A student loan is not a typical sort of loan. For a start, you don’t get it from the bank. This means that although you are borrowing money, the terms are much more affordable than those offered by a bank or building society. The biggest benefits to take note of are:
- The interest rate is low. Interest is charged at inflation plus 3% whilst you’re studying, and at the current RPI (that year’s inflation rate) once you start earning between £15,000 and £21,000. It rises gradually as your earnings increase to a maximum RPI plus 3% if you earn £41,000 or more. Visit Student Loans Company for more info.
- You don’t pay a penny back until you graduate and are in full-time employment, and even then paying it back depends on how much you earn – which makes it much more like a tax than a loan (in other words, if you don’t earn enough you won’t pay it back, which is similar to how income tax works).
- Despite being a debt, your student loan will never affect your credit rating – a grading system used by banks and lenders based on how well you manage your money – whereas failure to pay back a normal personal loan or a credit card will.
As with any sort of borrowing, be sure you understand the pros and cons before signing up for a student loan. However, most students can’t afford university without it and, in comparison with other forms of lending, the preferential interest rates and repayment conditions make it much the safest option for students.
An overdraft is an agreement with your bank that you can spend more than you have in your account, and, if you have a student account, you often won’t pay any interest on it until you graduate.
Be cautious about using your overdraft though – for the following reasons:
- If you spend more than your agreed limit you may be hit with large fees, so don’t be tempted – this is not free money.
- The 0% interest rates don’t last forever. Make sure you know what your repayment terms are; there’s usually a 1 to 3 year grace period after graduation, but then that’s it. Also, be sure to clear your debt before these charges mount up.
A credit card or store card offers another way of borrowing money from the bank. Unlike your student overdraft however, this usually comes with tight repayment terms (generally a month) and high interest rates (often between 6 and 20%). Not paying back can lead to increasing debt. Remember, too, that paying back the ‘minimum’ will mainly only clear interest – and that you keep accruing interest on anything outstanding. So that £50 impulse buy could end up costing you £100, £200 or even £300 if you don’t clear the whole balance as soon as you can.
However, if you only use credit when you can pay it back in full, having a credit card can actually improve your credit rating, which will be important later on in life. Using credit for things like flights and online shopping can also offer payment protection, meaning you’ll be refunded if something goes wrong, such as cancellations or non-delivery.
If you need a large amount of money for a specific purchase, then you might be tempted to take out a loan. However, a personal loan is not equivalent to a student loan. Any money you borrow from a bank or building society has to be paid for promptly, and you won’t be given preferential repayment rates just because you’re studying. A fixed repayment schedule will therefore be drawn up – taking into account both the debt and accrued interest – and you will be expected to make these payments on time, or pay charges (making the cost of the loan more expensive overall).
This one is simple: never be tempted to take out a payday loan. Although they offer immediate cash, the interest rates (typically expressed as an annual sum, known as APR) are extremely high. They may also affect your ability to attain credit in the future, even if you pay back immediately. Avoid at all costs!
If you do get into debt, try not to worry: your bank or building society wants to ensure that you avoid financial difficulties, and will do everything possible to help. So, if you have concerns, speak to an advisor as soon as possible and they’ll work with you to come up with a plan to manage your debt and budget more effectively.
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