7 types of credit provider
Credit providers are companies that offer a range of financial solutions to consumers. These solutions include loans, credit cards, goods and services on credit and overdraft facilities. They are regulated by the Financial Conduct Authority, who are an independent body responsible for ensuring the conduct of the firms.
It’s important to research the different options available when looking for credit, as different providers will offer different benefits depending on your circumstances. Read on to learn about the different types of companies that can lend you credit.
Banks are financial institutions where people and organisations can borrow and invest money. In the UK, variable interest rates on credit can depend on the Bank of England base rate. They will also vary depending on the borrower’s credit history, account history and the size of the loan.
While fixed interest rates normally stay fixed, they can alter depending on the details of the agreement. For example, if the deal had an introductory rate it may change to a different revert-to rate, or if payments are missed, the borrower may be charged a penalty rate or have the introductory rate removed.
The types of credit usually offered at banks range from secured credit, such as car loans and mortgages, to unsecured credit, such as personal loans and credit cards. Secured credit involves using an asset as security that may be seized if the loan is defaulted on. Unsecured credit involves no asset and its terms will depend on the credit history and application details of the borrower.
Supermarkets and department stores
Some department stores offer their own branded credit cards, which can fall under two categories. The first is store credit cards, which function similar to normal credit cards, but use is usually limited to one particular chain or group. Store cards can also come with various benefits, such as purchase discounts, vouchers, and free delivery on goods. The second is credit cards that are simply linked to the store and can be used anywhere. Although these cards are linked to the store, the credit may still be provided by a bank.
Credit unions are an alternative to banks in that they provide financial products and services, but the money is normally put back into the local community. Borrowing from a credit union requires a membership and these members may all share something in common, such as their location, jobs, or trade unions. They may provide smaller loans than high-street banks, and can be a cheaper alternative to other lenders, such as pay day loan companies.
Pay day loan companies
Pay day loan companies are often much more flexible in terms of lending to people with a poor credit history. However, this increased risk and the short-term nature of the loan can also lead to very high interest rates – while there is now a cap on the amount of interest they can charge, the cost of the loans is still expensive.
Some lenders apply a fee rather than interest which can be around £25 to borrow £100 for a month, compare this to credit cards where you might be charged a similar amount in interest to borrow £100 for a year. Although pay day loans may be suitable for some, the high interest rate may make keeping up with repayments more difficult if the loan is not paid off quickly. Missed repayments will be recorded on your credit report and may make it more difficult to get credit in the future.
Businesses offering hire purchase agreements
Some businesses can offer hire purchase agreements that involve putting down a deposit on the item in question before paying the rest in instalments. The item is owned only when the final payment has been made, and is essentially hired out during the repayment period. Businesses who may offer a hire purchase agreement include a vehicle dealership, expensive electrical goods companies, or other companies where customers may not be able to pay the entire cost of an item at once, such as sofa or high-end furniture stores. Missed payments can lead to losing the item, even if the majority of payments have been made.
A logbook loan lets a borrower take out a loan that is secured against their car, and the lender owns the vehicle until the loan has been fully repaid.
A logbook loan can have high interest rates, and if payments are missed, it could result in the car being repossessed by the lender. Repayment terms can differ depending on the deal, some deals may only require the interest to be paid every month before repaying the original sum at the end, while others may allow for the full loan to be paid off earlier.
Peer-to-peer lending connects individuals or companies looking to borrow money with prospective lenders searching for a high return on their investment. Sometimes known as crowd-lending, the online financial partnering websites eliminate banks or building societies as the intermediary, and borrowers may find lower rates than offered at a traditional financial institution.
Lenders can receive better return rates than many savings accounts would give, which can make it a desirable alternative. However, as there is no guarantee the money will be returned, i.e. if borrowers default on their loans, it may be seen more as an investment rather than a savings method. Peer-to-peer platforms are required to hold a certain amount of capital and in some specific circumstances the Financial Services Compensation Scheme may cover some losses.
Paying off the debt
When using credit, making repayments on time can be crucial in determining your financial stability. Interest rates, fees, and other repayment terms can vary amongst different types of lenders, and going to the lender best suited to your needs can be the difference between accumulating unmanageable debt and building up a strong credit history.
To learn more about the factors that can affect your credit history, take a look at our credit hygiene article and you can also check your FREE Equifax Credit Report & Score for your full credit history free for 30 days and £14.95 a month thereafter.
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