Types of Credit
Types of Credit
As a student, you might need to borrow money at some stage throughout your time at university. That means you will have some amount of debt to manage. Not all debt is the same though – some is ‘good debt’ and some is ‘bad debt’.
It is important to look at debt this way so that you can avoid ‘bad debt’ and if needs be stick to the ‘good debt’.
There are three main lending sources for students. Here they are listed in order of preference:
Student Loan Company
This is the type of loan you should apply for, if you need one. It will be the cheapest long term debt you'll ever get. If eligible, you will be given two loans to cover:
- Tuition fees
- Living expenses
The rate of interest (currently 1.5%)* is based on the rate of inflation, so in real terms the amount you will pay back should be worth the same as when you borrowed it. You won’t need to pay anything back until after you graduate and even then, not until you earn more than £16,365.*
*These figures apply only to students who are funded through Student Finance NI. Different repayment rules apply to students who are from England, Scotland, and Wales. To check out the rules which apply to each jurisdiction check out the repayment information available from the Student Loan Company.
Student Bank Account Interest Free Overdraft
Most student bank accounts offer free overdrafts.
This means you can spend more money than you actually have in your account. It's a free and flexible way of borrowing, as long as you stay within your limit. If you are careful, this can be a cheap way to borrow money.
You will normally be required to make regular payments into your account which, for most students, will be their student loan or grant.
- Terms and conditions apply. Read them cover to cover before you sign on the dotted line
- It's easy to become too dependent on your overdraft and even start to go above your limit. If this happens, you:
- Will be charged a high rate of interest
- May be charged a fee each time you exceed your overdraft limit
- May find your bank will take your overdraft away or close your account - if you can’t stay within your overdraft limit
- Avoid applying for lots of overdrafts from different banks. You might struggle to keep up with the repayments into each account regularly. Some banks will state that you cannot apply for any other student bank accounts if you have an overdraft with them.
Once you leave university, you will need to pay off the amount you borrowed. Most banks will give you some time before asking you to do this - usually between six and twelve months.
Other Commercial Borrowing
This is any way of borrowing that charges a commercial rate of interest. This type of borrowing should be avoided as it’s really easy to run up debt if you have trouble paying it off. Your lender will also add on interest. Here are the main types of borrowing:
A bank loan is a sum of money you can get from a bank that you will need to pay back with interest.
There are two types of bank loan:
A secured loan is one that is secured against something you own. If you can’t pay it back, the lender can sell it to get their money back.
You do not need to secure anything against an unsecured loan. The lender relies on your contractual obligation to pay it back. The interest rates of an unsecured loan are therefore usually higher than a secured loan.
Credit Union Loan
A Credit Union is a financial cooperative controlled by its members.
To become a member you must have a common bond with other members like living in the same area. You also might need to save some money with them before they will give you a loan.
The interest rates can be much lower than other types of lenders and vary between Credit Unions so it is best to look around.
A credit card allows you to borrow money from your bank to make purchases that you promise to pay back.
If you open a credit card you will receive a credit limit. This is the maximum you can borrow using the credit card.
Every month you will get a statement showing:
- How much you have spent
- What your minimum payment is (usually a percentage of the amount you owe)
- When this has to be paid
Credit cards can be useful for making online purchases or travelling abroad. They can also be very tempting when money is short, but they can be very dangerous if not used wisely. For example, you will be charged, the fee will be added to your outstanding balance and will also attract interest if you:
- Are late with your monthly payment
- Miss it altogether
- Spend more than your credit limit
If you can, try to pay the total month’s balance off in full. If you don't, you will start to incur interest on the outstanding balance. If you can’t afford to do this then make sure you can easily afford the minimum monthly payments. Be careful - if you only ever pay the minimum amount and no more it will take you longer to pay back and will cost much more in the long run because of the added interest.
Also, avoid using your credit card to withdraw cash from an ATM. This will attract a much higher interest rate than using the credit card to purchase the goods.
A store card is kind of like a credit card, but it will usually have a much higher interest rate and can only be used in that particular store or group of stores.
Sales assistants will often offer you a discount on a purchase you want to make if you open up a store card there and then. Don’t be tempted by this - unless you pay the balance in full within a month of opening the card, it is likely that the amount you end up paying in interest is much more than the discount you saved on the day!
A hire purchase is an agreement you can make to pay for something (usually large items like cars) in parts or at a percentage at a time. It might include a final lump sum.
You won’t legally own the item until you have made all the payments. The lender therefore might be able to take the item back if you can’t keep up with the payments. It is really important that you get advice if you are having problems.
It can be easier to get credit through hire purchase than through a bank or credit card, but it is usually a more expensive way to borrow.
Doorstep lenders offer small loans over short periods of time to people who are on a low income or have a poor credit rating.
Weekly or monthly payments are made to a local collector who will call at the borrower’s home.
Interest rates are usually very high.
A payday loan is a small amount of money that has to be paid back within a short period of time, often on or around your payday. It can be taken out online or from dedicated stores.
These loans charge outrageously high interest rates, sometimes higher than 1,000% APR. There are also really hefty fees for late repayments. This can mean that the cost of borrowing a small amount can quickly become very high, very quickly.
If you really have to use a payday loan, be sure that you will have the money to repay the full amount that has to be repaid by the due date.
The Money Advice Service provides comprehensive information on payday loans and the problems they can cause.
Loan Sharks - Illegal Lenders
Loan sharks are illegal money lenders.
They will target those people who are unable to borrow money from any other source. Interest rates are extortionate, payments are high, and you might be forced to borrow even more money to pay off the first loan. Intimidation also may be used to ensure payments are made.
If you have taken out a loan of this type and are having problems, contact Consumerline, which forms part of the Trading Standards Service in Northern Ireland. If the loan shark threatens you or uses violence, contact the Police immediately.