Understanding Credit Terms
Whether you’re new to borrowing money or not, financial jargon can be really confusing. Understanding what lenders are talking about is important, as the more you know, the easier it is to get the best deal. Before signing on the dotted line for a loan, you should be told exactly what your repayments are, how much interest you’ll pay and how much in total you’ll pay back over the loan term. Even with this information to hand, you should still be aware of the different terms used when talking about credit. Read on for a list of the basics.
APR:
APR stands for Annual Percentage Rate. This will be written as a percentage, for example 32%. This amount refers to the percentage of the loan that you’ll pay extra as interest and fees. For example, if you took out a loan for £100 with an APR of 32%, then, if you were to pay back your loan over the course of a year, you would pay a total of £132.
Arrears:
Being in arrears means that you’ve failed to make a scheduled payment on your loan, and are therefore behind on the payments. Being in arrears could harm your credit rating and may mean that you have to pay a fine to the loan company. For this reason, you should always make sure that you’re able to meet the repayment amounts or you could find yourself in a debt spiral.
Credit Limit:
Your credit limit is the top amount that you’re allowed to borrow and is based on your credit rating. If you have a bad credit rating then you’re not likely to be allowed to borrow very much, perhaps just £2000 or thereabouts. If you have a good or excellent credit rating then your credit limit may be up in the many thousands.
Credit Rating:
A credit rating is a measure of what kind of customer you’re likely to be. The loan companies use your credit rating to work out if you’re going to be a good person to lend to. If you have managed debt in the past and have a perfect track record of paying everything back on time, then your credit rating is likely to be good. You must demonstrate that you can manage debts well in order to build up a good score.
Guarantor:
A guarantor is someone who is named on your loan as a security for the loan company. Guarantor loans are rising in popularity as an easier way for people to borrow money. The guarantor does not need to do anything if the loan is paid back properly by the borrower. If payments are missed then the guarantor is liable to pay for the missed payments. Guarantors can be close friends or family members and obviously must agree before being named on the loan.
Interest:
Interest is the amount that you pay for borrowing the money. It is included in the APR and is paid back along with the monthly instalments, rather than all at once.
