Annual Percentage Rate (APR) is the figure that includes interest rates and any associated charges such as administration or redemption fees that may be applied to money you borrow. The APR shows the cost for comparison of borrowing money over a 1 year period. This figure can be used to compare costs between different lenders.
These are arranged in advance with the bank or building society that provide your current account. Your bank or building society will allow you to borrow money up to a limit. Fees and interest are often charged and you should review the terms of the overdraft before using it.
Transferring either all or part of the money owed on one credit card over to another credit.
A large payment due at the end of a loan contract. If you wish to buy your car at the end of a PCP agreement you will need to make a balloon payment.
A credit card can be used in a similar way to a debit card. Unlike a debit card which is linked to your current account, a credit card allows you to pay for goods or services on credit. Each month you’ll be sent a statement showing all of your credit card purchases. You can choose to pay off the debt immediately or pay it off over a period of time. If you don’t pay it off immediately you will normally be charged interest, which can be high.
Failure to make an agreed repayment on time. For example a borrower failing to make the monthly repayments.
Credit Score / Credit Rating
A number that indicates whether you may be considered a high or low risk by credit providers such as banks and other lenders. This number is based on information including your previous credit history and applications.
An interest rate that is agreed when a loan is first taken out and will remain unchanged throughout the term of the agreement. Where the interest rates is not fixed, monthly repayments on a loan may be higher or lower in the future.
Your income before any deductions such as income tax, national insurance and any pension contributions or student loan repayments you may be making.
Hire Purchase (HP)
A method of car finance where you pay a deposit up front and pay the balance of the car cost plus interest in fixed monthly instalments. You will not own the car until you’ve made the last payment.
In store finance
In-store finance is a popular way to purchase items and spread the cost over a period of time, it is often referred to as ‘buy now pay later’ credit. You may be offered an interest free period meaning you won’t pay any interest if you pay back the loan before this ends. If you haven’t paid off the debt at the end of the interest free period you will start to pay interest, normally at a high rate. This will make paying off the debt even harder.
If you have problems paying off a loan, the lender may offer you an extension or a further loan. You can end up being trapped in debt because you’ll have to pay further interest and fees. Debt can quickly spiral out of control.
Refers to your income after all deductions that are taken from your salary. This would include any income tax and National Insurance that is deducted from your salary, together with any other deductions such as pension contributions and student loan repayments you may be making.
An overdraft allows you to spend more from your current account than your balance. This is referred to a being ‘overdrawn’. There are two types: Authorised Overdrafts and Unauthorised Overdrafts – look up these definitions for further information.
Payday loans are short-term loans with extremely high interest rates, intended to fund small purchases (normally under £1,000) until your next payday. If you don’t repay the debt on time it can quickly spiral out of control. Due to the high interest rates often applied to pay day loans these should usually only be considered as a last resort.
Personal Contract Purchase (PCP)
A method of car finance where you pay a deposit and make monthly payments for a fixed period of time. At the end of the contract you have the option to make a balloon payment and keep the car, return the car to the dealership and walk away or start a new PCP agreement.
A loan made to an individual, usually for a fixed amount of money over a fixed time period. Personal Loans are normally offered by banks and building societies, however other high street retailers have begun to offer personal loans.
These loans are borrowed against assets such as your home or car. If the terms of the contract are broken the lender could seize the asset.
This is unplanned borrowing that your bank or building society has not agreed to. An unauthorised overdraft also applies when you exceed the borrowing limit on an authorised overdraft. You will pay additional charges and interest which are considerably more than apply for an authorised overdraft.
Unsecured debt or Loans
A type of loan or debt not secured against any assets. Personal loans, credit cards and in store credit are typically unsecured.
An interest rate that may go up or down during the term of the loan.