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Different Types of Debt

Credit Cards

Credit cards are issued to customers by either banks or credit card companies.  The card allows the purchase of goods and services from organisations who have agreements set in place with the issuers. Customers are given a set credit limit depending on individual circumstances. Repayments are paid by monthly installments and statements are issued to customers.  Payments must be paid in full to avoid interest charges.

Credit card budget account

As with a charge account a credit card budget account is a running account.  The customer is provided with a credit card at a fixed credit limit.  Repayments are paid by fixed monthly installments.

Catalogues/Mail order

Catalogue and Mail Order companies produce brochures (catalogues) and distribute them to different agents.  The agents act on the companies behalf in selling the products onto customers.  Once goods have been purchased (usually by phone or mail) a payment plan is agreed and goods are sent out to customers by post or personal delivery.  Payments are made weekly until the goods have been paid for in full.  The payment is generally a fixed sum credit agreement.

Personal loan account

A Personal Loan is made to a person rather than a company.  The loan is offered with a fixed rate of interest built in at the beginning of the loan.  Payments are made monthly and are fixed over an agreed period of time.  The interest rate does vary but on personal loans it is relatively high.

Loan sharks

A loan shark is a person or body who offer loans at a high interest rate to individuals.  It is a criminal offence to loan money without a credit license.  Loan sharks provide credit to those who are unable or unwilling to obtain money from respectable sources (e.g. banks).  Money is loaned at extortionate rates of interest.  Loan sharks can often operate in cash only and can use harassment and threats of violence to enforce payment.  Any known creditor using these practices should be reported to the police and local consumer protection/trading standards department.  Clients whom complain can remain anonymous.

Charge account

This is whereby a customer is provided with a credit card and a credit limit. Repayments are made by flexible monthly payments. The interest on a charge account is generally higher than other credit cards as it is a running account agreement.

Mortgage

A mortgage is given by a lender (e.g. bank, building society) to a borrower to buy property.  Mortgage payments are generally paid monthly if you do not keep up repayments you are likely to lose your home.  Most mortgage payments consist of two parts – repayment of the amount you borrow and interest.  Some people take the option of a re mortgage whereby an extra mortgage is taken on the property.  The lenders may charge a higher rate of interest on the second mortgage. 

Hire Purchase

A hire purchase agreement is a transaction in which the customer hires goods under the HP agreement.  Once an initial payment has been made to the hire purchase company the customer can then take possession and subsequently pay the other installments over an agreed time period. The goods remain the property of the creditor until the final installment has been made.  Payments are generally made monthly and once all payments are made ownership then passes to the purchaser (an option to purchase fee may apply in some cases).

Pawnbrokers

A pawnbroker is an individual or business entity whom offers monetary loans in exchange for an item of value.  The goods are used as security against the loan and are called ‘pledges’.  More up market pawnbrokers who charge a low rate of interest for valuable pledges are known as city pawnbrokers.  It is a fixed sum agreement over an agreed period of time.

Store Cards

Store cards are now offered to customers in most high street shops.  A store card can only be used in a certain store or retail group and are offered to customers who cannot pay cash.  Repayments are made on a monthly basis and must be paid in full to avoid interest charges.

Unsecured Loan

Unsecured Loans are based solely upon the borrower’s credit rating.  A separate loan account is opened for the customer and interest is built in from the beginning.  Repayments are paid on a monthly basis from their current account by Standing Order to the loan account. An early settlement rebate will normally be available where the loan is repaid in full before the expiry of its agreed term.