an
                    EAR of 17.6%


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               The terms and
               conditions also
            show what happens
                if you were to
             exceed the agreed
                overdraft limit




Borrowing                         21
     Epping Forest Citizens Advice Bureau
     Financial Literacy

                               WHAT IS EAR?
       •EAR is the abbreviation for “equivalent annual rate” & it is used
       to illustrate the full percentage cost of overdrafts and any type of
       account that can be in credit and also go overdrawn.
       •The calculation shows you the true cost if you use the overdraft
       facility.

       •In common with the APR calculation, EAR takes account of the
       basic rate of interest and when the interest is charged to the
       account plus any additional charges.

       •So in most respects EAR and APR achieve the same thing – it's
       just that APR applies to a pure lending product whereas EAR
       applies to a product, such as a bank current account, that can be in
       credit or go overdrawn
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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                             3. CREDIT CARDS

       Credit Cards give you a separate account from which you can
       borrow money. You can use the card to pay for goods or services in
       shops, by phone or via the internet.
       When you first obtain a credit card you will have a credit limit. This
       is the amount of money you can borrow.
       Each month you will be sent a statement which shows:
            • Each item of spending
            • The total balance
            • The interest charged
            • The minimum amount you can repay this month, usually 5%
            of the total balance

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     Epping Forest Citizens Advice Bureau
     Financial Literacy




   This is a recent credit card statement
   from a high street lender. Most
   statements are sent out monthly.

Borrowing                                   24
             Here you can see:

      • the amount left over from
          the previous month

      •The amount paid since the
            last statement

      •The amount spent with the
          card since the last
              statement

            •The current balance

      •The minimum payment due

      Please note the small print




Borrowing                           25
  A second sheet shows the transactions and charges on the account since the last statement.
  Here you can see: The balance from the previous statement = £177.74
  The amount paid into the account since the last statement         = £50.00
  Payment protection insurance                                      = £ 1.00
  Interest on the balance =                                         = £ 2.42

  So:                                 £177.74 minus £50            = £127.74
                               plus charges this month                 £3.42
                                left to pay                          £131.16


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     If you pay off the current balance within one month you
     pay no interest on what you borrow.
     This way using a credit card to pay for things can become
     a handy alternative to using cash.

     For example:
      Your current balance is zero & you buy an IPOD for £200 on 12th March.
     You receive your credit card statement on 20th March and the balance shows
     £200. The minimum payment is £10 to reach your account by 2nd April
     You pay £200 on the 22nd March = No interest charge = Balance now zero.

     If you paid only the minimum amount of £10 you would incur
     interest charges on the remaining £190. If the interest rate is 1.36%
     per month how much would your total balance be next month?

      £190 x 1.36% = £2.58 interest - total balance = £192.58

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     Epping Forest Citizens Advice Bureau
     Financial Literacy

        In this example if you continued to pay only the minimum amount
        of £10 each month how long would it take to pay for the IPOD
        priced £200?


        It would take 24 months to pay off the balance and you would
        be charged £35 total interest.



                Bought with credit card       Total cost
             borrowed amount £200 paid          £235
              back over 24 months at £10
                                                 BLACK
            per month (5% min repayment)          80GB
                    at 16.32% APR                20,000
                                                 songs



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     Epping Forest Citizens Advice Bureau
     Financial Literacy

            STORE CARDS are SIMILAR TO CREDIT CARDS
            •Store cards are the cards that many major retailers offer their
            customers as a convenient way of buying goods in their stores.
            •They operate similarly to a credit card with a monthly statement
            being sent to all customers with the requirement to pay off at least
            the minimum payment.
            •They can only be used at the issuing retailer store, have a much
            lower credit limit. They often come with incentives attached such
            as special discounts and privileges. BUT the APR can be very
            high.




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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                             STORE CARDS - Tips

       Before signing up for a store card consider the following:

       •Do you really need a store card & do you have other ways to get
       credit such as credit cards or an overdraft? If so which has the
       lowest interest rate?
       •Is there is an interest-free period? If so how much will the interest
       be when it ends?
       • Check all terms of the agreement - APR (This can be much higher
       than a credit card), interest free period, penalties for default and late
       payment
       •Beware of persistent shop assistants who try to persuade you to
       sign up for a card.
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     Epping Forest Citizens Advice Bureau
     Financial Literacy

             THE CHARGE CARD (this is not a Credit Card)

       Charge cards
       The difference between a charge card and a credit card is that the
       amount borrowed on a charge card must be repaid in full at the end
       of a given period, usually a month. Interest is not charged on the
       amount but you may have to pay an annual fee for the card.

       American Express and Diners Club are the two major operators.




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     Epping Forest Citizens Advice Bureau
     Financial Literacy

            THE DEBIT CARD (This is not a credit card either)
       Debit Cards – you do NOT borrow directly with these cards
       •Allows you to pay for things by taking money out of your account
       automatically when a transaction is made with the card. If you do not
       have enough money in your account or haven’t agreed an overdraft
       with the bank, the card may be refused.
       •If you use the card in a shop you can pay using Chip & Pin. The
       card is entered into a small machine which reads the info it carries &
       you will have to enter your Pin.
       •They allow you take to take cash out of ATM’s (cash machines)
       using a PIN number, they also guarantee payments by cheque.




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                               Card Comparison
                          Debit Card             Credit Card             Store card
    Available from      Bank or Building      Bank or other         Shops or stores
                        Society               lender
    Able to get cash?   Yes                   Yes but interest is   No
                                              charged
    Able to buy         Yes in most shops     Yes in most shops     Only in certain
    goods?                                                          shops
    Can you get         No                    Yes up to the         Yes up to limit
    credit?                                   maximum limit
    How do you pay?     Debits from your      Monthly Bill          Monthly Bill
                        current account
    Annual Charge?      No                    Sometimes             Sometimes

    Interest payable?   Only if becoming      Yes if balance not    Yes if balance not
                        overdrawn when        paid in full each     paid in full each
                        your a/c is debited   month. APR            month. APR can
                                              usually high(ish)     be very high
Borrowing                                                                                33
     Epping Forest Citizens Advice Bureau
     Financial Literacy

                   4. CREDIT SALE AGREEMENTS
     •Under credit sale, you buy the goods at the cash price.
     •You usually have to pay interest but some lenders offer interest-free
     credit. Repayment is made in instalments. You are the legal owner of
     the goods as soon as the contract is made.

     • The supplier cannot repossess the goods if you fall behind in
     repayments but can take court action to recover the money owed if you
     don’t keep up the repayments.

     •Credit sale agreements are now more common than hire purchase
     agreements and it is important not to confuse the two.



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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                      5. INTEREST FREE CREDIT

      •This is potentially a good way to purchase goods though it is not
      often available. You do not pay any more than the cash price but have
      a period of time to pay for what you’ve bought.
      Read the small print carefully. Sometimes a way of paying called ‘9
      months interest free option’ is offered which is very different from
      ‘interest free credit’.
      •Sometime if you don’t pay within a stipulated period, the interest free
      period lapses and you will revert to a full Credit Sale Agreement




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     Epping Forest Citizens Advice Bureau
     Financial Literacy

             5. INTEREST FREE CREDIT – An Example
       Here is an example of an interest free credit offer from one high
       street electrical retailer:
            Buy Now Pay 2008 on everything over £299
       Cash Price £699.99. No deposit required. Either pay £699.99
       within 10 months of the date of purchase, total amount payable
       £699.99, no interest charges paid.
       Or 39 monthly payments of £32.57 commencing 10 months after
       the purchase date. Total amount payable £1270.23. 29.5% typical
       APR. Interest calculated from date of agreement.

       PAY £699.99 within 10 months                   = TOTAL £ 699.99
       PAY over 39 Months                             = TOTAL £1270.23.

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     Epping Forest Citizens Advice Bureau
     Financial Literacy

             5. INTEREST FREE CREDIT – An Example


            As you can see from this example Interest Free
            Credit can be a good deal if you pay the full
            amount after the free period.
            If you don’t pay the full amount in time you could
            end up paying more than twice as much for the
            item.




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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                        6. HIRE PURCHASE (HP)

     •Under a hire purchase (HP) agreement, you hire goods until you
     pay the final instalment. You will not own the goods until then.

     •This means that you can end the agreement and return the goods at
     any time. However, you will owe any overdue instalments and, if less
     than half of the total price has been paid, you may also have to pay the
     difference.

     •The company which has made the loan (the lender) may be able to
     take back (repossess) the goods if, for example, you fall behind with
     payments. The lender does not have to sell the repossessed goods to
     reduce your debt.



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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                            6. HIRE PURCHASE

            Advantages              Disadvantages                 Conclusion

    Allows you to buy    You do not own the goods until     You can return the
    more expensive items you have paid off the full         goods and end the
    on credit            amount.                            agreement any time
                                                            as long as you are up
    It may be easier to get The Hire Purchase company can
                                                            to date with your
    a Hire Purchase         take back the goods if you do
                                                            payments.
    agreement than a        not keep up with payments.
    bank loan or credit                                     It’s worth considering
                            If the goods are taken back you
    card                                                    other forms of credit
                            may still owe money on them.
                                                            first.
                           HP can be more expensive
                           than a loan or a credit card.



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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                      7. CONSOLIDATION LOANS
       •A consolidation loan is a loan to pay off all your existing debts
       from whatever source such as credit cards, loans, overdrafts etc.
       •From then on you only make repayments to the new creditor. The
       advantage of this is only one payment to remember.
       •The disadvantages can be higher interest rates and
       consequences if you do not make payments on time.
       •Consolidation loans are usually secured against your home
       and therefore are only available to home owners. If you fail to
       keep up the payments you could lose your home.
       •You should think carefully before taking out a consolidation loan.
       There may be better, cheaper ways to pay off your existing debts.


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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                                  8. MORTGAGES

            •If you wish to buy a home you may be able to borrow money
            to do this. This is called a mortgage. The loan is for a fixed
            period usually 25 years and you have to pay interest on the
            loan. If you do not keep up the agreed repayments, the lender
            can take possession of your home.

            •Mortgages are available from banks and building societies
            and also other lenders. This is a very competitive area and the
            lenders are constantly changing the types of mortgage they
            offer. Because of this it is not possible to cover this subject in
            detail here.




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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                       MAIL ORDER SHOPPING


        Mail order
        Mail order shopping is usually arranged through a catalogue and is
        normally interest free, the customer paying only the price of the
        purchase in instalments. However, goods bought in this way may
        be more expensive.




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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                          DOORSTEP SELLERS
      •Selling or promoting goods or services on credit by calling at
      people’s homes is illegal unless the company has a licence to sell
      credit outside trade premises. Common examples are double glazing
      or home improvements. Any agreement that is made illegally may
      not be enforceable.
      •It is a criminal offence to try to make a cash loan outside trade
      premises unless the visit is made to your home in response to a
      written and signed request. Any agreement that is made illegally may
      not be enforceable.
      •If you have signed an agreement of this type seek advice.


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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                              CREDIT UNIONS


      •A credit union is a self-help co-operative whose members pool their
      savings to provide each other with credit at a low interest rate. If a
      member fails to repay a loan, the credit union can seek repayment
      through the courts.

      •Credit unions encourage people to save what they can and only
      borrow as much as they can afford

      •After you have been saving with the credit union for a few months
      you can apply for a loan.

      •The maximum interest charge is 1% per month.
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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                             PAWNBROKERS
     •Pawnbrokers lend money against the value of property left with them.
     They must give a receipt known as a ticket. Pawnbrokers agree to keep
     the property for at least six months but you can get it back at any time
     during that period by paying off the loan plus interest. The period can
     be extended by paying the interest only and re-pledging the property.

     •Pawning can be a way of raising cash which is difficult to get
     elsewhere, because: There is no check on your credit rating (which you
     get with other forms of credit) or your references.

     •Be warned though, some pawnbrokers will only loan a small
     fraction of your item’s actual resale value, and interest rates can
     be extremely high.

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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                             “LOAN SHARKS”


       Loan sharks lend money to people who are usually unable to
       borrow from other sources. They charge very high interest and are
       not concerned by your ability to repay. They may force you to take
       out a second loan to repay the first.

       If you have entered into an agreement with a loan shark or an
       agreement with excessively high interest you should seek advice.




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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                     BORROWING- Conclusions 1

              •Before borrowing money you should consider the
              full cost of paying it back and how this will affect
              your budget. Can you afford the repayments over a
              period of time?

     •You should compare interest rates and opt for the lowest.
     •Borrowing money can mean you can buy things now rather than
     having to wait to save up the same amount of money. Do you really
     need to buy it sooner rather than later?
     •With so many people getting into problems as a result of borrowing
     money do you want to be another part of this growing statistic?
     •Do you know what the consequences can be of borrowing money
     and getting into debt?
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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                     BORROWING – Conclusions 2
               •People get into debt for a variety of reasons and it is
               not always their fault. Sometimes reckless spending
               or bad budgeting is the cause of debt. Sometimes it’s
               just bad luck & unexpected change of circumstances.

     •Debt is something that can affect anyone at anytime.
     •If you find you are having trouble meeting your payments don’t panic
     and don’t ignore the problem.
     •Get to grips with your finances, review your budget and take action
     before it gets out of control.
     •Contact lenders and tell them about the problem.
     • If in doubt seek advice.
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     Epping Forest Citizens Advice Bureau
     Financial Literacy

                           BORROWING




                                   END




                       After all that I think I’ll save
                       up for that IPOD, it’s a much
                       cheaper option and far less
                                   worry.



Borrowing                                                 49

				
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