The Hidden Costs Of Getting Credit

When you're looking to borrow money, check the small print for these sneaky extra charges!

One thing which financial firms are incredibly good at producing (other than annoying adverts) is small print.

What's more, carefully reading through the small print of a financial contract is a bit like mapping a minefield. It's boring work, yet it's also vitally important, because if you can't be bothered to do it, it's sure to blow up in your face at a later date!

For example, when you're arranging a personal loan, you need to do more than just check annual percentage rates (APRs), which are supposed to give you an accurate comparison of borrowing costs. In practice, APRs can be manipulated, which is why I always advise borrowers to ignore the APR and instead check the total amount repayable (TAR). Note that the TAR adds the advance (the sum which you're borrowing) and all charges for credit to produce an accurate total for the true cost of a loan.

Here are some examples of how cunning lenders can manipulate advertisements for credit to their own ends:

1) The hidden cost of payment protection insurance (PPI)

When you get a quote for a personal loan from any UK-based lender, it will put pressure on you to buy payment protection insurance, which covers your repayments in the event that you are unable to work due to an accident, sickness or unemployment, and pays off your debt if you die.

However, because this cover is optional (even though lenders practically twist your arm to buy it!), adding PPI to your loan doesn't increase the advertised APR. Hence, a loan of £5,000 without PPI will have the same APR as an identical loan with PPI, even though this rip-off insurance will add around £1,000 to the amount which you have to repay! Happily, by checking the TAR, you will see the additional cost of PPI sticking out like a sore thumb.

2) The hidden cost of repayment holidays

With almost all personal loans, your first repayment is due one month after you draw down your loan. However, several lenders promote loans with initial repayment holidays, usually around three months. Many hard-pressed borrowers are attracted by the idea of having three whole months before they make their first repayment, so these loans sell well.

Of course, because the life of your loan increases by two months, you're effectively repaying your debt over, say, 38 months instead of three years. Extending your loan in this way actually reduces the quoted APR, because you have more time to repay. However (and here's the sneaky bit!), not making repayments for an additional two months actually increases your interest bill, which makes these loans more expensive than conventional loans, not less!

Again, comparing TARs with and without any repayment holiday will show the true cost of opting to have an extended pause before repayments begin, as the extra interest incurred will be there for you to see.

3) Add-ons and extra fees

One trend which I've spotted of late is the tendency for more and more lenders to charge hefty fees for 'instant' delivery of loan advances. For example, Northern Rock charges £35 to send same-day funds (before 3pm) to a bank account via instant payments system CHAPS. Although CHAPS payments cost only a few pounds to process, as I revealed in The Cash-Transfer Swindle, many lenders overcharge for this method of payment, including:

• Direct Line (£35);
  
  
• Eskimo Loans (£35; a division of Northern Rock);
  
  
• Alliance & Leicester (£30);
  
  
• Cumberland BS, Dudley BS, Furness BS, Hanley Economic BS, Mansfield BS, Stroud & Swindon BS Tipton & Coseley BS and Vernon BS (£25; all funded by the Co-operative Bank); and
  
  
• Co-operative Bank (£20).

Furthermore, Sainsbury's Bank charges £50 to deliver a same-day cheque by courier, even though this is no faster than paying the money into a current account via payments system BACS (which incurs no extra charge), as both credits will take at least three days to clear!

Given that other lenders provide a same-day loan service at no extra cost, it's clear that the above lenders are profiteering at their borrowers' expense. So, learn that convenience costs, because it may cost you a tidy sum to get your hands on your shiny, new loan without delay!

Remember to keep scanning the small print, people!

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