2/ ADVANCING CREDIT

1. Mortgage

Mortgage lending by UK banks accounts for one of the biggest growths in the industry in the last 20 years.

Traditionally the domain of building societies, today UK bank are more than willing to provide their customers with mortgages to purchase proprieties. Ordinarily mortgages are obtained over a period of 25 years. The down-payment policy of banks varies.

In some cases UK banks require their customers to pay a down-payment of up to 20% of the purchase price of the property. However, in this traditionally cut-throat business, UK banks have been known to provide 100% mortgages, and (in the mid 1980s) even 110% mortgages.

Those looking to take out a mortgage need to consider the monthly repayments they’ll be required to make. Underlying this decision will be whether to take out a variable or fixed interest mortgage. Fixed interest mortgage are where the interest rate is fixed over the term of the mortgage. Alternatively, variable interest mortgages are where the interest rate floats against a peg – usually the Minimum Lending Rate (or “MLR” as it is also know) or London Inter Bank Overnight Rate (“LIBOR”), if the mortgage is of sufficiently high enough amount.
Finally, generally banks lend amounts equivalent to two times the annual salary of the borrower, or three times the combined salary of the borrowers if the lending is a joint-mortgage.
One note of interest, most borrowers assume that they are being given a mortgage by the lending bank. In fact, as a mortgage is a security interest in law, it is actually the borrower who is giving the bank a mortgage.

2. Loans

For many years UK banks offered their customers a personal loan – and that was that! Today if you ask your bank for a loan, you’ll need to be a little more specific. To say the loan market in the UK has expanded exponentially would be understatement. Some of the more common types of loans you may come across include:
2.1 Home Improvement Loan
As the name suggests, the proceeds of this type of loan are used to improve the value of your home. In certain cases the lender may ask to “secure” the loan against the home.

2.2 Auto Loan

This is the type of loan you’ll need to apply for if you want to buy a car. Again, in certain cases the lender may ask that you secure the loan against the car. Also, you will likely be required to take out fully comprehensive insurance for the duration of the loan – in case anything should happen to the car.

2.3 Student Loan

These days student loans come in various forms. It is possible to get a student loan from the government to help pay towards the tuition costs of your university fees. It is also possible to get a student loan to help you with your day-to-day expenses whilst studying at university. It is the second of these two types of “student loans” that UK banks are generally willing to provide.

2.4 Holiday Loan

A newer entrant into the loan field is what is called the “holiday” loan. As its name suggests, the proceeds of this type of loan are used in order to go on holiday. Although the repayment period can vary, many suggest that you should not create a repayment period exceeding one year, otherwise you may not be able to afford to go on holiday next year!

2.5 Consolidated Loan

With credit becoming easier and easier to obtain in the UK, one of the biggest growth areas for UK banks lending to their customers is the consolidated loan. A consolidated loan allows you to use the proceeds of the loan to pay off other debt that you may have where the interest rate is higher than that incurred on the consolidated loan – for example, to pay off your credit card debt. It is also a useful means of consolidating lots of small debts, with lots of different creditors to repay, into one large debt.

2.6 Personal Loan

These days it is still possible to apply for the traditional personal loan. Normally this type of loan is applied for where no other form of loan applies – for example, if you want to buy a new television and don’t want to pay high interest rates on hire purchase borrowing.

2.7 Overdraft

Although not strictly a loan-type product, provided you are earning a salary, most UK banks these days are willing to let their long-term customers run a small overdraft on their current account to help them tide over their day-to-day living expenses.

3. Credit Cards

Today the UK is one of the biggest consumers on credit cards in the world. A statistic recently being pushed around by consumer watchdog groups was that there were now more credit cards in the UK than people! As you can see then, credit cards are big business. They’re also, likely to be, the most expensive way to borrow! So, be carefully. Most major banks and financial institutions issue credit cards under the Master Card and Visa Card name.

Essentially what happens is you apply for a credit card, it is authorised, you then go to a store and purchase an item on the credit card, and you will then get a statement asking you to make either a minimum repayment (of 5%) or full payment, or somewhere between the two.

If you fail to make repayment in full, you’ll be charged a monthly interest rate on the outstanding credit. Conversely, and rather nicely, if you make repayment in full you’ve found a way to get 28 days interest free credit (the statement period).

As you can see then, credit cards have their uses, provided they are used sensibly. Importantly, if you only make minimum monthly repayments, you’ll need to compare credit card offers to see if you can find a cheaper way (i.e. less interest and fee charges) of funding your credit card purchases.
Finally, keep in mind that a credit card is neither a debit card, a charge card, or a store card. All of these work on similar but different basis – notably that you cannot usually maintain a credit balance at the end of any statement period in the case of these last three types of cards.