‘Credit’ is a term given to a sum of money that is made available for an individual to borrow. This could be money that is borrowed and repaid over a very short space of time or a loan that is repaid over a period of months or years. Applying for credit can be useful in a wide range of situations. It may allow a large purchase to be made, such as a house or a car, where the borrower doesn’t have the up front funds available but could borrow the money from a bank or credit provider and pay it back through regular monthly instalments.
This is a short guide to applying for credit and the easiest ways to make sure that you borrow responsibly.
What kind of credit is available?
Credit comes in many forms. Credit cards are perhaps one of the most recognisable forms of credit. Credit cards allow you to pay for purchases up front and then repay the credit company at a later date. Credit cards normally require the borrower to commit to a minimum monthly repayment, which tends to cover the interest and a small amount of the balance owed. Borrowers can choose to pay off the entire balance anytime they wish. Because of this, many credit card customers struggle to pay back the amount borrowed in timely fashion.
Loans (like those offered through CashLady) are the recognisable form of consumer credit. Unlike credit cards, loan providers require borrowers to repay the loan (plus applicable interest) across a fixed period. The details of this agreement can be found in a contract called a credit agreement. The loan might be for a specific purpose – for example, a mortgage loan to fund the purchase of a house – or it might be a more general loan that the borrower is going to use for something else.
Payday loans offer some of the shortest loan periods and are usually repaid over a period of days or weeks. Payday loans are used to provide someone with emergency finance until the next payday comes around. Payday loans are normally much lower amounts – typically less than £500.
Personal loans offer borrowers larger amounts – usually more than £1000. The repayment periods tend to be longer and rather than the loan being repaid in a single instalment, it is divided up into smaller repayment amounts that are paid over a longer period of time. CashLady could also help you with loans, even if you had a history of bad credit in the past, subject to affordability checks and regulatory requirements.
Which type of credit is best?
There is no definitive answer to what type of credit that is best. The answer will depend on what the money is to be used for and how long the borrower wants to make the repayments. For smaller loans that are to be repaid quickly, payday loans are often ideally suited. Larger amounts of money and less pressure to repay straight away are better structured as personal loans, payable in numerous instalments. For something specific, such as a house or car, a mortgage or a car loan respectively are the best products.
What is the interest like when applying for credit?
One of the features of credit is that interest is usually payable on the amount borrowed. The only time this won’t apply is where credit is available for an interest-free period – for example, many credit cards might offer an initial interest-free period for the first six to 18 months. The rate of interest is set by the lender (often by reference to the Bank of England base rate) and is always made known in advance to the borrower. For payday loans, for example, the rate of interest is usually around £25 for every £100 that is borrowed. Generally, where a sum is borrowed over a longer period of time more interest will be payable but the repayment amount may be smaller. So, for example, with personal loans that are borrowed for just two months, there will be less interest to pay but the entire amount must be repaid in two large repayments; this is in contrast to personal loans repaid over 12 months, where there will be more interest to pay over the 12 month period but the monthly repayments on the loan will be smaller.
Understanding your credit reports
A credit report is essentially a collection of information that is designed to show how well someone can manage borrowing. Lenders will usually consult a credit report before deciding whether or not to extend credit to a borrower. The credit report will contain details of all previous borrowings, including mobile phone contracts, mortgages, credit cards, overdrafts and will help lenders to decide whether or not to approve an application.
What is a credit score?
A credit score is based on information in a credit report or credit file. It’s a numerical score that is reached by a credit reference agency analysing the various factors in the credit report or credit file. Most credit scores will essentially provide an estimate of the risk that a lender is incurring by advancing credit to a borrower i.e. the likelihood of any failure to make repayments on the loan that is made over the next couple of years. There are a number of factors that can affect a credit score – for example payment history, such as late or missed payments, the length of credit history (a longer length is preferable), how many new accounts have been opened over a short period of time, as well as matters of public record, such as bankruptcies or judgments.
How to apply for credit
You can apply for most types of credit online, whether that’s payday loans or a credit card. You will usually be asked to provide information about your income, your current and previous addresses and your employment status. Applicants usually have to be at least 18 years old to apply for credit in the UK, as well as a UK resident with a UK bank account.
Ensuring you can afford credit
If you’re applying for credit then it’s crucial to make sure that you can actually afford to borrow it. Credit can sometimes appear to be ‘free money’ but remember that this is not the case and that you will pay interest on everything you borrow. It’s easy to get into trouble with borrowing if you don’t repay on time or work out whether you can afford it. Remember to factor in interest payments, as well as the repayments of the borrowed amount, and be sure that you can still cover all your regular living expenses, as well as the repayments you’ll need to make to the lender that has extended the credit to you.
It can be difficult to decide if you are able to afford credit and other finance options. CashLady has created a loan affordability calculator to ensure you can meet the affordability criteria if you decide to apply for credit. Check your affordability here.