Confused By Credit?
Sometimes it seems like you need a University degree in math’s to understand the terms used in the adverts on the television for homeowner loans, credit cards, car loans and mortgages. The lenders use terms like APR, final payment, minimum payment, monthly instalments, credit rating, secured, deposit, fixed and variable as if we’re all supposed to be completely familiar with what they mean. However, sadly it’s all not that simple and unless you truly understand what you are signing up to, you could get yourself into financial hot water.
APR
APR stands for annual percentage rate. It is complex and difficult to calculate, but most people will not need to bother to do the calculations themselves. For the man on the street, all that you need to know is that the lower the APR number, the lower the interest you will be paying. Bank loans or homeowner loans typically have interest rates of around 15%, store cards and credit cards are higher at 30% and some of the very short term payday loans have interest rates running into the many thousands of percent as they are not designed to be used over the whole year.
Secured
This term doesn’t really apply to anything other than loans. The two main types of loans are secured, and unsecured. A secured loan is something like a mortgage or home owner loan where you have to use some asset as a guarantee for the lender. If you don’t make your payments, the lender has the right to come in and take your home to sell it and get their money back. Secured loans are generally cheaper than unsecured loans, but are not open to everyone as you obviously can’t get a home owner loan if you do not own a home.
Variable Rate
It is important to be crystal clear about your interest rate whatever the sort of credit you are signing up to. Many loans on the market offer fixed interest rates, so if the loan is for 3 years and the rate is 10%, you will pay the same interest throughout the period of the loan. If the rate is stated as variable, that means if the interest rate goes up, your repayments go up too. With interest rates at an all-time low, experts agree that they are bound to rise at some point in the near future. Therefore be very cautious when signing up to a loan or other credit agreement on a variable rate basis.
Monthly Installments
An instalment is just another name for the payment you make each month or week to pay off the debt. Usually the loan agreement will specify how much you have to pay and on what day of the month the payments will be taken. Some credit agreements will allow you to make extra payments and pay off the loan quicker, others will not.
Deposit
Deposits really only come into play when you are buying a house and taking out a mortgage. In the days before the credit crunch, homeowners only had to find between 5% and 10% of the purchase price of the house as a deposit, but now deposits of 30% to 40% are the norm. Having the purchasers provide a large deposit lessens the risk for a lender. For people thinking of taking out a home owner loan, lenders will expect them to have equity in the property which is more than the amount being borrowed. For example, if a property is worth £200k and the mortgage is £150k, the owners will not be able to borrow any more than £50k.
Minimum Payment
If you have a credit card or store card, the amount you pay every month will vary according to how much you’ve spent in the store. The minimum payment on your bill will be £5 or 3%, whichever is greater. It is never a good idea just to keep making the minimum payments on your store cards and credit cards as the interest will just keep building up and you will never pay off the debt. If you can’t afford to clear the whole balance, make a payment of as much as you can afford and make a point of not using the card until the balance is under control again.
