There are two main forms of credit – borrowing money, or borrowing goods.
You can borrow money from a range of places, including banks, building societies, credit unions, shops or catalogues, payday lenders, pawn shops, borrowing from friends and family, or loan sharks.
In almost every case, it will cost you to borrow money. It is important to understand the basics of these costs, so that you can understand fully the different options you have. You need to understand that when you take on credit, you are in effect, taking on a debt.
The most common way that the cost of credit is expressed is as ‘APR’. APR stands for Annual Percentage Rate, and shows how much your borrowing would cost over the course of a year. (It includes any ‘upfront’ fees charged by the lender).
Two main things affect how much credit costs overall – the length of time you borrow the money for, and the ‘APR’. The longer you have the credit for, usually, the more it costs. The higher the APR, the higher the cost of borrowing the money is.
When you see APR mentioned in adverts, it is usually the ‘typical’ APR that the lender charges people, and you may be offered a different rate. Lenders must offer the ‘typical’ rate to the majority of their customers, but not everyone – it is dependent on your circumstances and credit score – so it might look like a good rate in the advert but you need to check what rate you would get.
It can be confusing trying to work out how much credit will cost you, as you can get credit over different periods. Any reputable lender will show you upfront how much you will pay back overall.
Before you take out any form of credit, it is important to be sure that you can afford the repayments, and that you know what will happen if you miss payments.
Credit usually costs more if:
- You take it out over a long period
- You take it out with a high APR.
Goods on credit
Goods on credit (or hire purchase) are things that you get but don’t pay for straight away, or don’t pay for all in one go.
This includes cars on lease, home goods from places like Brighthouse, catalogues like Littlewoods, and ‘buy now pay later’ items of furniture.
You can think of it as the equivalent of borrowing money to buy the item – you are paying to borrow the money.
It’s important to remember with goods on ‘buy now pay later’ and ‘hire purchase’ – the company own it until you pay it off. What is the interest rate once the free period is over?
Again, with goods on credit, because you are paying back over a long period in some cases, make sure you know how much the final amount payable will be. When you look at this, if it makes you think twice, consider other ways of getting hold of it – do you really need it right now? Can you save for a bit and buy it outright for cheaper?