Getting the best credit deal

There are a lot of ways you can borrow money. Borrowing money can also be called 'credit'.

Before you borrow money it's important to make sure you get the best deal you can and will be able to keep up the repayments. If you don't keep up the repayments, you could be taken to court and might even lose your home or other valuable possessions.

This page tells you what you need to think about before you sign up to anything. It tells you:

• how to shop around for the best deal

• how to compare the cost of credit deals, including APR

• how to look out for additional costs such as early redemption fees, arrangement fees and fees for late or missed payments

• how to make sure you understand all the terms and conditions of a credit deal

• how to check you can afford the repayments.

There is also a checklist of questions to help you get the best credit deal.

Choosing what type of borrowing to use

There are a lot of ways you can borrow money. Different types of borrowing suit different situations.

For more information about the different types of borrowing, see Credit.

If you have a poor credit history, you may have to pay more for your borrowing. Many lenders offer loans or credit cards with a range of interest rates that vary according to your credit history. If you are finding it difficult to get a loan or credit, you might be able to get a loan from a credit union.

To find a credit union near you and check out what your local credit union offers, you can:

• search for credit unions on the Find Your Credit Union website

• call ABCUL on 0161 832 3694

• in Scotland, check the website of the Scottish League of Credit Unions members

For more information about checking your credit history, see 'Being refused credit' in Credit.

Shopping around for credit deals

Once you have chosen the type of borrowing that suits you, you can look around for the best credit deal. To get the best deal available, you need to spend a bit of time looking at what is on offer from different lenders. It’s a good idea to get a few quotes so that you can compare cost and other terms of the agreement. Take information home to look at if you can, to give yourself time to take it all in.

If you are borrowing jointly with someone else, make sure you both understand all the terms and conditions.

If someone else agrees to pay the loan if you don’t pay it, they’re called a ‘guarantor’. Make sure your guarantor understands all the terms and conditions, including when they would have to pay the loan instead of you. For example, the agreement might say your guarantor has to pay the loan as soon as you miss a payment. 

If you are not sure about anything, ask questions before signing the agreement.

Comparing the cost of credit deals

The cost of credit can vary enormously depending on the lender and the type of deal you choose. The things to look out for when comparing the cost of the credit deal are:

• the Annual Percentage Rate (APR)

• type of interest rate - variable and fixed rates

• fees and charges

The Annual Percentage Rate (APR)

The Annual Percentage Rate, usually called the APR, is a standard way of showing the cost of borrowing. The APR is worked out taking into account the following things:

• the interest rate

• other charges you have to pay

• how long the agreement lasts

• the amount and timing of the repayments

Some charges aren’t included in the APR. These include things like charges made if you pay off the loan early.

Lenders have to tell you what the APR is before you sign an agreement. The APR varies from lender to lender and between different types of credit. You can use the APR to compare what deals are on offer. Generally, the lower the APR the better the deal for you, so if you are thinking about borrowing, shop around.

Comparing the APR works best if you are comparing similar types of credit over the same repayment period. For example, loans for the same amount to be paid back over the same number of years.

The table below shows an example of how different APRs affect what you would have to repay if you borrowed £1,000 over ten years:

Variable and fixed interest rates

Check whether the interest rate (included in the APR) is variable or fixed rate.

Variable rate interest may change during the agreement. If the rate is variable, your repayments could go up or go down.

Fixed rate interest can't be changed once the agreement is made. If the rate is fixed, your repayments will stay the same.

Fees and charges not included in the APR

Find out from the lender whether there are any costs that are not included in the APR. For example, any of the following charges might not be included:

• arrangement fee (for loans) or balance transfer fee (for credit cards) - this is usually added into the total and you pay interest on this as well

• early redemption fee - some lenders charge an extra fee if you pay a loan off early

• higher priced goods - sometimes the lender will charge you more for goods if you buy using credit

• charges for late or missed payments - these can greatly increase how much you will have to pay back

Understanding the terms and conditions of the credit deal

When you borrow money, you and the lender will sign a credit agreement. This sets out details of all the things you and the lender agree to do as part of the deal. This is called the terms and conditions of the agreement.

Always read the small print before signing anything. Most lenders have a legal duty to provide pre-contract information which you can take away with you and study. The information which must be provided includes:

• the amount of credit

• the total charge for credit

• the rate of interest

• repayment details, for example, the number and timing of instalments

• statements of consumer protection rights and what you can do if things go wrong

Some lenders will make it a condition that you offer your property, usually your home, as security for the loan. This is called a  secured loan. If you don’t keep up repayments, the lender can take court action to repossess the property.

Repayment arrangements will vary depending on the type of borrowing. The lender can tell you what options there are for making repayments. Bank loans usually have to be repaid by direct debit directly from a bank account so you need to check you have the right arrangements in place.

For more information about credit agreements, see Credit.

Checking you can afford the repayments

It's a good idea to work out how much money you've got coming into your household and how much you spend. This is called your budget. Working out your budget will help you make sure that you have enough spare income to afford the loan repayments.

For more information about working out your budget in England or Wales, see Help with debt. 

Remember, you will need to be able to keep up with the repayments for the whole period of the loan. If you know about any changes in your circumstances that are likely to happen during the life of the loan, for example, a change in income, think about how you will manage your repayments.

Spreading the loan over a longer period can mean lower instalments which may be more affordable. But this means you will pay more in the long run.

The Money Advice Service website has an online loan calculator which can help you decide whether you can afford the repayments and compare different loans. 

Payment protection insurance

Payment protection insurance will cover your repayments in certain circumstances such as losing your job or being off sick for a long period of time. However, this sort of insurance may not be suitable for you. For example, it isn't suitable if you are self employed or have already been diagnosed with an illness.

If you are offered payment protection insurance, check whether you would be better off to buy it separately from another provider. The lender can’t include payment protection insurance in the loan - they have to wait at least a week after you get the loan before they can offer you insurance.

You can find information about payment protection insurance on the Money Advice Service website.

Checklist of questions to help you get the best credit deal

The following list of questions should help you to decide whether a credit deal is right for you.

About my personal situation

• how much can I afford to repay each month?

• how long do I want to pay for?

• am I expecting a change in circumstances during the lifetime of the loan? If so, how will it affect my ability to repay?

• what method of payment will suit me best?

About the credit deal

• how much will it cost me? How does this compare with similar deals?

• is it the best APR I can get?

• are there any other charges not included in the APR?

• will the interest stay the same?

• are there extra charges if I pay the loan off early?

• what happens if I miss a payment?

• how much do I have to pay each month and for how long?

• what is the total amount I will pay back?

• does the lender require security?

• do I fully understand the credit agreement I am about to sign?

• can I take the credit agreement away to think about?

Further help and information

• Credit

• Help with debt in England and Wales

• Help with debt in Scotland

• Mortgage problems in England and Wales

• Mortgage arrears in Scotland

The Money Advice Service

The Money Advice Service website has lots of useful information about managing your money, mortgages, insurance and other financial products.

It also has an online loan calculator  which can help you decide whether you can afford the repayments and compare different loans. 

The Association of British Credit Unions (ABCUL)

To get information about credit unions you can call ABCUL on 0161 832 3694.

The Scottish League of Credit Unions

In Scotland, you can get information about credit unions by checking the website of the Scottish League of Credit Unions members.