/ Money

Will you pass the financial loans test?

Colourful numbers

The government reckons we need better education when it comes to our finances. Maybe, but most of us could benefit more from having decent financial options.

Let’s start with a maths quiz.

If Mrs Jones borrows an average of £1,000 on a credit card with a monthly interest rate of 2%, how much interest will she pay in a year? I’m guessing that even the mighty Carol Vorderman would struggle with that one.

Government review of consumer credit

Which is why the government has announced a review of consumer credit; in particular whether people really understand what they’re committing to.

Ministers are worried that some consumers are taking out loans and credit cards without fully understanding how much they’ll be charged and what they can afford to borrow.

Options under consideration include a ‘test’ for anyone taking out a loan to make sure they understand what it means for them personally. Lenders could also be forced to be much clearer about how much interest will be charged.

What about better financial options?

The question for me is whether this will make much of a difference? Payday loans are probably the best example here. If I desperately need to borrow £100 to buy food and clothes for the kids, how much attention will I pay to the interest rate?

When the loan company tells me I can have the £100 today and pay back £120 in a month, I might think that sounds like a good deal – it gets me out of a tight corner. Until next month that is, when I’m short again and now need to borrow £120 to repay the original loan.

Following this pattern for a year would mean repaying almost £900, equivalent to an annual interest rate of almost 800%.

Consumer education is always a good thing. However, making sure consumers understand interest rates and loan deals is only the first step. The more informed we are about our finances, the more likely we are to shop around for the best deal. But the market has to react too.

Where the system falls down is not primarily in consumers’ lack of understanding, but their inability to access affordable, mainstream credit when they are turned down by their bank.

Greater support for local, community-based lending, especially credit unions, is just as important as consumer education in helping people cope with their finances.

Oh, and by the way, Mrs Jones would pay £268.

Comments
Member

I was taught at school and by my parents "To Live within your means" – Equally Hire Purchase (HP) was called "Never Never" .

Directly I was responsible for my own income. I always did a weekly budget to work out how much I needed to save and how much I could spend on food etc – so I was debt free..

So I always made certain I could pay the ‘loan’ back – bought a motorcycle on HP concentrating on paying that back – before buying something else .

A house (it was a wreck) on a mortgage that was 2.5 my annual salary – even though the interest rate reached 15%. it was always total priority. Before I bought it I decided on whether endowment or prepayment mortgage was most suitable – Decided endowment was too risky (I was right as several friends lost their housed due to the equity shortfalls) ‘ I wouldn’t buy anything until the monthly mortgage was paid. As my salary grew – I also saved for a rainy day. I also kept my mortgage payment at the high interest rate to pay it back early.

My car was a bank loan – again concentrated on paying it back fast.

Credit Cards were my only real mistake – I had too many (10) and found I would forget to post a payment back and had to PAY INTEREST!!! – So I reduced my cards to two – a credit and a debit. – buying with the credit card (which also kept monthly tabs on purchases – and any cash needed using the debit.

My only beef is the bank interest rate is now under 0.5% which has drastically effected my "funny money" – That is the money I can spend on anything I want – as all my living expenses and savings are met from my normal income.

Interestingly – years ago when "O" levels were for the ‘academic" I taught "Everyday Arithmetic" at CSE level at my low slum end comprehensive. It covered everything mentioned by the article. This was appreciated by the boys and girls as totally relevant to their future lives and they were always interested. Now of course such courses are not allowed – and everyday Arithmetic hardly mentioned.

Member
Stuart A says:
10 August 2010

I think we must have gone to the same “school of life” Richard!

Its simple – live within your means. The only dept I have ever incurred was to buy my home, which because that was under the old rules of only being allowed to borrow what you could realistically repay, was paid off when I retired at 50. Sadly today so many people want a lavish lifestyle they can ill afford.

I use one credit card, from John Lewis Partnership, which earns me vouchers to use in their outlets, and I pay off the full amount each month. I consider this is using credit cards to my advantage, and even helps me budget. If only more people would listen to Mr Micawber’s advice1

Member

I have also followed the principle of saving for what you want, living within your means, paying off the mortgage early etc. Recently after nearly 40 years at work I was made redundant and was umemployed for 3 months. I tried to keep expenditure within income (JSA), helped by the small mortgate left, BUT was unable to do so, let alone save. Easy to say save and keep within income if you have a decent job. But if you do not, and the kids need new shoes….People in this position should not have to be ripped off by loan sharks and profiteers, and this includes so called respectable organisations!

Member

Though I do really sympathise Lau – I did use the “saving for a rainy day” from very early on – In other words I had two savings accounts – One “rainy day” account – a set sum decided annually – and so budgeted for – never touched except when my boy’s injuries needed us to stay close to the hospital for three months.

The other was my “Funny money” account – This was any sum over and above my living expenses AND my rainy day account. This could be used to buy luxuries such as new curtains or a computer.or a holiday.

I fully understand that some contingencies may not be able to be covered – but I covered any big loans by insurance – This came in handy when I was ill and could no longer work.

Sadly if there is a need for such loans without collateral then the interest rate reflects the risk involved.