Topic 6 - Borrowing Products

Cost of Borrowing

• Consumer Credit Directive 2008 requires providers to quote an APR on adverts for borrowing products allowing people to compare the relative costs of different products.

• Providers must provide a representative example which is defined as the APR that 51% of people are expected to be offered for applying for the product after seeing the advert. This means that up to 49% of applicants are likely to receive higher APR based on personal circumstances.

Overdrafts

• An overdraft enables people to borrow from their current account provider by withdrawing more money than what they have paid in.

• Designed for current account holders to use for a few days or a few weeks time.

• Enables account holder to bridge the time difference between making a payment and receiving enough income to cover it.

• Costs of an authorised overdraft (planned) can vary from 0 to 40% APR.

• Overdraft borrowing that isn’t authorised charges much higher rates but since April, this is no longer allowed.

• All APRs are variable

• Interest rates offered to account holders for agreed overdrafts depend on personal circumstances and credit history of the borrower.

Paying with a credit card

• Accepted by most sellers not all - these sellers are called merchants.

• The cardholder pays with the card and the merchant accepts the payment. Then, the merchant sends transaction details to the Merchant’s bank (acquirer) and the acquirer pays the transaction. The acquirer will send the transaction details to the Cardholder’s Bank (Issuer) and the issuer pays acquirer and sends a statement to the Cardholder.

Different types of credit card

• Low APR - Available only for those with a certain level of income or good history of repaying.

• 0% introductory APR + Handling fee on balance transfers - Cardholders transferring from one credit card to another.

• Cashback cards - Gives the cardholder money back as a percentage of all transactions made on the card as cash.

• Reward cards - Offer rewards schemes e.g. points that can be used for discounts.

• Charity donation cards - used to donate to a particular charity.

• First credit cards - higher APR and lower credit limit. Issuer won’t know how well new borrowers will manage their money yet.

• Cards with low costs for foreign transactions - some issuers charge a foreign transaction fee for using card abroad.

• Gold, platinum and black credit cards - offered to those with higher incomes, has higher credit limits.

Credit card costs

• The costs are the APR and any fees that apply.

• Issuer will offer the individual a specific APR and credit limit when applying - based on their personal financial circumstances.

• May have different APR for different purchases (e.g. withdrawing money may have a higher APR)

Store Cards

• Can only be used in their own stores

• Not part of Visa or Mastercard payment systems

• APR on these tend to be higher

• May have fee gifts/offers

Charge Cards

• Must be repaid in full every month.

• No interest charged as money cannot be paid beyond the interest-free period.

• Issuer may charge fees, e.g. service fees.

Personal loads

Allows people to pay for expensive items now and spread the repayment cost over years. (e.g. home improvements, car)

Payday loads

• Short term, high-cost credit designed to help a person meet their commitments until their next payday.

• Provides same day access to funds - sometimes within 30 mins which is useful for those who feel like there is no other option.

• Relatively small amounts (usually 100s)

• Extremely high interest rates and can cause serious debt - in 2014, they introduced the total cost cap of 100% meaning the borrow will not have to pay more than twice the amount they borrowed.

• They should think about other viable options for e.g. savings or selling unwanted items.

Credit History

• When applying to borrow money, their credit history is checked which is the record of borrowing and repaying money.

• Agencies such s Experian, Equifax and TransUnion record the credits people have applied for and the amount they have borrowed in the last six years. It also keeps a record of how often late payments were made.

• Providers use this to decide whether or not to lend money and on what terms.

Choosing Products

These should be considered:

• How much do they need?

• What can they afford to repay?

• When do they plan to repay?

• Different borrowing options

• What are the other consequences of borrowing?