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Guide to Types of Credit Available

Mortgages

What happens here is that you borrow against the equity in your home and your repayments are added to the amount you are already paying on the property.

The advantage is that interest rates will be among the lowest you can find and, because they are spread over such a long period, the monthly payment will seem small.

At the same time, because the repayment period is so long, the actual amount of interest that has to be paid may still be high. You will not be free of that debt for a long time. And if you fail to make payments, you could lose your home.

Hire purchase

This is a commonly recognised way of buying a car (and also computers and other electrical goods) and is quite often offered by the dealer at the point of purchase.

You pay a deposit and then agree to make a fixed number of monthly payments to a credit provider. At the end of that period, the item is yours.

This last point is important: the item will only belong to you when every penny is paid off. Before then it is only “hired” by you. Miss a payment, even the last one, and the item can be repossessed.

HP can also be quite expensive: a typical rate on offer may be up to one or two per cent dearer than most loans – although sometimes a sweetener may be on offer from some car dealers. If so, this is usually funded by the car manufacturer and applies only to its – new – cars.

With-profits endowment loans

These are a little-known feature of many endowment policies, investments made by mortgage borrowers in order to pay off their homes.

Some endowment insurers are willing to lend you a proportion, usually up to 30 per cent, of the guaranteed sum you have built up since you started saving with them.

Interest, usually set at a lower rate than many overdrafts, is charged on what you owe.

If you don’t pay back the loan, your final maturity payout is reduced by the sum borrowed, plus the added interest in the period you borrowed the money for.

The advantage can be that of freeing up money you couldn’t otherwise get hold of. The disadvantage is that you may end up with less than you need to pay off a mortgage when the time comes.

Each of these methods can be valid for borrowers at certain times. The danger for many is that may end up being propelled down one route either because they have not researched the market properly or because they are so desperate for credit that they take whatever deal is on offer without thinking the consequences through.


More pages

Page 1: Introduction
Page 2: Mortgages

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