Useful Tips - Bank loans
This month’s useful tips page concentrates
on bank loans and the different types of variations
available to you, the customer.
If you want to borrow money to buy something expensive
that you cannot afford out of your monthly income,
then a loan from the bank can be the best way to get
it. Bank loans tend to be over a fixed period from
one to five years. Over that time you pay a fixed
amount each month, and at the end the debt is paid
off. If you repay the loan early you can get hit with
penalties, so they are inflexible. The rate of interest
is fixed, however, so you know how much it will cost
you.
Alternatively you can pursue a credit card. They
allow for far greater flexibility in how much money
you borrow from the financial provider. Credit cards
are restricted to an agreed credit limit, but making
repayments each month can vary to how much you wish
to pay back above the minimum requirement.
There is also an overdraft that comes with the typical
current account offered by banks. At some point most
of us let our current account slip into an overdraft,
whether intentional or not, but it nevertheless happens.
They are usually not a cheap way to borrow for more
than a few days through an overdraft. It is certainly
never wise to do so if you do not have an agreement
to go overdrawn; the rate charged then will be usurious.
We recommend that you never borrow money to buy something
for longer than it will last; so don’t take
out a two-year bank loan to pay for an annual holiday.
Never take out repayment insurance either as it can
double the cost of the interest on the loan. In many
cases it will not pay out even if you lose your job
and find you cannot meet the repayments. It is almost
always a waste of precious income.
Bank loans vary greatly in their costs. Your own
bank will seldom be the cheapest place to borrow money.
If you have Internet access, you can borrow money
at less than 6 per cent; on the high street you can
pay double that easily. This is why you should not
underestimate the importance of the Annual Percentage
Rate (APR) on bank loans and credit cards.
The APR is supposed to be a standard way of calculating
the interest charged on a loan so that you make fair
comparisons. However, banks and other lenders have
made such comparisons almost impossible by finding
ways to bend the rules. The Consumers’ Association
has calculated that there are now ten different ways
used by card providers to work out the monthly repayment
on a credit card. It claims that a single purchase
of £300 on a card that charges interest at an
APR of 18.9 per cent can lead to a monthly charge
for interest ranging from £5.50 to £9.54.
The Government is currently looking at APR and how
it is worked out. Meanwhile all credit card providers
have agreed to produce a single ‘summary box’
in plain English and in a common format that shows
the main terms of their cards.
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