Loans explained

Borrowing money is something done by many households simply because some of the straightforward items available to us are too expensive to pay for up front. In fact, lending is the only way in which many things like cars are obtainable for ordinary people. But not fully understanding how loans work can be disastrous, as the more they get out of hand, the harder they tend to be to deal with. Choosing the right product is the first step towards managing your debt comfortably.

Loans are available from banks, building societies, and specialist companies. All involve an amount of interest, as that is how the firm itself makes money on giving up cash. Some might include interest free periods, usually in the first few months of the loan, but some way or another you will end up paying back more than you have borrowed.

The two main loan types are secured and unsecured. Secured loans are normally more associated with larger purchases and are often quite quick to arrange. For example, someone might borrow 18,000 pounds from a bank to help finance a home extension. They can also be spent on new cars or even to fund someone’s higher education.

This ’secured’ part of the deal involves the borrower offering up some form of collateral as proof that they are going to pay back what they owe. This usually involves someone’s home, meaning it can be repossessed from them if they fail to keep up with the repayments. In this sense their house is acting as security for the bank or lender as an assurance that they’re going to get the money back. The plus side of this is that it can help someone to get a large amount of money, but the downside is that if someone fails to keep up with it, they can eventually lose the roof over their head.

The availability of secured borrowing is linked to house prices, the more prices tend to fall, the less secured loans can be available. This is because banks become concerned that the effective value or strength of the security someone can offer is unstable and may be decreasing.

Unsecured borrowing, although it might sound somewhat unstable and risky, actually involves the borrower and not putting up any asset. As a consequence they are usually only granted for smaller amounts and attract higher interest rates. Because a loan is unsecured does not mean you can get away with not paying it back. Banks can still take legal action through the courts and can refuse to lend you any more money in future. You’re also likely to end up with a significant mark on your credit rating, significantly affecting your ability to borrow and even open up and run bank accounts in future.

A vast array of different interest rates are available from different providers, and these can fluctuate wildly. Of course the interest rate is the key to how much you are going to pay back overall, so it may seem that the smallest possible interest rate means that product is the best possible deal. But it can pay to look carefully at the payment plans of different loans, and particularly at any low or no interest free introductory periods. Once you come off this introductory rate the interest may switch to a very high level, negating what you otherwise would have saved - so it can pay to look carefully at the small print.

Short guide to mortgages

Mortgages are a way of life for many people buying a home in the UK. The British in particular seem to have a particular tendency towards buying a home at the earliest opportunity, and funding this usually means going to the bank for a loan. In this sense a mortgage is essentially a generic title for a loan used to buy a house. But the market can be quite confusing to somebody who has not explored it before, and all the different products available can be baffling.

To get a mortgage you will normally need to provide a deposit, ie a certain slice of the value of the house you want to buy. So say someone is buying a house worth £100,000, and they are applying for a loan following a 10 per cent deposit, they will need to put up £10,000 to begin with. Some providers have been known to offer 100 per cent mortgages, ie the entire total of the home value, but these tend to be relatively rare, and can even disappear from the market completely during difficult credit times.

With any home loan, the bank reserves the right to repossess the property from you if you cannot keep up with their mortgage repayments. However, this is usually a last resort after a bank has tried other methods of reasoning with you, and it will normally only be attempted when it is quite clear you are never going to be have to pay the money back. However, it is extremely important to keep up with repayments as repossession is a stressful and life changing event. Therefore it is important to get a mortgage you can deal with.

Most mortgages are repayment-based, involving paying back the total amount in instalments plus interest. There are sometimes a limited number of products available which involve only paying back the interest, meaning someone must put aside capital to eventually pay for the house.

Many variations of mortgage products relate to the interest rate. For example, a variable rate mortgage allows someone to pay back the money with an interest rate which goes up and down according to the base rate set by the Bank of England every month. In contrast, a fixed rate mortgage involves an interest rate which stays the same for a set number of years, perhaps two to five, before the rate then changes and goes on to a variable one. Fixed rate deals have proved popular with people who are buying a home for the first time and are getting used to the burden.

There are also capped rates, which involve an interest rate which is flexible but never rises above a certain percentage or ‘cap’. While banks are all too happy to offer somebody a mortgage with an attractive initial interest rate, it is perhaps worth paying close attention to how mortgages will be worked out after this period ends because home loans are typically large and lengthy commitments.

European Breakdown Cover for peace of mind

It is surprising how many people take very great care to ensure that they are fully covered for roadside emergencies when driving at home in the British Isles, but who overlook the need for European breakdown cover for peace of mind when they take their car across the Channel. To some degree, the oversight is understandable, since many UK breakdown and roadside assistance plans also provide cover for driving in the rest of Europe. But by no means do all of them, so it is a wise precaution to check the extent of cover you might need when driving in Europe.

A number of insurance companies specialise in this form of breakdown cover, with a range of policies offering basic roadside emergency provisions, to fully-fledged breakdown and rescue packages that will include the repatriation not only of the driver and passengers but also the vehicle itself if it cannot be repaired whilst overseas. The following are some of the typical features of European breakdown cover for peace of mind:

Annual or single-trip cover

Perhaps one of the first decisions is whether to buy permanent, year-round cover or insurance for a single-trip only. The former can offer significant savings – especially for regular travellers abroad – and frequently includes over within the UK, too.

Roadside assistance and repair

This is likely to be your immediate concern. The majority of breakdowns, of course, can generally be fixed at the roadside, with the minimum of fuss, inconvenience and delay. The company you choose for the greatest peace of mind is likely to be the one with the most extensive network of roadside assistance centres in the countries in which you intend to be driving.

Alternative transport or accommodation

If your breakdown cannot be fixed at the roadside, you and your passengers will be well and truly stranded unless the insurance cover includes the provision of alternative transport in the event of an emergency and/or accommodation while the repairs are completed or until you can resume your journey. Many companies offering European breakdown cover, therefore, have certain policies that include the provision of a hire car, where necessary, for the occupants of the vehicle to continue their travel.

Repatriation

In the worst event, and your car cannot be fixed at the roadside or within a reasonable period of time at a local garage, you might choose not to continue your journey by alternative transport (such as a hire car) but instead prefer transport home. Some policies will provide not only this for the driver and passengers, but also repatriation of the vehicle itself (provide the costs do not exceed the value of the vehicle, of course).

Help with the language

Something that is a relatively straight forward roadside incident at home in the UK and assume far greater proportions when you are driving in Europe, if only because of any difficulties in speaking or understanding the language. Many companies offer dedicated, English-speaking help-lines 24-hours a day in order to help you manage any incident in the course of providing European breakdown cover for peace of mind.

Introduction to savings accounts

Any introduction to savings accounts these days is going to make quite sombre and gloomy reading. This reason for this can be pinned quite squarely on the recent drastic reductions in the Bank of England base rate, which has plunged to its lowest ever. And it is that rate, of course, which determines the interest rate not only paid by borrowers, but also that received by savers. The current rate might be potentially good news for borrowers, therefore, but it is far less so for savers.

Figures released by the Bank of England and published in the Guardian newspaper on the 12th of January 2009, for example, revealed that the rates of interest currently available on most forms of saving account is less than 1%.

With the base rate at an all-time low of 1.5%, of course, such poor returns on savings accounts has to be expected. Nevertheless, the overall shortage of funds available for lending counts to the savers’ advantage because it means that banks and building societies are practically desperate for cash deposits. Although it might not seem like it, therefore, there remains quite keen competition amongst such deposit-takers for savers’ funds.

Not only are banks and building societies keen to attract cash savings, they are especially eager to attract longer-term rather than short-term deposits. The rates of interest offered on notice accounts – where advance notice of an intended withdrawal of anything between 30 and 90 days is required – remain slightly higher than the rates offered on instant access savings accounts. If you are able to tie your money up for at least as long as the period of notice allows, therefore, it should be possible to secure a better rate of interest on your savings. Nevertheless, the low rate of the underlying interest rate is eroding the wide differences between rates offered on notice, compared to instant access, savings accounts that would have been apparent a year ago, for example.

Slightly higher interest rates again should still be available if you are in a position to tie up your savings for a still longer period of time in a savings bond. A bond is effectively your loan to the deposit-taker for a fixed period, at a given rate of interest, and at the end of which period, you will receive back the money you initially lent, plus any interest earned on the loan. Once the bond has been purchased, therefore, there is generally no provision for you to gain access to those savings by redeeming the bond early and it will be necessary to wait until the agreed maturity of the bond. Because the deposit-taker has your money for longer and the more or less certain knowledge that you will not be able to reclaim it before the maturity date of the bond, this form of saving generally represents the highest rate of interest available.

The net value of any savings, however, also need to take into account any income tax that has to be paid on the earnings and no introduction to savings accounts would be complete without reference to the Individual Savings Account, or ISA. This represents a way of enjoying tax free income from savings up to the maximum permitted in an ISA of £3,600. The tax-free incentive, moreover, has the potential for turning an otherwise unattractive rate of return on your savings into one that is at least inflation-proof.

Finding the best Digital TV Package for you

Finding the best digital TV package for you and your family of course depends on just what you want from your digital television service. It might be the basic ability to watch the relatively limited range of familiar channels broadcast by what is known as “terrestrial television” or it could be the choice for a whole range of different television and radio channels, High Definition television (HDTV), information services, telephone services and internet broadband services. These are all components of some of the digital TV packages that are currently being rolled out across the country.

Whether you choose a basic package or one with all the whistles and bells, however, one thing is certain: you will need either a digital television (with the digital tuner already built into it) or a set-top box, “digibox” or STB, to covert an older-style analogue television. This is because the existing analogue signals are being progressively switched off as the country’s regions switch over to digital broadcasts. The switchover is scheduled for completion during 2012.

In addition to the television content you want, finding the best digital TV package for you will also depend on the digital service providers in your area. There are essentially four main types of service provision and each will determine, to one degree or another, the range of content choice your package will be able to offer:

Free-to-air

Also known as “terrestrial television” this is the core service that will continue to offer such familiar channels as the BBC’s (1, 2, 3 and 4), ITV’s (1, 2 and 3), Channel 4, Five, S4C and E4. There is no monthly subscription required to view these channels, but simply the digital television’s in-built tuner or a set-top box. Current service providers are Freeview, BT Vision and Freesat.

Digital satellite

Digital television is also broadcast by satellite and reception of these services requires the installation of a mini satellite-dish to receive the signal and set-top box, together with the provider’s viewing card, to decode it. Sky is currently the principal provider of satellite services and will offer a complete installation package with all the necessary equipment for receiving and decoding the broadcasts.

Digital cable

Just as the name suggests, this relies on the use of a cable network, along which providers can pass not only digital television signals, but also telephone and broadband internet services. Clearly, you would need to live in an area where one or other of the cable providers has installed a cable network to subscribe to these services. Currently some 15 million homes in Britain have access to digital cable television (and related services).

Digital broadband internet

The fourth means of delivering digital television is via a high-speed broadband network using telephone lines. Connection requires a telephone line, set-top box and modem. Although this system naturally enables a home connection to the internet, digital broadband internet television is not the same as watching television on a home computer via the internet. Instead, it lets you watch television programmes as and when you watch them, rather than waiting for them to be broadcast. Therefore, you can stop, pause, rewind or fast-forward the programmes.

Summary

Finding the best digital TV package for you, therefore, is a question not only of content, but the choice of delivery system and the availability of your chosen system of delivery in your area.

Finding the right credit card for you

Of course, the vast majority of people have at least one credit card and many have more than one. They are convenient, safe to use and, for some transactions, essential (try renting a hire car without a credit card, for example). But how many card-holders have given serious thought to the particular card or cards that they use. What are the principal considerations in finding the right credit card for you?

As is so often the case, it all depends. It all depends on your particular circumstances and the way in which you intend to use the card. But even in these days of post-credit crunch, the competition amongst card providers is sufficiently intense that, whatever you lifestyle and whatever your spending habits there is almost certain to be a choice between some credit cards that will suit you better than others.

For example, if you use your card often, but rarely manage to clear the outstanding balance each month the most critical consideration is likely to be the interest rate charged on that remaining balance. Different cards apply different rates, of course, but these are most conveniently expressed as the annual percentage rate (or simply APR) for ease of comparison. It is also worth bearing in mind that different rates of interest are also likely to apply to purchases, cash withdrawals and use of the card overseas.

If the outstanding balance on a credit card is one that has accumulated as a result of past spending, there is still a large choice of cards offering zero percent interest on balance transfers for up to a year. By transferring an outstanding balance to a new card with such an introductory offer, therefore, it is possible to prevent further interest accumulating while the debt is repaid. Although some such transfer deals also extend the zero percent interest to new purchases made using the card, beware that not all of them do and that in such cases your monthly repayments will go first to paying off the transferred balance, leaving the new purchases to attract the maximum rate of interest. Clearly, it will also be important to diary the date when the introductory deal is going to expire and when any existing balance and new purchases both revert to the provider’s standard rate of interest. This will mark the time when you should aim to have cleared outstanding balances or are prepared to start the process of finding the right credit card for you all over again with a further balance transfer at zero percent interest.

Of course, if you are sufficiently disciplined to repay the whole of any outstanding credit balance every month, then you will pay no interest however much your card is used for purchases (although cash withdrawals will start to attract interest from the moment the withdrawal is made). In such a case, you are less likely to be concerned about the rate of interest charged by the provider and more interested in whether a monthly subscription or administration fee is levied for holding the card. If interest rates are less to worry about, you might instead consider the benefits of any “reward” or “cash back” offers made by certain card providers.

Finally, whatever kind of credit card user you are likely to be, the opportunities for your finding the right credit card for you will also be determined by the kind of credit card user you have been in the past. These days, past credit history will be scrutinised more closely than ever and the availability of some cards, some transfer offers, and the most attractive interest rates, is likely to be restricted to those with the healthiest credit rating.

Getting a good deal on your car insurance

Getting a good deal on your car insurance is about getting the cover you want for the lowest premiums available. It is about value for money, therefore, rather than a quest for the cheapest cover on the market. The latter could simply result in your arranging cover that is inadequate for your needs and fails to deliver what you had expected of it when the worst comes to the worst and a claim needs to be made.

Getting a good deal on your car insurance, therefore, is about knowing what cover you need and the considerations that will affect the price of the premiums you pay.

One of your first decisions, therefore, is likely to concern the level of insurance cover. The three general levels of cover available in the UK are the familiar: third party only; third party, fire and theft; and comprehensive cover. Since each level requires the insurer to take on a progressively wider range of risks, the premium for doing so also increases. Comprehensive cover, thus, costs more than cover against third party claims only (and cover against third party claims, of course, is the minimum level of cover required by law).

Any insurance is about assessing risk and in the case of motor insurance it is a case of assessing the risk of your causing or being involved in an accident which causes loss, damage or injury to you, any passengers in your car and third parties. In order to asses this risk, insurers have developed profiles of groups according to their level of risk and will therefore want to know your own sex, age, occupation and where you live. Similarly, if you have been involved in accidents in the past, the insurance company is likely to make the assessment that your chances of having an accident in the future are higher than normal. One way of increasing the chances of your getting a good deal on your car insurance, therefore, is to drive carefully to avoid such incidents as far as possible.

The opportunity for getting a good deal – paying less for the same level of cover – is also likely to increase if the car you choose to drive is in a low insurance category. These categories represent insurers’ broad ranking of cars according to their value, cost of repair, and performance. The “lower” the category, the less you should expect to pay for the insurance. By the same token, however, modifications to a car that are designed to enhance its performance or increase its overall value are likely to attract loadings that increase the cost of the insurance premiums.

Getting a good deal on your car insurance can also be a question of being prepared to assume more of the risk yourself. Most motor policies will have a “compulsory excess” – the first part of any claim that the policy holder him or herself must pay – but it is also generally possible to accept a further, “voluntary excess”, increasing the total amount of the excess.

How does life insurance work?

Life insurance is based on the principle that most of us would want to protect our family and loved ones if, for some reason, we were to die prematurely. It recognises that of course death will come to us all at some stage, but that it is possible to pay a regular premium to secure financial protection for the family against an untimely death. So, how does life insurance work?

Life insurance does this in one of two ways: The first involves setting a specific period of time – a term, with a commencement date and a closing date – during which a benefit becomes payable in the event of the insured’s death. If the insured person dies at any time between the commencement date and the final date, the assured benefits become payable; if the insured dies at any time after the terminal date, however, no benefit is payable. Monthly premiums are payable throughout the term of the life insurance cover but cease beyond the terminal date. At no time does such a life insurance policy have a cash-in value; it pays out only in the event of the death of the insured.

An alternative form of life insurance is called whole of life insurance – because it does just that; it covers the insured person for the whole of his or her life and pays out a benefit whenever death occurs. So if you die within three years of the commencement of the cover, or after 30 years, the whole of life insurance policy still pays out an assured sum. Indeed, with the majority of whole of life policies, the insurer will have been investing the money paid in premiums and a proportion of the earnings from those investments will be credited to the policy in the form of a cash value. The cash value part of the policy can then be used in later life as part of a retirement investment plan, while some of the cash value is also used to maintain payments on the life policy until your death and the payout of the death benefit to your family or loved ones. It will be appreciated, therefore, that premiums for a whole of life insurance policy cost considerably more than those for a term life insurance.

Standard term life insurance can work in more flexible ways, too. For example, one of the most popular purposes of life insurance is to ensure that a mortgage is completely repaid in the event of the premature death of the principal breadwinner. If the mortgage is a standard repayment mortgage, of course, the balance of the mortgage will be decreasing over the years. A decreasing term life insurance policy takes into account this reducing commitment by steadily reducing the amount of death benefit that would be paid over the term of the policy. In this way, the risk to the insurer is reduced and premiums can be made correspondingly cheaper.

Alternatively, term life insurance can be made to work in a way that ensures that any benefits payable increase by incremental amounts each year or that they keep pace with the prevailing rate of inflation. In this case, the policies to choose will be increasing term life insurance (where the benefits increase by a certain proportion each year) or an index-linked term life insurance (where the amount of the benefit increases in line with the prevailing index of retail prices).

Instant Access Accounts explained

The banks and building societies offer quite literally hundreds of different savings accounts and products all designed to encourage the customer to save with them.

These products vary significantly from one to another and their suitability will depend very much upon a customer’s individual circumstances and needs.

There isn’t space here to describe them all but one classic offering is ‘the savings account’. This type of account will often break down into two basic types:

• Those that normally ask the customer to give some notice before the savings are withdrawn – typically these will be called 30, 60 or 90 day accounts to indicate how much notice the customer will need to give before they can gain access to their savings.
• Instant Access Accounts. These usually offer immediate and unrestricted access to savings via cheque, card or ATM etc.

Notice accounts are the traditional savings products that institutions have offered their clients for centuries. As the customer normally has to give a notice period before withdrawing funds, the bank or building society will therefore be able to keep the money for a longer period ‘on average’. This means they often offer customers a higher rate of interest with notice accounts than on some other types of savings accounts or products.

These sorts of savings arrangements may not suit all savers though. In today’s world people sometimes want faster and unrestricted access to their savings and having to wait 30, 60 or 90 days is not always convenient.

So the Instant Access Account was developed to offer the customer more choice.

Instant Access Accounts were designed to be very flexible. They often seek to offer customers a better interest rate than that available with a normal ‘current’ banking account AND instant, or more or less instant, access to the funds when they need them. This can prove very useful to some customers, although on the whole Instant Access Accounts may offer lower interest rates than those available through the Notice Account savings schemes.

The world of financial services moves fast though and new offerings are continually appearing. To some extent, the differences between notice period and instant access accounts are diminishing.

Over recent years new types of Instant Access Account have appeared. These are ‘hybrids’ that are a mixture of the traditional Notice and Instant Access accounts with features of both.

Some of these new Instant Access Accounts may offer the higher interest rates usually found with the traditional notice accounts, while at the same time offering more flexible access to the savings.

They may offer, for example, 3 free withdrawals a year without risking a reduction in the interest rate paid on savings.

In the final analysis, the banks and building societies will usually have available a product or service that will meet the needs of those savers looking for a good interest rate coupled with flexible access to their funds. This may be one of the familiar ‘Instant Access Accounts’ or one of the newer hybrids.

• Instant Access Accounts usually offer higher rates of interest than current accounts.
• Notice Period Accounts usually offer higher rates of interest than current or Instant Access Accounts.
• Instant Access Accounts typically give immediate and unrestricted access to the savings if needed.
• New hybrid accounts have emerged which have some characteristics of both Notice and Instant Access accounts.

Online Current Accounts Explained

Given that we now live in a digital age in which a large number of people have access to the internet twenty-four hours a day, seven days a week, it should come as little surprise that online current accounts are rapidly increasing in popularity.

While some people decry the fact that it’s taking the human contact out of banking and it’s a step away from the old fashioned face-to-face values, that kind of nostalgia really has no place in today’s banking marketplace. When was the last time you had a pleasant chat with your bank manager? The odds are, it’s been a while. Using the latest technological advances allows you to streamline your financial transactions to suit the world you live in – no rushing to the bank before closing time, no being unable to access your funds during the night or on Sundays, and no dealing with irritable or poorly-trained bank tellers (a minority, but they’re certainly still out there). Online banking allows your money to work for you, not the other way around.

Setting up an online current account is, generally speaking, very simple. It usually involves going to the site of the banking institution in question, answering various questions about what you need from your account and personal details. Once that’s finished, it’s as easy as choosing a password and printing off a form to sign and send in – thanks to the fact that digital contracting is still in its infancy, you still need to have an actual pen-and-ink signature to make the whole thing official.

It all depends on what kind of service you’re after, of course, but it’s not at all unusual to find banks and other financial institutions that offer better deals for people who use internet banking services, including online current accounts. This usually comes in the form of higher interest rates on your savings, but banks are free to offer the same kind of incentive they do with any other kind of account, be it telephone or in-branch banking. Check to see what the terms are before you sign up, and make sure you’re getting a good deal.

Of course, one of the main advantages of an account like this is its functionality. Once you have the ability to move your money around at the click of a mouse, it’s easy to find the best deal possible, as well as to keep track of your income and expenditure over any given period. Additionally, up-to-the-minute electronic statements means that, should anyone be making unauthorised withdrawals from your account (as a result of, for example, identity theft), you can find out right away. For the computer literate, there’s really very little to lose by embracing the future of banking.

That doesn’t mean you shouldn’t still hunt around and make sure you’re getting the best deal, but for those in the know (and for those willing to learn), online current accounts can be an extremely simple way of saving both time and money – and in these financially-shaky times, who couldn’t use a little extra of both?

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