People borrow money all the time.
Running up debt can be very easy
- They take out a loan to buy a car.
- They use credit cards to pay for everyday items - and more.
- The have a mortgage to buy a house...
Most people manage to keep their borrowing under control and make the repayment regularly until it is all paid off. When they do, they can borrow again. If they fail to do so, they will end up on a black list and lenders won't be prepared to lend to them.
Why is it important to make repayments regularly when you borrow money?
Why are lenders not happy to lend to people who do not have a good record?
The Meadows hit the headlines when they got into trouble because they hadn't paid up on time. They had a bad credit record so the banks on the high street wouldn't lend to them. They ended up borrowing from a loan shark who charged them 34.9% interest. When they stopped paying - their loan ballooned from the £5,740 they'd borrowed to £384,000!
It turned out all right though because the man who lent the money to them ended up in jail and their debt was cancelled. He'd specialised in lending to the poor and people who had a bad record - at interest rates of 8,000%. He was jailed because he was licensed to lend money.
Explain why the debt grew as it did.
Why do you think people borrow from loan sharks when they know they will have to pay very high interest rates?
If you get into trouble and can't pay your debts there are some simple rules...
1. Talk to the lender. Unless it's a loan shark, they'll probably listen and try to help. After all they want their money back.
2. Work out what you can pay. Add up all your outgoings and see what's left. Offer to pay a realistic sum so you don't fall behind again.
3. If you've got several debts, work out how to pay the most important ones. If people fall behind with the mortgage, they might lose the house - so it's important to make sure it's paid.
4. Get it sorted because you can be sent to prison for not paying your debts.
If a family gets into debt, which debts would you think are most important to pay.
Have a look at this advice from the Citizens Advice Bureau to help you work it out.
Getting it right
When taking out a loan you must make sure you have all the information you need to make a sensible decision about signing up - and being sure you're not dealing with a loan shark.
Any agreement should tell you:
1. How much you are borrowing.
2. The interest rate
3. Any charges
4. What will happen if you want to cancel the loan
5. The Annual Percentage Rate - the total amount you will pay each year including all the charges.
If all these are not on the agreement - it may not be valid.
Once you have the agreement - it must be signed by both the lender and the borrower.
Why do you think an agreement is only legal if you have all this information?