A few months ago I was commissioned by a colleague to write a series of articles about money, borrowing and debt. He was seeking to get some insight into these areas, notably how people can become trapped into slavish repayments at alarming interest rates and the negative name this has attracted to the concept of loans. He turned to me to draw on my insights as a high street bank employee and asked me to comment on the ups and downs, as I have also maintained that loans, if taken out sensibly, can and are used as a successful tool in the individuals financial tools. There effective use, however, relies on key understandings of interest rates, how to compare them, when to consolidate a loan, in fact what debt consolidation actually means as an effective tool and the concept of refinance. But enough of the background:
The first scenario I will look at is the typical school loan consolidation or student loan consolidation scenario. The term consolidation is key here as these debts often comprise one or more components. There is the federal or state loan, such as a student loan. This is usually at a low interest rate but with a fixed borrowing and repayment limit. Consolidation here would be less about saving money and more about convenience. There may be a student overdraft which begins interest free but gets converted to interest bearing shortly after graduation. Additionally there may be a credit card or store card element to consolidate.
The key to any credit consolidation will be the interest rates. This is easiest to compare with APRs (Annual Percentage Rate). APR is a standardised measure of interest and one should insist to know the APR of any borrowing before one commits.
Currently in the UK debit interest rates of overdrafts can range between 16.9% and 19.9% APR. Credit cards and store cards can be anything from 0% introductory rate to 26.9% APR, sometimes even higher if the risk is deemed great.
Although APR is hard to calculate it is thought to be the best tool to compare total cost of borrowing as it takes into account any one off set up fees or other charges which cost the consumer but would not affect interest rate in normal calculations.
How does one arrive at a cost effective borrowing solution? My advice is straight forward here. If possible I recommend booking an appointment with a customer service representative in your branch for a financial review. It is an astonishing fact as to how few people do this on a regular basis.
I would suggest it is as important as dental or GP visits, just to keep everything ticking over correctly. It is far better to spend half an hour to be told everything is in order every six months or so than to apply for credit cards as one requires them and only see a financial adviser when one is so burdened with repayments and penalties that no bank will take the risk of lending a consolidation loan at a decent rate to help you get back on your feet.
Lend can be a lifesaver. Countless great businesses, weddings and home improvements have been realized on the back of a bank or federal loan. Put keep ahead of the game, consolidate if need be while you have the maneuverability to keep ahead of the game, and above all don't bury your head in the sand as it can also be a life sentence.
We've talked briefly about borrowing. The loans I have described here go hand in hand with secured loans, such as mortgages, and savings, two topics we haven't been able to explore here.
N.b. Individual circumstances vary and these articles only provided for illustrative purposes. I recommend you see a bank assistant or a financial advisor if you need help with your finances.
