Thinking of borrowing money using a credit card, an overdraft or a loan? Steer clear of these painful pitfalls...
Unless you have a perfect credit history and preferably your own home, borrowing money is getting more difficult. As a result some lenders are dreaming up some shockingly expensive borrowing options for those with little other choice. We look at some of the worst ways to borrow.
Credit card cash advances
Using your credit card to get cash out of the ATM is always a bad idea.
Even if you've got an interest-free card, cash withdrawals are not eligible for the interest free period so customers pay interest on the amount withdrawn from the day of the transaction. To add insult to injury, interest is charged at a higher `cash advance' rate too, usually around 30%.
It's not just cold hard cash that attracts this treatment either. Some credit cards providers treat money orders, betting, lotteries, Visa travel money cards, money wire transfers and casino gaming chips as cash withdrawals too.
Credit card cheques
Credit card cheques are similar to cheques issued on current accounts and can be used to pay for something when you don't have cash and you can't use your card. Instead of using a cheque guarantee card to back your purchase you use your credit card, and instead of the money coming from your current account it is charged to your credit card.
It sounds good but credit card cheques are an expensive way to borrow. They are treated as cash advances by credit card companies (and so suffer from all the negative issues described above) and can often attract a `handling fee' of around 3% too. And you aren't protected for the purchases you make under section 75, the way you are with a credit card purchase.
Unauthorised overdrafts
Banks will give most current account customers an authorised overdraft at a set interest rate. Exceed this limit and you venture into `unauthorised overdraft' territory and higher interest rates apply.
Before things get this bad it's a good idea to speak to your bank to extend your authorised overdraft and stop you setting off a chain of events that could cost you dear; as well as being charged a higher interest rate, venturing into the red could see you slapped with a penalty fee too.
Here's help on how to reclaim your bank charges.
Payday loans
A raft of payday loan companies have sprung with several advertising on social networking website Facebook, typically frequented by young adults.
They work like this: basically the lender offers you a cash advance on the salary you're expecting at the end of the month. Once you've received your wages you pay the money back and typically pay £25 for every £100 borrowed. In most cases all you need to qualify is be over 18-years-old, have a full time job, a bank account and a debit card.
Although this might sound reasonable, the charges can spiral if you cannot pay the money back when it's due and the APR on these loans can work out to more than 2000%, as Laura Starkey explains here.
Logbook loans
Some loan firms offer loans secured on your car. Logbook Loans, for example, which also advertises on Facebook, will lend to anyone who owns a car regardless of whether or not they have a good credit history. It charges a massive 343.4% on loans and your car is at risk if you cannot keep up repayments.
If you borrow money this way the lender you deal with will hold on to the original documents associated with your car, including the V5 registration document (the `logbook'), the MOT certificate and the insurance certificate.
You'll also have to sign a credit agreement and a `bill of sale'. This temporarily transfers car ownership to the lender - and gives them the right to take possession of it if you fall behind with your repayments.
Serena Cowdy looks at logbook loans in more detail here and explains why this type of borrowing should be avoided at all costs.