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					Eastbourne Citizens Advice Bureau
Financial Literacy




                      BORROWING




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                         Types of borrowing

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.

In this unit we will look at how borrowing money works in various forms
including:

• loans
• overdrafts
• student loans
• credit cards
• credit agreements
• interest free credit
• store cards
• hire purchase
• consolidation loans
• mortgages.




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                     Who do I borrow money from?
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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                                   Fact

   UK consumer borrowing amounts to £1.24trillion as of October 2011.

   The CAB deals with 8910 new debt problems everyday.

   Citizens Advice has seen a 44 per cent increase in the number of
   people seeking help for debt problems over the past six years.




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                                      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, eg 12, 18, 24 months etc
• the bank will tell you what their interest rate is, stated as an 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, eg standing order, cash payments,
cheques etc and the date each month when you must pay.
Let’s look at some examples.

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                        Borrowing example 1


   You want to borrow £1,000 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 gives you the following figures:




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                            Borrowing example 2      These figures are example only

These figures are examples only.
Loan amount: £1,000          typical APR: 17.8%
Term: 12 months
                                                  As you can see
Initial repayment: £90.91                         from these
Subsequent monthly repayments: £90.97             figures, although
                                                  the monthly
Total amount repayable: £1,091.58
                                                  repayments are
Loan amount: £1,000          typical APR: 17.8%   lower, you end
Term: 18 months                                   up paying more
                                                  to borrow the
Initial repayment: £62.93
                                                  same amount of
Subsequent monthly repayments: £63.10             money over a
Total amount repayable: £1,135.63                 longer period of
                                                  time.
Loan amount: £1,000          typical APR: 17.8%
Term: 24 months
Initial repayment: £49.18
Subsequent monthly repayments: £49.20
Total amount repayable: £1,180.78
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                     Annual percentage rate (APR)
The annual percentage rate (APR) of the total charge for credit 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, but basically the
interest and all other charges made for granting the credit (the total
charge for credit) are totalled and then expressed as an annual rate.




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                      Payment protection insurance 1
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.
• An amount for insurance is added to your monthly repayment.
• Payment protection insurance is normally optional but some credit
arrangements make it compulsory.




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                      Payment protection insurance 2
• Most payment protection insurance agreements pay only a part of the
balance each month, for a limited period.
• The most common amount paid is 10 per cent for ten months.
• The amount paid off is always equal to or more than the minimum
monthly payment required by the credit card or store card company.
• If you are sick, lose your job and become unable to make your monthly
payments and you have payment protection cover you should contact the
lender and make a claim as soon as possible.
• Check the details of your credit agreement for further information.
• It has recently been discovered that many customers were mis-sold
payment protection insurance by their banks. As a result the banks have
been forced to pay back millions of pounds in compensation. It is advised
that when borrowing money you look closely at the terms and conditions,
particularly regarding PPI.




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                                Overdrafts
An overdraft is an agreement with your bank to take out more money from
your current account than it currently contains.
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.
An overdraft can be a good way to borrow money short-term or to have some
funds available to cover emergencies.




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                      Overdraft example 1
For example: you need £800 to put a deposit on a
flat. At present you only have £600 in your account
and your pay goes into your bank account in two
weeks time.
• You arrange an overdraft of £300 with your bank.    Account balance
• You write a cheque for £800 for the deposit.         £600
• When the cheque is cashed your account shows         £200
a balance of -£200. This gives you up to £100 to      - £275
live on until your wages go into your account.
                                                       £625
• You spend an extra £75.
• Your wages of £900 go into your account.
• What does your account balance show now?




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                              Answer


When your wages are paid in, your account balance is £625 minus any
interest charges. Many student accounts don’t charge interest on
overdrafts.




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                      Terms and conditions for an overdraft


                                           This is a copy of the terms and
                                           conditions for a typical overdraft for
                                           a current account.




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                       The interest rate is
                      shown as 1.36% per
                             month.



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                      Overdraft example 2


Interest rate 1.36% per month.                            Account balance
                                                          - £275
• In our example you were overdrawn by £275.              +£900
• Your wages of £900 were paid into your account.           £625

• Therefore you would be charged £3.74 interest for the   Interest charge
first month.                                              - £3.74
• The balance minus interest charges after one month
would be:                                                 £621.26




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                        Overdraft example 3


   How much would the charges be if you remained overdrawn by £275
   for 6 months?


   Answer


   £275 x 1.36% = £3.74 x 6 = £22.44


   assuming no other transactions were made on this account.




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                Charges for exceeding an overdraft limit



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




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                                Student Loans
Student loans are a simple way to pay for university fees, living costs and
any equipment you might need for the course, such as books.


It is provided by the Government and through the Student Loans
Company.


A student loan differs from a normal loan in many ways.
Firstly, if you are using the loan to pay for tuition fees, it will go directly to
the university, rather than you having to deal with it.
Secondly, the interest rates are much lower than other loans.
Thirdly, students are given much longer to pay back their loans. For most
cases loans will not have to be paid back until you are earning more than
£21,000 (as of 1st September 2012).



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                            Student Loans 2
All students are eligible for tuition loans and maintenance loans. The tuition
loan amount depends on the type of course and the university. The
maintenance loan amount is dependent upon where you are studying.
Some students may also be eligible for maintenance grants; however
these are dependent on the annual family income.

If things get really tough, money wise, there are other options.

There is the National Scholarship Programme that helps students with
family income of less than £25,000.

Also some Universities have their own bursaries or funds that can be
applied for.

To apply for student loans, visit either Directgov or the Student Loan
Company.


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                                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 that shows:
• each item of spending
• the total balance
• the interest charged
• the minimum amount you can repay this month, usually 5 per cent of the
total balance.




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                            Credit card statement 1




This is a credit card statement from a
high street lender. Most statements
are sent out monthly.
    22 / 51   Borrowing
                       Credit card statement 2

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




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                         Credit card statement 3




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
• payment protection insurance = £1
• interest on the balance = £2.42.
So: £177.74 - £50 = £127.74 + £3.42 charges this month = £131.16 left to pay

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                       Paying off the current balance
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 a jacket for £50 on 12 March
• you receive your credit card statement on 20 March and the balance
shows £50
• the minimum payment is £5 to reach your account by 2 April
• you pay £50 on 29 March
• no interest charge
• balance now zero.
If you paid only the minimum amount of £5 you would incur interest charges
on the remaining £45. If the interest rate is 1.36% (per cent) per month how
much would your total balance be next month?

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                                    Answer



               £45 x 1.36% = £0.61 interest. Total balance = £45.61




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                      Current balance example


In this example if you continued to pay only the minimum amount of £5
each month how long would it take to pay for the jacket priced £50?




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                               Answer


It would take 10 months to pay off the balance and you would be charged
£3.33 total interest.


Total cost £53.33




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                             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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                              Credit 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.

• Repayments are made in instalments.

• You are the legal owner of the goods as soon as the contract is made and the
goods cannot be returned if you change your mind.

• 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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                               Interest free credit


This is potentially a good way to purchase goods though it is not often
available.
You don’t 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 ‘nine months
interest free option’ is offered which is very different from ‘interest free credit’.




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                         Interest free credit offer


Here is an example of an interest free credit offer from one high street
electrical retailer:

                 Buy Now Pay 2006 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 £1,270.23.
 29.5% typical APR. Interest calculated from date of agreement.




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                      Example from a catalogue retail store


Here is an example from a catalogue retail store:

Spend £195 on a 6 month Buy Now Pay Later agreement on your Store
Card. Pay nothing for 6 months (although you can if you wish) and then
settle the cash price at that point.
Total payable £195.
Or choose to spread the cost over a longer period, paying a minimum 3%
or £2 each month (whichever is the greater) and if you only ever pay the
minimum the total payable would be £524.36 (25.9% APR).
Includes deferred interest from the Buy Now Pay Later period.




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    As you can see from these examples 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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                               Store cards

Store cards are the cards that many major retailers offer their customers
as a convenient way of buying goods in their stores, often with incentives
attached such as special discounts and privileges.

A store card generally:

• is considered as another payment method amongst others such as cash
or credit cards
• has a lower credit limit than a credit card
• can be used only at the issuing retailer store.

Store cards 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.

When considering a store card, you need to weigh up the costs and
benefits in the same way as you would for other forms of credit.



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                               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?
• Discounts sound tempting but only if you pay off the full balance.
• 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, interest free period, penalties for default
and late payment.
• If payment protection insurance is offered is it worth having? Read the terms and
conditions.
• Beware of persistent shop assistants who try to persuade you to sign up for a
card.
• Don’t be rushed into it. If in doubt take the paperwork home and read it before
signing anything.



    36 / 51   Borrowing
                                 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 overdrawn   Yes if balance not    Yes if balance not
                                             paid in full each     paid in full each
                                             month                 month
   37 / 51   Borrowing
                               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 doesn’t have to sell the repossessed goods to reduce your debt.




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                                Hire purchase


        Advantages               Disadvantages                 Conclusion

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



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                               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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                        Mail Order catalogue goods on credit



       Advantages                Disadvantages              Conclusion
Small weekly                 Catalogues may be        Compare with prices in
repayments.                  more expensive.          shops before buying,
It might be easier to get
catalogue credit than        Can be higher interest   Compare interest rates
from other lenders.          rates.                   with other forms of
                                                      borrowing before buying.
Only borrow the price of
goods you buy.




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                              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.




  42 / 51   Borrowing
                                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 cent per month.




   43 / 51   Borrowing
                                 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.




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                              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 get behind with payments a loan shark may threaten you.
• This is illegal and, 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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                           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
don’t make payments on time.
• Consolidation loans are usually secured against your home and therefore
are only available to homeowners.
• 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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                                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, building societies and 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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                      Consequences of borrowing
 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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                              Getting into debt
• 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 is just bad luck and 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.
For more information visit:
Your local Citizens Advice Bureau www.citizensadvice.org.uk
Direct Debtline telephone 01323 635999 www.directdebtline.com
National Debtline telephone 0808 808 4000 www.nationaldebtline.co.uk
Financial Services Authority www.fsa.gov.uk



49 / 51   Borrowing
                               Activity 1
‘How would you like to pay?’
Consider the advantages and disadvantages of different ways of paying for
items. Which would you prefer?
The following items have various payment options:

            ITEM and PRICE                      Payment options
New clothes: £150                     Save up: time taken 3 months
                                      Store Card: 6% APR
                                      Credit Card: 1.5% interest monthly
A laptop computer: £500               Save up: time taken 6 months
                                      Interest Free Credit 6 months: 29.3%
                                      interest thereafter
                                      Credit Card: 1.5% interest monthly
A second hand car: £1000              Save up: time taken 1 year
                                      Hire Purchase:12 months at 2.8%
                                      interest monthly
                                      Credit Card: 1.5 % interest monthly
  50 / 51   Borrowing
                                Activity 2
A new games console is released in a week’s time at £150. Although you
want one you decide to save up to buy it. You save £10 a week so it will take
you 15 weeks until you can afford it.
Your friend decides to buy one today with a credit card. He pays 18 per cent
APR and pays £40 a month. In four months time he has paid £150 plus £5.57
interest a total of £155.75.
After three months you see the price has come down to £125.
You buy the games console at that price.
Who gets the better deal?




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                      Borrowing
                         End




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