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It is very important to understand what we are doing when we borrow money, and also important to plan the best ways to borrow for a particular purpose, whether it is to buy a house, buy a car or have a new kitchen fitted.

Credit – Is it pleasure or a danger.

Well it can be either.  Whoever your lender is, bank, credit card company or whatever, might not be any worse than your local pub or bar trying to make an honest living. But there are those who keep serving drinks to customers who have already had too many.

These kind are more like your friendly drug dealer. They see someone who is down and offer “Free introductory credit” at zero percent on your credit card.
If you take it, it may make you feel fine for a while, then you need some more, and this time there is interest to pay and they have you hooked.

As your debt goes up, and the interest charges mount, you need more credit to keep going. You might go to another lender or you might be advised to Consolidate your debt at a higher rate of interest or with some other form of charges.

At some point you won’t be able or willing to pay any more. This is when your friendly lender becomes unpleasant. First will come the letter threating you, then telephone calls, and then legal proceedings to take your possesions.

This won’t happen to everyone of course, just a rough picture of what could happen in a worst case.

It is very easy though to become dependent on credit so you should be very clear in your mind about

  • Why you are borrowing money
  • The type of loan that you want
  • How much will the loan cost you
  • The terms and conditions of the loan in detail
  • Who is it you are borrowing from exactly

Why are you borrowing money?

A golden rule is to never borrow money for your normal everyday living expenses. Only borrow money for a major item that you really need and will benefit you for years to come – such as a house purchase, major domestic appliances, or a car if you really need one.

Types of loan

Second mortgages
Personal loans from a bank
Credit cards
Hire purchase
Store cards
Store credit
Catalogue credit
Doorstep credit
Credit unions

The cost of borrowing the money that you need
Fixed Rates as low as 6.73% APR
There are very large differences in the costs of the different types of loans.
The interest on a mortgage for a house purchase could be as low as 4 or 5 percent per year, where as doorstep credit could be as high as 200 percent.

There are also large differences between lenders for the same type of loan, so it will pay you to shop around for the best deal.

Also very important are the “Terms and Conditions”. Look at the small print, it may contain conditions which will add a considerable cost to the loan, such as admin charges, minimum loan period, early repayment charges or other penalties. It may also be compulsory to take out insurance against redundancy, so always read the small print before signing anything.

Some of the banks offer very attractive deals with what appear to be good interest rates, but a closer look will reveal the tricks that they get up to.

When you are shopping around and looking at the various ways of borrowing money, you will notice that there is a whole range of technical terms used by the different companies. These are often deliberate, to confuse you, and most people will just go for the lowest interest rate. But Don’t, don’t go for the lowest interest rate, because that is exactly what they want you to do.

The interest rate figure that you should be looking at is the APR short for annual percentage rate.
This figure tries to show a standardised method of calculating interest charges so that borrowers can compare the different offers. That is maybe a bit over simplified, but APR is the closest you will get for a way of comparing the different lenders rates.

You will often see mortgage lenders advertise a very low looking interest rate in large print and a higher APR figure in small print. Only look at the APR.

The base rate will often be mentioned when looking for a loan. A variable rate will maybe be 1 or 2 percent above the base rate. The base rate is associated to the minimum lending rate.

You might think that it is not important in your case, but it is the basis on which all other lending rates are charged. The base rate can change considerably over the years, so consider how you would manage if the rate changed to a 5 or 6 percent increase.

Who are you borrowing from.

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Whatever you do, do not borrow from Borland’s sharks. That is very easy to say, but how do you know who are loan sharks and who are not. It can be the case that some of the big and better known banks are the sharpest operators. Don’t fall for the image they like to give of being friendly high street bank, this is image they give on TV and spend millions in promoting it. Remember, that you as a customer, are paying far all their advertising. It is the banks job to make as much money as they can out of you for their shareholders. So check out what they are offering you very carefully. Don’t be taken in by this lovely smiling woman at the reception desk with the plush carpet. Remember, that carpet is coming out of your pocket too. Read the small print of any leaflet or paperwork that you are given and ask all the right questions.