Freedom Finance Guide to Borrowing

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Ever wondered what APR means? Do you know what a credit footprint is? How do you improve your credit score? What are your best chances of getting a loan, mortgage or a credit card? Download this step by step guide to borrowing and find your answers here.

Of course the team at Freedom Finance are here to answer any other queries you may have. Call us on 0800 432 0142 or visit www.freedomfinance.co.uk!

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Freedom Finance Guide to Borrowing

  1. 1.  FINDING YOUR WAY AROUND BORROWING
  2. 2. Welcome to the Freedom Finance Guide to Borrowing e-book. The one stop shop for all your borrowing queries! Our aim at Freedom Finance is to present our customers, and anyone else interested, with lots of the financial information needed to make an educated decision about borrowing. Today’s market place is filled with conflicting, jargon-fueled ideas about which way to turn. Many of these seemingly attractive deals apply only to those with outstanding credit history and in reality; the best deal on offer might not be available to you. With this guide Freedom Finance wants to present you with all the options. This e-book, in conjunction with our website www.freedomfinance.co.uk, is a collection of all our easy to follow financial guides to borrowing, complete with a jargon busting glossary. With this booklet and our soft credit search, borrowing options have never been so accessible!
  3. 3. “Everything you wanted to know about loans and finance, but were afraid to ask!” If you still have questions: Call us on: 0800 432 0142 or from a mobile on: 0161 498 7727 (Monday to Friday 8am–9pm, Saturday 8am to 6pm) or Email us at: support@freedomfinance.co.uk This way Please Before you get into the detail, first read our useful ‘financial jargon glossary’, then take a look at the ‘tips to improve your credit rating’ to get you in to the best financial shape! Topics Page Financial jargon glossary 04 Tips to improve your credit rating 06 Balance transfers 08 Borrowing small amounts 10 Choosing a secured loan 12 Information about mortgages 14 Loan application checklist 16 Borrowing with a poor credit history 18 Things to look out for 20 Managing financial difficulties 22 Mortgages v credit cards v loans v overdrafts 24 Shopping for loans online 28 Rejections through bad credit 30 The cost of having bad credit 32
  4. 4. Do you feel intimidated by the financial jargon thrown at you? Scared to ask what the words (that will affect your borrowing) actually mean? Look no further than this financial glossary for all the terms you will need when considering a loan. You’ll perhaps recognise the words and abbreviations without fully understanding what they mean. APR This stands for Annual Percentage Rate and is used to show the total cost of borrowing over a yearly period. This total is inclusive of costs of borrowing such as upfront fees and interest rates. This figure facilitates comparisons across lenders. CCJ This stands for County Court Judgement and is issued by a County Court in response to a failure to repay a debt. It adversely affects your credit rating as it shows you to be a less reliable borrower. As a result, future borrowing may be affected. Consolidation loan These loans are taken out by borrowers who have existing debt. This existing debt is repaid with the larger ‘consolidation’ loan, which means that there is just one repayment to make each month. This enables borrowers to better manage their finances. If the interest rate is favourable, it could mean that less money is repaid each month than the sum of the separate loans. Credit card Your lender issues this card so that you can make purchases on credit. The credit must then be repaid at the rate the lender specifies on a monthly basis. A minimum payment must be made each month and ideally should be paid in full. 01/ A glossary of financial jargon 4
  5. 5. Credit footprint A credit footprint is the mark left on your credit report as a record of your application for credit. This ‘footprint’ shows the date of the credit check, the name of the lender to whom you applied, and the type of credit requested. It does not show whether or not the application was accepted. Credit rating This is a score to measure your creditworthiness based on your previous credit history. If your credit report shows that you have always repaid borrowing on time then your rating will be good, if it shows missed or late repayments, or that you have received a CCJ, your rating will be poor. Defaults A default notice is issued usually after 3-6 months of missed payments. A default notice is a formal letter that if not rectified (arrears paid) will result in a default being registered on your credit history. This has a negative impact on your credit rating and makes future borrowing difficult Early repayment charge This charge is incurred when a borrower chooses to pay off the loan or mortgage, before the agreed term length has expired to cover the lender’s costs. Always check with the lender what these charges are if you think you may want to pay the loan back early. Eligibility criteria This is the list of requirements and/or exclusions that will determine whether or not a potential borrower is suitable for a particular type of credit. Equity This is the difference between what an asset (i.e. your property) is worth and what is owed against that asset (i.e. your mortgage). Hire Purchase This method of borrowing is used on big-ticket purchases such as a fridge freezer or car. It means that you can take the product at the start and repay the monies owed each month over a set period. Mortgage This is a large loan that is given to those who wish to purchase a house but cannot afford to make the payment up front. The loan is secured against the property so that if the borrower fails to make the repayments the property could be repossessed. The lender would only do this as a last resort. Payday loan This is a short term borrowing of small amounts that must be repaid on the next payday. The interest rates are high because of the short period of time the loan is taken over Personal or unsecured loan A personal or unsecured loan means the lender relies on the borrower’s promise to pay it back. Due to the increased risk involved, interest rates for unsecured loans tend to be higher. Before you decide to take out this type of loan, check out the interest rates which are often fixed but can be variable. Remember, any loans are only as good as the interest rate. Typically, the balance of the loan is distributed evenly across a fixed number of payments; early repayment charges will be applied if the loan is paid off early. Unsecured loans are often more expensive and less flexible than secured loans, but suitable if you want a short term loan (one to five years). Repayment holiday This allows borrowers to postpone repayments for an agreed time. The cost of the missed repayments and the interest charged will then be spread across the remaining payment term following the holiday. Secured loan These types of loans are usually larger than personal loans so for security of repayment, lenders secure the loan against an asset, usually your house. Because of this risk to your home should repayments not be met, the lender may offer better interest rates. Secured loans are also usually available across a longer term. Store card Similar to a credit card, this allows the borrower to make purchases on credit to pay for at a later date but can only be used at a particular chain of shops.
  6. 6. Financial difficulty or mismanagement in the past may have damaged your credit rating, but this can be improved. This guide provides you with all the tips you will need to repair your credit rating for the future. 02/ Tips to improve your credit rating 6 The footprint free ‘soft search’ service This service is a great way to check whether your credit rating is good enough for you to be accepted for a loan without you taking any risks by making numerous applications that could affect your rating.
  7. 7. Take out a credit card Spend a little on the card every month making sure that it is repaid in FULL the next month. It is better for you to take out a few cards and keep the spending to significantly below the credit limit than maximising the amount on one single card. Potential lenders do not like to see current credit at the maximum limit. Show your stability Staying at the same job or address for a long period of time shows the lender that you are stable. Loyalty to one bank is also considered to be beneficial for your credit score for the same reason. Consider your financial links If your partner has a poor credit history, this may be linked to you through utility bills, bank accounts or your mortgage. To avoid this, try to separate your credit accounts and bills. Stay up to date Ensure that your credit reference file is up to date. This can be checked through credit reference agencies such as Equifax, Experian or Callcredit. Take out a phone contract Whether it is a landline or mobile phone, a telephone contract will help to boost your credit score so swap that pay as you go! Avoid a payment break Taking a payment holiday or any other pre-arranged payment break might affect your credit score, although it is advisable to talk to your creditor as soon as you begin to struggle making the repayments. Register on the electoral role Registering will establish your identity to lenders as well as demonstrating your stability, 3 years of voting history is a great way to boost your credit score. Keep applications to a minimum If you have been declined for credit, do not reapply straight away. Instead, check your credit reference file to see if something is on there that shouldn’t be. Next, use a soft search tool such as Freedom Finance.
  8. 8. A balance transfer is where all or part of your debt is transferred from one credit card to another one which benefits from a reduced interest rate. Here we look at the pro’s and con’s of balance transfer. Why do it? A balance transfer can be a great way to manage your credit. If you have spent on a particular credit card, and are paying a high interest on the balance, you can transfer it to a card that has 0% interest for a set period of time. If you can manage to repay this amount within the deal period, then you will not have to repay any interest at all. If the deal term passes, you will just pay interest on the remaining sum. So in effect, you have received an interest free loan. 03/ A guide to balance transfers 8 Freedom Finance offers a footprint free ‘soft search’ service that is put in place to protect your credit rating when searching for a loan. By entering your specific details you can obtain a personalised quote from the lenders that best suit your circumstances and all without leaving a footprint on your credit file. A reference mark is only left on your credit file after you select a product. This removes the risk of multiple rejections, which is damaging to the credit history you are looking to manage with a balance transfer.
  9. 9. The best deals are usually reserved for those with an excellent credit score. A minimum payment MUST be made each month. Failure to make a minimum payment can lead to penalty charges or a full interest charge. Don’t forget the transfer fee! Although the interest can be set at 0% for a time, there will be a fee, usually around 3% of the balance, to make the transfer. If 3% sounds too high, there are other cards available which offer a lower transfer fee but with a reduced 0% interest period. Don’t use your balance transfer card to make purchases! The rates for spending may be significantly higher than your original card. You will need to switch the balance within a couple of months of opening the balance transfer card to benefit from the advertised deal, so don’t delay! It’s not a good idea to keep switching the card balances, as this will be recorded on your credit score and may affect it badly. You can plan the repayment of the debt by transferring the balance to a 0% interest card and setting up a direct debit, which divides the remaining balance between the number of months that the 0% deal lasts. This means your debt can be fully repaid at 0% interest. You can’t balance transfer between the same banking group, so check who is affiliated before applying. For example, NatWest and RBS are members of the same banking corporation so they would not allow a balance transfer between the two companies. If you can’t fully repay the card at the end of the interest free period, you could try making one more switch. This will give you longer to repay the debt at the lower interest; otherwise the remaining debt will incur interest that is perhaps higher than what you were paying on the original card. If you want to clear the debt in one sum at the end of the interest free period then you can do so, but don’t forget to continue to pay the monthly minimum payments! Failure to do so will damage your credit rating, regardless of whether or not you clear the balance at a later date. If at the end of the interest free period you cannot afford to clear the remaining balance, it may be worth arranging a loan to cover the required amount. The loan may provide a cheaper alternative to paying the high interest rates on the card. It is advisable to close the card that the balance has been transferred from. This is because of the affect more access to credit will have on your credit score. Closing the card will also remove the temptation to use the card again.
  10. 10. Often a small amount of finance is all that’s required and you may want to avoid long term commitments. It is true that some small loan amounts come at a higher cost, but this section will look at the best options in obtaining small amounts of credit. It needn’t be an overly expensive exercise with just some simple tips. Increased overdraft If you are looking to borrow a small amount, it is wise to first contact the bank that holds your current account to request an overdraft facility. If granted, the fixed amount will be credited to your account and then repaid. If you are disciplined, the overdraft can be repaid fairly quickly. Overdraft interest rates are usually charged but there are offers of interest free arrangements so make an enquiry with your bank. Make sure you do not exceed the agreed overdraft limit, as this will incur an unarranged overdraft charge, and may damage your credit rating. Personal or unsecured loan A personal or unsecured loan is a small borrowing of a fixed amount, usually between £500 and £25,000. This is a great way of borrowing a small amount because it enables you to budget efficiently, as normally the monthly repayments stay the same. 04/ A guide to borrowing small amounts 10
  11. 11. 0% credit card If you need the credit for purchases, why not go for a credit card with an interest free period? Many deals offer interest free purchases for up to a year, so if you can repay the debt within this time then the cost of borrowing will be zero. Be aware of the interest rates following this period, they may be substantially higher than a card with no interest free offer. You may wish to balance transfer but this activity also shows on your credit rating, and should not be done often. Credit unions These are small organisations set up by their members offering savings and loans. There maybe one in your area you can join. Other ideas If you need to raise a small amount of cash, there may be alternatives to borrowing from the bank. Selling unwanted goods will raise some funds, or shopping around for improved deals on your car insurance or mobile phone may also save you money each month. Perhaps you could cancel luxuries such as gym memberships or nights out until the required amount of money has been raised. Don’t forget Most borrowing, however small, leaves a footprint on your credit rating so make sure that you never borrow more than you can afford to repay. While managing a small loan well can actually improve your credit, missing payments or having to extend the term can cause a fall in credit score. The Freedom Finance ‘soft search’ service which is put in place to protect your credit rating is perfect for finding out the best loan option for you. This innovative tool allows you to enter your specific details to obtain a personalised quote from a range of lenders. It means you can quickly find the best short term lending option without affecting your credit rating with lots of small applications.
  12. 12. Our current financial climate has made it very difficult to borrow money. Some people are finding it harder to get finance without any personal assets, and some banks prefer to lend to people who secure their loan against their property. These secured loans are also referred to as homeowner loans or second charge mortgages. What is a secured loan? This is a loan in which the debt is secured against collateral such as a house. This asset can then be taken by the lender should the debtor default on his repayments. What can I use secured loans for? As secured loans are available up to as much as £500,000, recipients often use this for home improvements for example, to build a conservatory or extension which should increase the value of your home. Secured loans may also be taken out to consolidate other debts and for larger purchases such as cars etc. However, you should not take out a secured loan on the basis that you can replace it later with a cheaper alternative. Long term loans are not designed and should not be used as bridging loans or to meet other short term needs. Will I be eligible for a secured loan if my credit rating is poor? With a secured loan, the bank is more likely to get the money back as if payments are missed; they have a charge on the house. 05/ A guide to choosing a secured loan 12
  13. 13. As a result of this, lenders are, on the whole, more likely to offer a secured rather than unsecured loan to customers with a poorer credit rating. Can I borrow a higher amount than I could with an unsecured loan? Yes. Unsecured lenders usually cap the borrowing at £25,000 but a secured loan may be taken for up to £500,000. Secured loans are typically offered with longer repayment periods (but as with all loans, longer repayment periods incur more interest). A secured loan may be taken for up to 30 years whereas a personal loan is usually taken out up to 7 years. Are the interest rates higher with a secured loan? They are variable across lenders subject to lender criteria and personal credit scores. The length and amount of the secured loan will also influence the rate, as well as the amount of equity in your home. Home equity is the difference between the current value of your home and the remaining mortgage left to pay. What are the disadvantages of secured loan? The primary risk of a secured loan is that your house may be repossessed if you fail to keep up with repayments. Because of this, you must check if the rates on your secured loan are variable or fixed. If the rates are variable, you must consider that they will change with lender criteria or the economic climate. Don’t forget to keep this in mind when setting your monthly budget! A further disadvantage is that you are likely to incur an Early Repayment Charge should you wish to pay the loan off early. Secured loans are not designed for short term borrowing so make sure you choose the best product for your circumstances. Are there similar alternatives to secured loans? Homeowners may wish to release some equity from their existing home by switching mortgages. For example, if your home is worth £400,000 with a mortgage of £300,000 you may wish to move lenders and obtain a mortgage for £340,000 to pay for home improvements. You might even save money by switching to a mortgage with a lower interest rate. Another option maybe a further advance from your existing mortgage provider so always contact them to see what they can offer before you shop around. Many people fall into the trap of believing because they have a home they will automatically qualify for the best rate possible. This can lead to multiple rejections from lenders. Don’t forget even secured loans are subject to conditions and just because you have a home doesn’t mean you will automatically qualify for a secured loan. Which is why it makes sense to use our soft search facility to find exactly the right loan for your circumstances without potentially damaging your credit rating.
  14. 14. Taking out a mortgage is a big step, and making the wrong decision about the most suitable type of mortgage can be a very expensive mistake. This information is designed to outline the range of mortgages available and the differences between them. Repayment mortgage As the name suggests, a repayment mortgage involves repaying both the capital (money borrowed) and the interest charged on the outstanding amount. This amount is typically more than the interest only alternative, but at the end of the repayment mortgage period, the debt will be fully repaid so there is no need to invest elsewhere. Interest only mortgage The monthly payments to an interest only mortgage covers only the interest and none of the capital. This means that the amount borrowed does not reduce. Because of this, money will need to be invested elsewhere so that the mortgage can be repaid at the end of the mortgage term. Although the monthly repayments are less than a repayment mortgage, the risk is higher as there is no guarantee that you will have sufficient capital to repay in full at the end of the term. Pension plan mortgage This investment mortgage is also tax efficient, but not flexible. The interest is paid to the lender each month and the loan itself is repaid at the end of the term from the tax-free lump sum that the pension provides 06/ Information about mortgages 14
  15. 15. on retirement. Because you cannot access your pension until you are 50, this type of mortgage cannot be repaid until then. Again there are no guarantees that the lump sum will be enough to cover the full amount of the loan at the end of the term. Buy to let mortgage This is a mortgage taken on a second property that you intend to rent out. The repayment method used for a buy to let mortgage can be either repayment or interest only. Lenders use the expected rental income and amount of deposit paid to calculate how much you can borrow. Second mortgage / further advance Homeowners who need a large amount of extra credit can apply for a second mortgage or further advance. It is a loan that is secured against your property in the same way as the primary mortgage. The difference is that your initial mortgage has priority over your home should payments be missed. The second mortgage would only be paid after a payment has been made to the first mortgage. Remember If you are unsure of your options it is always a good idea to seek financial advice.
  16. 16. 07/ 16 Deciding to take out credit for the first time is often a daunting task. With the amount of lenders, endless jargon and extensive deals on offer it can be difficult to know where to start. Here we give you a step by step guide to lead you through the process. Step 1 – check your credit score The first step in taking out credit is to check your credit rating. This is a score that measures your creditworthiness based on your previous credit history. If your credit rating is poor, you will be offered a less attractive deal as you will be deemed high risk to the lender. A credit report can be requested from Experian, Callcredit or Equifax. Most of these companies offer a free 30-day trial so you can check your credit rating for free providing that you cancel the subscription at the end of the trial period. Step 2 – check your eligibility Lenders may advertise attractive APRs that you may not qualify for. Check what the APR will be, based on your specific circumstances. You may also need to check if there are any prerequisites to your loan such as needing a loyalty card, or having a current account before qualifying for the best loan from a high street bank. This is where sites like Freedom Finance can be invaluable in assessing your suitability without you having to go to the trouble of actually making a full application. Loan application checklist
  17. 17. Step 3 – don’t over apply If turned down for credit, the tendency is to try again with another lender. This is possible, but bear in mind that each application will leave a footprint on your credit file which will affect your future creditworthiness. Do not apply for too many forms of credit at one time. Again the Freedom Finance soft search technology is the perfect solution to avoid this common problem. Step 4 – consider borrowing more Sometimes, the larger the loan, the lower the interest rate. For this reason it may be beneficial to take out slightly more than you need to benefit from a more favourable APR should it cross the higher threshold. Remember though, you will still need to repay the money so don’t borrow more than you can afford to pay back. Remember your circumstances may change during the term of the loan. Make sure you can afford the monthly repayments. If you are having difficulties always contact your lender Step 5 – consider other forms of credit If you are looking to borrow a small amount which you are planning to pay off quickly, then a credit card offering a 0% interest rate for a year may be cheaper than taking out a loan. Step 6 – research insurance There has been a lot of bad press about payment protection insurance recently, but it is not a bad product. It is an optional insurance, which covers your loan repayments in the event of accident, sickness or unemployment, and as long as you are unaffected by any exclusions of the policy (which should be explained to you) then it may be a useful cover. You should make that decision based on your own circumstances. There are other types of insurance available. If you are unsure you can always seek financial advice. Step 7 – don’t forget early repayment charges You may think that you are being conscientious paying your loan early, but you might be charged for doing so. If early repayment would be an option for you, check the terms before signing up to ensure there is no charge. The Freedom Finance footprint free soft search tool has been designed to help you avoid the potential pitfalls of finding the right loan for your circumstances. By simply inputting your details once, our search can provide tailored actual quotes rather than a simple rate table found on other comparison sites. The search results are returned without leaving a damaging footprint on your credit file, which is only marked once you choose a product.
  18. 18. If previous financial difficulties have left you with a poor credit rating, you may feel that you can no longer obtain credit. This guide will help to improve your chances of getting the right finance in the future, and enable you to start to rebuild your credit portfolio. How do I check my credit history? The first step in rebuilding your credit rating is to get hold of your credit reference file. This is the document that lenders refer to when deciding upon your suitability for a loan. Your credit report can be provided by one of 3 credit reference agencies, Equifax, Callcredit and Experian. Some offer a free 30-day trial for you to check your report. Will all lenders calculate the same credit score for me? No. Most lenders will refer to your personal credit report when deciding if you are a suitable candidate, but each use a different criteria to determine suitability. There is no such thing as a credit blacklist so if one lender turns you down, you may want to try with another. What will affect my credit score? Any missed payments on a loan or credit card will have a detrimental effect on a credit score as it implies that finances cannot be suitably managed. On the flip side, if you have had a lot of credit, but managed to pay everything on time then you will be a preferred 08/ Borrowing with a poor credit history 18
  19. 19. candidate to someone with no borrowing at all. Previous financial difficulty such as bankruptcy, IVA or CCJs will also damage your credit rating. Do not apply for too many loans at a time, as the rejections will affect your credit score. I have never borrowed before so why can’t I get a loan? Lenders assess your ability at handling credit when deciding on granting a loan, so if you have never had credit before, it is harder to determine how well you will be able to pay it back. How can I improve my credit rating? • A good way of building credit rating is to get a credit card and spend a little bit each month, making sure that it is repaid IN FULL the next month. This way you can prove that you are a responsible borrower. • Similarly, you may wish to take out a personal loan from a company who will lend to those with poor credit in order to rebuild your creditworthiness. Again, if you choose to do this, you MUST NOT default on repayments. • Another tip is to make sure you are registered on the electoral roll at your home address, and that your credit reference file is up to date. Keep your applications down to a minimum, as lenders will be cautious of those who have previously been refused credit. Citizens Advice or Step Change are available to offer free advice for those experiencing financial difficulty Freedom Finance offers a footprint free ‘soft search’ service, which is put in place to protect your credit rating going forward. If you’re credit history isn’t particularly good, a soft search approach to finding the right loan is essential to protect whatever credit status you already have.
  20. 20. The current economic climate has made it increasingly difficult for people to obtain loans and, as a result, they can become desperate for extra cash. Unfortunately, fraudsters prey on the vulnerability of these people and target them with the lure of an easy and accessible loan that really is too good to be true. Read on for our tips to protect yourself from loan fraud. TIP 1 If something sounds too good to be true, it usually is. If you are offered a loan no questions asked, then be wary. TIP 2 Some companies are taking upfront fees for credit brokerage services (loan arrangement). If you pay this fee to a credit broker you are entitled to a refund of this money (less £5) if a loan is not taken out within 6 months of the fee being charged or if you cancel your arrangement with the broker. The Citizens Advice Bureau has warned that these companies are often persuading consumers to give them their banking details. Consumers are then offered little or no service in return and are unable to get their money back. If this happens to you, complain to the company first, then if you do not get a satisfactory response you can complain to the Financial Ombudsman Service or your local Trading Standards. 09/ Things to look out for 20
  21. 21. TIP 3 Never give your personal details to anybody over the telephone that you were not expecting to speak to. If a company calls you, they should already have the details you supplied them with. Answering a few data protection questions to companies who already hold your details such as your name and date of birth is ok but never disclose your bank account number. TIP 4 Don’t pay the first ‘loan installment’ over the telephone. It is unlikely you will see this money again. Also, this provides the fraudster with your bank details, which they can reuse. Direct debits can be set up with legitimate lenders with the first and subsequent repayments being taken at agreed times of the month. TIP 5 Don’t be tempted by unusually long repayment terms. Although initially attractive, on closer inspection many people end up paying a lot more than they expected over such a long period. TIP 6 Do your research. There are so many loan companies out there so use the Internet to determine the best deal for you, check their credentials and check existing customer reviews. Call the number they provide to check that it exists and have a chat with the advisor about what they can offer for your particular circumstances. TIP 7 Don’t feel pressured into signing up. This is your debt, not the company’s, so don’t feel obliged to sign up to a loan you cannot afford. Simply take their advice and shop around for the most suitable agreement. By being smart about your choices, and aware of the fraudulent activity that can occur you will be better equipped to obtain the required loan. Freedom Finance’s footprint free ‘soft search’ service is professional and secure. Simply enter your specific details and receive a personalised quote from credible lenders. We present true and accurate results and look to reduce the chances of loan fraud within our industry.
  22. 22. It can be extremely stressful to run into financial difficulty and the ability to obtain further credit these days can be challenging. However daunting the prospect of debt can seem, it’s important to take control, re-evaluate and prioritise. Taking the time to reorder your finances can not only be the first step in getting out of debt, but can even save you money going forward. The following tips are designed to help those in financial difficulty by advising what to do next. 10/ Managing financial difficulties 22
  23. 23. TIP 1 – act now The stress of falling behind with repayments can lead to people ignoring the problem simply because they feel unable to cope with it. The longer that payments are missed, the higher the charges will become without the debt ever reducing. If you feel that debt is getting on top of you, act immediately. There are options available to you, but these options will reduce the longer your finances spiral out of control. TIP 2 – talk to your lender If you feel that you are struggling with your debt repayments, get in touch with each of your lenders straight away. Explain your situation and see if you can extend the term of the borrowing in order to reduce the monthly payments. Some borrowing comes with payment holiday options, and if you have been paying into an insurance policy, now is the time to set the insurance cover in motion should the reason for non payment be as a result of accident, sickness or unemployment. It may be that you can be accepted for a consolidation loan that you can use to repay your existing debts leaving you with one single, easy to manage debt per month. TIP 3 – make a budget, and stick to it Work out what you need to live on day to day with the priority being food and travel to work. Remember that non-repayment of secured debt can lead to repossession of the home or car so this too must be high on the priority list. Next outline your monthly bills and debts and measure them against the income. If possible, make cut backs by canceling luxuries like satellite TV or gym membership. TIP 4 – shop around If you have a mortgage, see if you can transfer it to a better deal. Can you sell your car, repay the finance and buy an older model outright? Shop around for car insurance deals; you may be paying above the odds simply because you haven’t searched elsewhere. Review your mobile phone contract. Can you negotiate a better deal? Do you need all those free minutes? By shopping around, a little saving here and there can mount up to a substantial monthly saving, which can in turn be used to pay off existing debt. TIP 5 – take advice Charities such as National Debtline and Step Change (formerly Consumer Credit Counselling Service) are available to offer free advice to those struggling with managing their debt. It may be that you need to enter into a plan that allows you to pay a single reduced monthly sum divided across your creditors. Although this will affect your credit rating, it will make a start in better managing your debt. Whatever the debt counsellor advises, talking to someone who can help may set your mind at ease as you will be given a path to lead you out of financial difficulty.
  24. 24. 11/ Mortgages v credit cards v loans v overdrafts Mortgages A mortgage is a high value loan that is taken out for the purpose of buying property. Mortgages are categorised into two basic types, repayment and interest only. As the name suggests, a repayment mortgage means that the borrower repays both the capital and the interest that the remaining balance has accrued, each month. At the end of the repayment mortgage term, which usually lasts between 25 and 30 years, the mortgage debt will be fully repaid. An interest only mortgage allows the borrower to simply repay the interest throughout the term on a monthly basis, but must find an alternative method of repaying the debt in full at the end of the term. A mortgage is a loan that is secured against your home, which means that your home is at risk of repossession should you fail to meet the agreed payments. Advantages % The primary advantage of taking out a mortgage is that it makes home ownership affordable. Rather than finding the huge amount of funding required to purchase a property, a mortgage allows you to make the purchase and then repay the debt over a lengthy term, in manageable installments. % A further advantage is that secured borrowing of such a high amount provides a lower interest rate than other types of borrowing. This is because the lender has the security of this valuable asset should the debt not be repaid. % Unlike standard loans, there are government led schemes such as Help to Buy, NewBuy and shared ownership that helps first time buyers to obtain this credit. 24 Disadvantages x The main disadvantage of taking out a mortgage is that your home is at risk should you not be able to make the repayments. x Some do not like the thought of carrying a huge debt for a long time. x Although the monthly repayments are affordable, the total amount repaid throughout the term as a whole is much more than the original loan amount. This is not due to high interest rates, but rather to the frequency of interest payments over a long period.
  25. 25. With such a variety of lending options available today, taking the first step to obtaining the credit can seem overwhelming. By looking at the advantages and disadvantages of the major credit types, you can approach the application process with the consideration and knowledge needed to make the right choice. Credit Cards A credit card is lending which allows the borrower to make purchases based on their pre-approved credit limit, the balance of which can be repaid each month along with the interest accrued. Advantages % A credit card is a great tool to use when making a big-ticket purchase, such as a holiday. Rather than having to part with a large amount of money, the credit card allows you to spread the repayments over a few months, making the purchase more affordable. % Credit cards are an efficient and secure way of making Internet purchases. They can be used around the world and are particularly good for travel. % A credit card offers protection against fraudulent activity so if your card is stolen, any money spent will be returned to you. However the claim cannot be made if the card provider finds that you have been negligent, so keep your PIN safe! % There are interest free credit cards available which effectively provide you with a free loan for a specified period. This is only beneficial if you pay off your balance in full at the end of the interest free period to avoid high interest charges. % Some credit cards offer incentives to borrowers such as cash back, air miles or loyalty points. These incentives mean that the card can be used to save money, but only if the balance if repaid in full ensuring that the value of the rewards is greater than the cost of the borrowing. Disadvantages x The problem of ‘buy now, pay later’ is that the debt is prolonged. Some credit cards have notoriously high interest rates in comparison to other loan types, so it is advisable to pay more than the minimum payment each month to avoid your debt spiralling out of control. x Remember that using your credit card to withdraw cash from an ATM can incur a fee. x If you are late with a repayment, or exceed your credit limit, then costly penalty fees are added to your bill. For this reason, it is imperative to keep track of your credit card spending.
  26. 26. Loans A loan is a type of borrowing that is repaid to the lender over an agreed period, inclusive of interest. This interest may be set at a fixed or variable rate. A loan can be unsecured (personal) or secured against an asset such as a house. There are various specialised loans tailored for big ticket purchases such as a wedding or car, those which can be taken out to consolidate existing debts into a more manageable repayment, or business loans to assist in the running of your company. Advantages % There are so many loan options available that you can seek the perfect deal for your individual circumstances. % A loan allows a large purchase to become affordable by spreading the costs. % A consolidation loan can help to manage your monthly budgeting and if paid correctly, can actually improve your credit score. 26 Disadvantages x Taking out a loan is a commitment, and a borrower is tied into the agreement regardless of illness or job losses. x If payments are missed, it can have a damaging effect on your credit rating, which may affect your chances of obtaining future credit. You may also face legal action, repossession of property or penalty charges. x Be aware that a charge is often incurred if the loan is repaid early.
  27. 27. Overdraft An overdraft is an extension of credit attached to your current account. The lender allows the customer to withdraw money up to the agreed overdraft limit even if the current account balance is at zero. This enables cheques to be cleared which would otherwise have bounced, as well as honouring direct debits. Advantages % An overdraft is easy to arrange, and can be set up quickly. % This type of borrowing is often cheaper than a loan because you only borrow what you need. % Interest is only charged on the value of the overdraft used, not the facility as a whole. % There are usually no early repayment charges. Disadvantages x An overdraft can only be arranged from the lender with whom you hold your current account. x The lender has the right to cancel the overdraft at any time. x If the overdraft limit is exceeded, a charge will be incurred. x The cost of this type of borrowing is difficult to monitor, as the interest rate applied is often variable. Freedom Finance’s footprint free ‘soft search’ service which allows potential borrowers to search for the best deal to suit their individual circumstances, without damaging their credit score in the process. A mark is only left on a credit file after a product is selected. This removes the risk of credit damaging multiple rejections. By using this search, all available credit options can be investigated footprint free, and the most suitable product can be found at an affordable rate.
  28. 28. More and more people are turning to online lenders for finance. But what are their advantages, and are online loans as trustworthy as we think? Here we look at some of the reasons why online applications for loans are so popular and likely to grow. You can keep an eye on the balance An advantage of an online loan is that it is easily accessible. The current balance can be easily checked and any changes to your details can be updated quickly and efficiently rather than having to visit a branch or speak with a call centre. Competitive pricing Due to the growing market for credit during the recession, more and more online lenders are appearing. This is great news for the consumer as these lenders must be competitive in their pricing to make them more appealing than their contemporaries. Easily comparable Many online comparison sites present tables displaying lenders’ representative interest rates that do not apply to all borrowers. One of the solutions to this is to use ‘soft search’ tools offered by the footprint free site Freedom Finance. This allows potential borrowers to seek the most suitable loan based on their individual circumstances, giving an actual quote rather than an impersonal rate table. The aim of this is to reduce rejections, which are harmful to your credit file as no footprint is left until a formal application is made. 12/ A guide to shopping for loans online 28
  29. 29. Privacy Your personal details can be input privately rather than having to discuss your circumstances in front of a room full of strangers. Also you may not feel comfortable divulging your personal circumstances to a bank manager, whereas the ‘faceless’ online lender takes away this problem. Online loans are not the best option for everybody and some disadvantages are outlined below. Difficulty in understanding online terms and conditions. Some customers value the explanation that a face-to-face loan consultation can provide and feel more confident in what is expected of them in terms of repayment and changes in circumstances. Some people prefer to ask specific questions, and the answers may not be available online. Online doesn’t give the opportunity to explain complicated finances. Individuals who have complicated financial portfolios may feel more confident discussing these matters with a financial advisor or personal banker rather than trying to fit within the parameters laid out by online application forms. Online advertised rates Online lenders will advertise rates that you may not qualify for. A face-to-face lender would give you the specific rate based on your circumstances so you wouldn’t feel you were missing out on a better deal. Preferential rates may be offered from your existing bank If you have been with the same bank for some time, it may be worth checking if you would qualify for preferential loan rates through being a loyal customer. Make sure you take advantage of the footprint free, soft search tool offered by Freedom Finance. This innovative service allows potential customers to enter their details just once, and in return be presented with actual quotes that have been tailored to the individual. The aim of this is to protect credit ratings by encouraging consumers to apply only to the loans for which they will be accepted.
  30. 30. Have you been rejected for loans? Are you worrying how to rebuild your credit status? This guide will offer you tips on what to do next. Why am I being rejected? There is no such thing as a credit ‘blacklist’ so don’t worry. The current economic climate has meant that lenders are far less likely to offer credit but that doesn’t mean there aren’t options available. What can I do next? If you have been rejected for credit do not continue to apply. Firstly, check your credit report (from Equifax, Callcredit or Experian) and check that it is correct. The problem is that if you continue to apply and are subsequently rejected for a loan within a short amount of time, your credit rating will be badly affected. As well as checking your credit report, it may be worth using a pre-application checklist, which will test your eligibility for the loan before it is applied for. This way you can determine whether the credit was rejected as a result of poor rating, or due to one off lender specific reasons. Can I use a card to rebuild my credit rating? You may wish to transfer the balance you already have onto a lower interest or interest free card using a balance transfer. This will lower your repayments to allow you to pay off the balance faster by chipping away at the loan, rather than the interest. Using a soft search tool will allow you to gauge your chances of obtaining the credit without the lenders seeing your application. This will have no impact on your creditworthiness and so will reduce your chances of being rejected in the future. 13/ Rejections through bad credit 30
  31. 31. If you find that the only loans you will be able to apply for come with massive interest rates, it may be wise to evaluate whether or not you really do need to borrow. There may be budgeting tools you can use to better manage your finances, or if you are still struggling there are free debt advice services available to help you. How can I rebuild my credit rating once I have been accepted? If you have been accepted for a credit card this can actually help to rebuild your score providing that the card is paid off in full, every month. Even if you do not need the card, its wise to spend a little on it each month then repay the amount fully. This will prove to future lenders that you are a worthy candidate for credit because you can manage your finances sufficiently well to repay debt in full every month. Be careful though, because often specialised ‘credit rebuilding’ cards come with high interest rates, which isn’t a problem if they are paid off in full, but can put you in a worse situation if it is not repaid. The best tip when obtaining credit is to only borrow what you can afford to pay back. Although it is tempting to request the highest level of credit available to you, by borrowing and repaying on time, your bad credit will become a thing of the past. Before making your next application, use the footprint free soft search tool available from Freedom Finance. This allows you to search for the best loan rates to suit your individual circumstances. The best rates available on standard rate tables offered by other comparison sites may not apply to you, which means that the chances of rejection are high. The soft search tool allows potential borrowers to determine the best rate without leaving a footprint on the credit file. A mark will only appear once a formal application has been made.
  32. 32. The cost of having bad credit can be damaging in many ways. Your credit score shows an endless list of lenders and service providers how much of a ‘risk’ you pose to them financially when it comes to lending you money or providing you with a product or service. In today’s economic climate there are no two ways about it; having bad credit will affect you and a low credit score can be damaging in many ways. For a start, having a bad credit rating might result in you not even being able to get a loan. Even if you can, the cost of borrowing is likely to be significantly higher than that offered to someone with a higher credit rating. Credit or loan applications rejected A bad credit rating will mean that in the eyes of those granting loans or credit, you may not be fit enough for them to take a risk with you financially. Remember that most organisations are profit-driven and your credit rating is their way of determining whether or not you fit the bill for making them money. A poor credit rating may see many applications for loans and credit rejected. Higher interest rates and higher insurance premiums A bad credit rating will mean that many lenders, creditors and insurers will charge you higher amounts for their products or services. Many insurance companies check your credit rating too. 14/ The cost of having bad credit 32
  33. 33. Difficulty purchasing many products In today’s world, a mobile phone contract is somewhat of a necessity to most. All mobile phone companies check your credit rating and a bad rating may mean that they don’t grant you their service which can hit you in the pocket when you‘re forced to pay more for a pay-as-you-go service. A bad credit rating will mean that you may find it difficult to take out a car loan or end up paying a high interest rate if you do manage to buy one. You may also find that organisations such as utility companies or telephone companies ask you to pay some kind of security deposit in order for you to begin receiving their services. Bad credit can impact your whole life It’s not just your finances that will take the hit as a result of you having bad credit. Landlords may check your credit when it comes to renting properties as this is their way of checking how reliable you are when it comes to paying rent. Imagine being turned down for a perfect property because of bad credit! Some jobs even require a good credit rating, too, such as those in the finance industry. Call us on: 0800 432 0142 or from a mobile on: 0161 498 7727 (Monday to Friday 8am -9pm, Saturday 8am to 6pm) Email us at: support@freedomfinance.co.uk
  34. 34. We hope that this guide has done its job, to inform its readers about the borrowing options available in the market place today. Now you have the knowledge about the different types of borrowing, don’t forget to visit our website www.freedomfinance.co.uk to make your loan application. We are proud to offer our customers the innovative ‘soft search’ option, which allows potential borrowers to check their loan eligibility without leaving a harmful mark on their credit score. So what are you waiting for?

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