There are many temptations now in the world of credit. Student finances are tighter than ever, with rent, fees and cost of living all rising more quickly than student income.
Many people claim short-term loans are expensive. But the range of credit available to students is growing, including much larger loans at lower interest rates but over long periods of times. Take this example:
Loan amount £6,200. Duration 12 years 5 months. Total amount paid over life of the loan: £12,350.04. Interest rate during studies 11.30% pa. (variable) Interest rate after graduation 9.30% pa. (variable). Representative 11.8% APR (variable).
Here’s some things to be aware of:
1.) This 11.8% APR loan costs £6,150.04 in interest and fees.
Lower interest rates add up – especially with compound interest. After 5 years, a 15% per annum loan has grown to double what you borrowed. Low monthly repayments of a few hundred pounds may be tempting, but this is a huge amount of money. Are you unwittingly spending the money for your first car or house deposit, before you’ve even earned it?
2.) Student Finance and support from parents are designed to cover your cost of living.
A large loan to improve your quality of life may be tempting, but remember there is no shame to living on a shoestring at university – in fact, it’s a rite of passage and part of the fun. You may see a figure going around that an average student spends around £735 p/month even though the average maintenance loan is £458 p/month, which might make a big loan look more appealing.
But hang on – the average student also receives additional funding which is made up of either a Maintenance Grant or a calculated “family contribution”. Things may be tight, but not THAT tight.
As Mark Twain once said, “There are three kinds of lies: lies, damned lies, and statistics”. Don’t be fooled into dishing out £6,150.
3.) You are signing up a a burden on your finances for the next 10 or more years.
With a longer term loan, you are committing to making payments of perhaps several hundred pounds a month, for 10 years or more. As a student, how can you be certain that this will work out? Your loan payments are an obligation that will be reported on your credit file, and any mistake will affect your ability to access other credit.
4.) Small, short emergency loans are much cheaper – even with a higher APR.
At Smart-Pig, we think you should tighten your belt and try to live between your means, instead of resorting to long term finance. If it doesn’t always go to plan, we’ll be there for you – and the occasional fix will cost you a lot less than £6,150. A two week emergency loan from Smart-Pig of £200 will cost you just £22.40 in fees, even though the APR would be 1,492%. And what’s more, you can graduate without a long term financial burden from a private loans company.
Warning: Late repayment can cause you serious money problems. For help, go to: www.moneyadviceservice.org.uk
Your University may be able to offer financial support and advice.
Representative example: Loan £100 over 40 days. Interest rate 292% pa (fixed). Total amount payable £132. Representative 1160% APR.
Not everyone without a maintenance grant can rely on support from their family, so if this is the case a longer term loan might be a sensible option for the confident and the brave. But for the rest of us, why spend £6,150 ?