For many people, loans are an essential part of their finances at some point in their life. Loans can be part of how we finance big purchases such as buying a house; many of you will have already taken out a student loan to cover the costs of your tuition and living expenses whilst at uni. That’s why King’s Money Mentors are here to make sure you know your APR from your FCA. In this blog post, we’ll aim to teach you about Student Loan Repayments, Credit Cards, Mortgages, and Loan Sharks, as well as how you can find some help if you do find yourself in debt.
Credit Cards
Whilst debit cards pay using money directly from your own bank account, credit cards allow users to buy things on credit (i.e. borrowing money with the aim of repaying it later).
An ‘interest rate’ is the amount of interest that is charged as a proportion of the amount of money that you have borrowed.
An APR (Annual Percentage Rate) tells you the total cost of borrowing over a year as a percentage of the amount borrowed.
If you repay the money you borrowed on your card by the end of your billing period, you can avoid being charged interest.
An advantage of using credit cards is something known as ‘buyer protection’ – this means that if you pay for something between £100 and £30,000 on a credit card, and the company doesn’t deliver, by law (Section 75 of the Consumer Credit Act 1974) your credit card provider is required to give you a full refund, even if the company you bought from has gone out of business or won’t pay refund you itself.
However, credit cards may look like easy access money, but you might be putting yourself at risk of borrowing money you find yourself unable to repay, resulting in your level of debt rising.
If you’re unable to repay, there can be some scary consequences, for example damaging your credit score (you can see our last blog post for more on this topic), incurring additional charges, and accruing a large amount of interest, all of which will make it more difficult to repay the debt.
Interest payments alone can make it difficult to save and stop you from being able to afford large purchases in the future.
It is difficult to clear your debt just by keeping up with the minimum repayments, so make sure you’re putting aside enough money to pay off your debt as much as you can. If you’re struggling with debt contact the Money & Housing Advice Service who can put you in contact with Specialist Debt Adviser who can help you to get back on track.
Also make sure to check out @Blackbullion and follow the link below to read an article on Credit Cards and a handy guide on Paying Off Debt.
Mortgages
The scary M word…Mortgages.
We all can’t wait for the day we get the keys to our own place! However, making such a big financial commitment can be overwhelming. While it may seem a something for your future self to tackle, it can’t hurt to get ahead and know what you should consider before planning your dream home!
Very few people buy a property upfront. Most people will put down a sum of money and take out something called a ‘mortgage’ to cover the rest. A mortgage is a type of loan specially made to help you purchase a property, where you borrow money from a bank or building society. The interest rate will either be fixed or variable, or sometimes a combination, and usually lasts for 3-30 years.
The amount you need to borrow will depend on things such as the size of your deposit and the purchase price of the property you want (which has its own long list of considerations!). Generally speaking, the bigger your deposit, the lower the interest rate attached to the mortgage.
However, the amount of your mortgage that you can afford depends on your yearly income and other financial commitments you may have. Most lenders will limit the amount you can borrow to just under 5 times your yearly wage.
Don’t forget the deposit and mortgage repayments are just some of the expenses that go along with buying a property! You will have to consider additional costs like property tax/stamp duty, survey fees, land registry and more.
Worried? Confused? Click the link below and check Blackbullion’s ‘Mortgages 101’ article to see what questions you need to ask yourself before jumping onto the property ladder!
Student Loan
Student loan repayments begin the April after you complete your studies (whether you graduate or not), provided you are earning over the current repayment threshold. If you are earning under the threshold you will not repay until you are earning above the repayment threshold. Likewise, if your income falls below this threshold, your loan repayments will stop.
So how does your employment type affect your loan repayments?
If you are self-employed, the loan repayments will be calculated each year alongside your other taxes when you complete a tax return.
If you are employed but not self-employed, Student Finance England will take the money directly out of your paycheck each month.
When you begin to repay depends on which Plan you are on. 4 plans exist (Plan 1, Plan 2, Plan 4 and Postgraduate Loan).
Plan 2 applies for all English and Welsh students who have begun an undergraduate course anywhere in the UK (and EU students who have begun an undergraduate course in England and Wales) from September 2012 onwards, currently Plan 2 repayments only begin after your income is over £524 a week, over £2274 a month, or over £27295 a year. You will repay 9% of the amount you earn over the threshold per month.
Postgraduate Loan Plans apply to all English and Welsh students who took out a Postgraduate Master’s Loan on/after August 1 2016, all English and Welsh students who took out a Postgraduate Doctoral Loan on/after August 1 2018, or all EU students who started any postgraduate course on/after August 1 2016. Postgraduate Loan Repayments only begin after your income is over £403 a week, over £1750 a month, or over £21000 a year. You will repay 6% of the amount you earn over the threshold per month.
Example Plan 2 Student loan
Here’s an example of repaying student loans on Plan 2:
Your annual income is £28,800 and you are paid a regular monthly wage. This means that each month your income is £2,400 (£28,800 divided by 12). This is over the Plan 2 monthly threshold of £2,214.
Your income is £186 over the threshold (£2,400 minus £2,214).This means that you will pay back £16 (9% of £186) each month.
Example Postgraduate
And here’s an example of Postgraduate Loan Plan repayments:
Your annual income is £28,800 and you are paid a regular monthly wage. This means that each month your income is £2,400 (£28,800 divided by 12). This is over the Postgraduate Loan monthly threshold of £1,750.
Your income is £650 over the threshold (£2,400 minus £1,750). You will pay back £39 (6% of £650) each month.
Got both?
If you are on both plans:
- You will pay back £39 (6% of £650) to your Postgraduate Loan and £16 (9% of £186) to your Plan 2 loan. So your total monthly repayment will be £55.
Plan 2 and Postgraduate Loans are cancelled 30 years after graduation. Making extra repayments may save you money otherwise spent on interest if you are likely to pay off the loan in full anyway before the 30 years are up (i.e. with a high income). You should only do this if you are certain that it will be beneficial for you, as you cannot get this money refunded.
Resources: Repaying your student loan: How much you repay – GOV.UK (www.gov.uk)
Student loan repayment: should I pay back early? – MSE (moneysavingexpert.com)
Loan Sharks
The phrase ‘Loan Shark’ is an informal, commonly used term for illegal money lenders. These people are not approved by the FCA (Financial Conduct Authority, the people who regulate financial services to protect your money), and they may even threaten violence if you cannot pay them back.
You can help stop dangerous loan sharks. A governmental body known as the ‘England Illegal Money Lending Team’ says it’s recently seen more people turn to loan sharks, as a result of the COVID-19 pandemic. To fight back, it’s launched an app that makes it easier to report illegal lenders – and to find help if you’ve fallen victim to one. It also has tips on how to spot a loan shark and a tool to find alternative legitimate lenders.
You can speak in confidence to the Illegal Money Lending Hotline on the telephone number 0300 555 2222.
Alternatively, you can also email the Illegal Money Lending Team at reportaloanshark@stoploansharks.gov.uk or text loan shark and your message to 60003.
Struggling?
Effects of financial hardship on mental health and where to get help:
Is the thought of money a source of anxiety for you? If it is, you’re not alone! In 2021, Save the Student’s annual survey found that 65% of participants’ mental health suffered due to money troubles. Many students worry about whether they’ll have enough money for food, to pay bills, and this sadly often affects their wellbeing as a result.
This has ripple effects on student life too. Many students are unable to focus on their studies and start to take on multiple part-time jobs to cover the costs, affecting their ability to manage their time effectively.
As scary as this sounds, there can be light at the end of the tunnel! If you find yourself in a situation like this, there are numerous resources and services that can help you.
Here at King’s, you can book an online appointment with the Counselling and Mental Health Team, they provide a free and confidential service for students seeking mental health support.
The King’s Money & Housing Advice Service are a team of specialist advisers able to help you with your financial situation whether it’s from accessing funding and challenging student finance decisions to dealing with accommodation and other debts. Submit an online enquriry form with the team for initial advice and where appropriate an appointment to fully explore your situation. King’s also offers a range of hardship funds and bursaries that you can apply for if you’re facing financial hardship. Just remember, you’re not alone, take the first step and ask for help.
If you are feeling overwhelmed by debt you can also find free impartial advice from Citizens Advice at Debt and money – Citizens Advice or National Debtline. The Money & Housing Advice Service has a partnership with Citizen’s Advice Westminster to provide free and impartial debt advice and they can usually see you within a week, you can use the online enquiry form to request a referral.
Shivam Chotai
King’s Student Money Mentor
Part of Money & Housing Advice
The King’s Student Money Mentors blog shares our students’ personal experiences and thoughts on money-related topics. Any reference, opinions or recommendations on a particular company/brand are only the views of the student(s) who wrote the blog post. King’s College London, the Money & Housing Advice service and the Money Mentor project do not share the views in the blogs nor endorse any of the companies mentioned. Readers should conduct their own research before using any companies mentioned in our blog posts.