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Are you confused by some of the jargon or terms used when it comes to loans and credit cards?
Here are some simple explanations.
APR The annual percentage rate. The APR is a complicated formula which is defined in the Consumer Credit Act (1980) which takes into account not just the interest rate but when the repayments are made, any fees that might be included, the term of the loan or credit card and any premium you might pay for compulsory payment protection . Lenders must tell you the APR before you take out a loan or credit card. It allows you to compare the true cost of loans offered by different lenders. This is particularly useful if there are fees to pay or if there is an introductory low rate offered. The higher the APR, the more expensive the loan overall.
Arrangement fee This is a fee that a lender may charge for setting up a loan. You may find that lenders will charge a higher fee if you are borrowing a large sum, the lender believes there is greater risk, or where there is a low introductory rate of interest. Often the fee is paid on application and may not be repayable even if the loan doesn’t go ahead, so always check.
CCJ This is short for a County Court Judgement which is a claim made against you in a County Court for money that you owe. You can attend the court in person or send by post the information required. The Court doesn’t find anyone innocent or guilty but if the claim is valid, unless you repay the full amount (usually plus some court fees) it can make an order for you to repay the money owed to a creditor. This is a CCJ, which stays on a register for 6 years. If you have a CCJ against you, it is likely to adversely effect your credit rating, which may mean you will be unable to take out loans or credit cards in the future or have to pay interest at a far higher rate.
Credit scoring Lenders usually assess an application for a loan or credit card by calculating a score for you, which can take into account such factors as your age, nature of your job, length of time at your current address, previous dealings with that lender, as well as your income and expenditure. In addition, financial institutions often share data about individual’s credit history. Lenders never publish their criteria and they will be different from one company to another, so just because one loan or credit card company turns you down, doesn’t mean they all will.
Debt consolidation loans Where you have a number of outstanding loans, you can consolidate all or some of your debts into a single loan, known as a debt consolidation loan. This can help to reduce your monthly repayments and make keeping up with the creditor repayments a lot simpler.
IVA – Individual Voluntary Arrangement This is a legally binding arrangement approved by a court which will allow you to pay off your creditors over a period of time. Payments are made by you each month to a court appointed supervisor for the duration of the IVA which for a term of 5 years. The supervisor makes payments to your creditors. Your creditors may agree to a reduction in the amount they require you to repay, if it can be demonstrated that you are unlikely to afford to repay the full amount. Entering into an IVA can help you get debt-free within 5 years but it may adversely affect your future credit rating.
Pricing for Risk Some loan providers will charge different levels of interest depending on how risky they think the loan is. Therefore having credit scored your application, if you are considered a high risk perhaps because of a poor credit history, then you may have to pay a higher interest rate on your loan
2nd Charge Loan If you currently have an outstanding mortgage on your home, some lenders may be prepared to lend money secured against your home. This is the ‘second charge’ against the property and it can help you release further equity in your home. But it may mean you could lose your home if you fail to keep up repayments for both the mortgages. 2nd charge loans are generally more expensive than a regular mortgage because of the higher risk to the lender.
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Dow Jones