A Guide: Banking

Loans

Taking out a loan can be disconcerting to many because it is a commitment entered into usually for several years which carries a continuous responsibility to have funds every month in order to make the payments. This means that a regular income must be secured in order to meet this commitment every month. Failure to keep repayments up to date may result in prosecution or loss of the asset or goods purchased.

How much will it cost?

When entering into a loan what one has to determine is how much it will cost each month and for how long the repayments will run. The bank will be able to inform you of how much the total cost of the loan will be in the long run. There are usually different interest rates for different amounts of the loan taken out. Ultimately what you will pay is an APR (Annual Percentage Rate) on the amount taken out (this is the interest rate plus any other charges or expenses). This rate will fluctuate according to inflation and the base rate at the time.

The following table illustrates a typical example of what you would expect to pay for a loan over 5 years (60 months):

Loan Amount (£) APR Monthly Repayment Total Amount Repayable
£3,000 15.40% £70.50 £4,230
£5,000 7.90% £100.58 £6,034.80
£10,000 7.40% £198.90 £11,934.60
£15,000 6.80% £294.37 £17,662.20

These calculations are based on taking out a loan with a fixed rate, which is the most usual kind of loan. There are loans however, which have variable rates. This means that the loan is subject to interest rate fluctuations (tracking the changes in the base rate) and therefore your monthly payments might change in the future. This type of loan makes it harder to budget, and payments may increase or decrease.

Small Print

It is very important to read all the information provided by the bank and the terms and conditions that you are signing. The small print (normally after the space where the signature goes), usually entitled ‘Disclaimer’, sets out different clauses which you would be legally bound to for the duration of the loan.

A bank is required to provide the customer with some form of ‘facility letter’, or agreement which must be signed by the customer. This should outline all the terms and conditions and how much you are expected to pay per instalment etc

Secured Loan

One must also be very aware if the loan is secured on your home or any of your personal belongings. If the bank holds something of value as collateral, and you were to default on loan repayments and became what is known as a ‘bad or doubtful debt’, the bank would be legally entitled to repossess your home or valuable belongings in order to repay the loan.

Acting as a Guarantor

When someone you know very well, such as a family member, takes out a loan and asks for you to become their ‘Guarantor’ for the purposes of a lending agreement great care must be taken.

This affects you in two very important ways. Firstly if the person you are the guarantor for, defaults on the payments, you will be legally required to take up or repay the loan. Secondly, as this becomes a personal liability even if you are not the person making the payments for the loan, and it is not in your name. Upon applying for credit yourself, you would have to disclose this and the lender would have to take this into consideration as if the loan was held by you. Because of these two reasons, very careful consideration should be taken when agreeing to become someone’s Guarantor.

Applying for a loan

Usually it is a requirement to already hold an account at a bank to apply for a loan and be aged 18 or older. Upon applying, you might be required by the bank to provide due diligence (proof or address and proof of ID).

Savings

Most banks and building society’s offer a range of savings accounts. The general rule is that the more restrictions there are in taking the money out of the account, the higher the interest rate. This is because the bank invests the money paid into the account into either the bank’s own accounts, to cater for lending, or to invest in bonds and shares on the stock exchange, which means that the money will be tied up. Basically, the longer the bank holds your money, the more options for the bank to be able to invest it elsewhere, and thus the reasoning behind rewarding the customer with a higher interest rate.

Care must be taken when opening a savings account due to the fact that there may be substantial charges incurred as a result of an early withdrawal, although usually this is simply taken from the interest paid instead of from the amount actually on deposit.

There are savings accounts which are longer-term deposits, usually called ‘money market deposits’. These usually request much larger amounts to be deposited (usually above £25,000 or £30,000) for a fixed term (weekly, fortnightly, monthly, quarterly, half yearly or yearly) which is then directly placed on the money market or stock exchange by the bank. These usually pay out a much higher interest rate than normal current or savings accounts.

Travellers cheques

Although used less and less since the advent of debit and credit cards, Travellers Cheques are still considered a preferred or safe option to travel with money.

Travellers Cheques are protected from the moment they are purchased. If lost or stolen, Travellers Cheques can be replaced with a telephone call - usually within a day or two. They are a safe way to protect yourself against the hassle and inconvenience of losing cash.

Travellers Cheques are accepted worldwide and are available in numerous currencies and denominations. Although this differs from country to country and bank to bank they are usually accepted at a wide variety of shops, restaurants and hotels, as well as banks, foreign currency exchange bureaux and Travel Service locations. You can buy Travellers Cheques at participating banks, building societies, travel agents, foreign exchange bureaux etc.

There is usually a charge associated with purchasing and redeeming Travellers cheques, and one must be prepared for fluctuations in currency exchange, and differences between the buy and sell rate when cashing in Travellers Cheques. This means that the amount you paid for the Travellers Cheques might not be the same as you get back.

Current Accounts

Most banks offer what is called a ‘Current Account’. This is a type of account, which enables you to pay for day-to-day goods and services using either a card or a cheque book, and that normally does not require giving any notice of withdrawal or deposit. In many cases your monthly/weekly salary or pension will be paid into this account, and bills can also be debited from this account.

Most banks require you to have a current account before you are eligible for a loan. This is because banks usually prefer to have a history of the ‘account conduct’ before supplying credit facilities.

Upon opening a current account for the very first time with a bank, you are not only opening an account. The way that a bank views your application is as the beginning of a business relationship during which, in the future, the customer will be requesting further services. As a result therefore, due diligence (proof of address and proof of identification) will be required, as well as filling in an application form which may include a considerable amount of questions. You will also be asked to sign the application form to confirm that you agree with the terms and conditions outlined in the form. Always remember to read the ‘small print’ and the terms and conditions as these vary from bank to bank.

Cheque Book and Debit Card

In the past, most current accounts came with a cheque book and a debit card. Historically, cheques have been the most common method of paying for goods. There has, however, been a reduction in usage as a result of the wider use of the debit card in shops, and because a cheque guarantee card is now requested when paying by cheque it is easier to simply use the card.

A debit card is a card which you can use to pay for goods and services. Unlike a credit card, the money is directly taken out of your account. Most UK-bank debit cards carry the logo ‘Maestro’. If you find this logo in shops and/or on cash machines, it means that you may be eligible to pay via card or take money out of that machine.

When using your debit card to purchase products on-line you might be requested to type in your ‘security number on the back of the card’. These are the last three digits which appear on the signature strip on the reverse of your card. This is designed to greater increase the security of shopping on-line.

When providing your card or account details on-line you must always search for a lock symbol which normally appears on the top right-hand of your screen. This icon lets you know that the site is a secure one.

The cheque guarantee logo is usually found on your debit card. However you might not be entitled to this until you have proven to the bank that you manage your finances appropriately or until you have been with the bank for long enough to merit your cheques being guaranteed by the bank. There will be hefty charges for misuse of the cheque guarantee system and it is therefore worthwhile to ensure that there are enough funds in your account before you make a cheque.

On a cheque one would expect to find some of the following:

  • Sort Code (a unique number which identifies the bank)
  • Account number
  • Account name
  • Cheque number
  • Name and address of the bank
  • Different fields to fill in the information of the cheque (payee, amount etc)

A cheque must be dated and has a life of six months after which it becomes void and you will have to be issued with a new one if it has not been banked. A post-dated cheque will not be accepted by a bank. If you were to lose a cheque, you can call up your bank and stop the cheque via the cheque number so that no-one pays it into another account (charges may apply). If the cheque has not been signed, the person receiving the cheque will not be able to pay it into their account.

If you are given a cheque to pay into your account and the cheque ‘bounces’ (cannot be paid in because either the payer’s account has been blocked or there are insufficient funds), usually there will be charges involved to cater for the administration time that a bounced cheque involves. If you have been charged you will have to re-coup this money from the person that issued you the ‘bad cheque’.

Chip & Pin

The ‘chip and pin’ system has been applied to debit and credit cards in order to increase security.

Each card provided by the bank (debit or credit card) will be issued with a noticeable chip which allows merchants to insert the cards into a special machine where customers then punch in their chosen pin number. This method is far more secure than a signature. If the card were stolen, it would be much harder for a fraudster to use the stolen card for their benefit because they would not know the pin number. However, no system is infallible so if you lose your card, you should always contact your bank immediately.

Your pin number is usually dispatched to you by your bank separately to your card. You can usually change your pin number to one that you can remember, although it is not advisable to used consecutive numbers or memorable dates. This can make it easy for fraudsters to use your card.

Automatic Teller Machine’s (ATM)

Your debit/credit cards are usually usable in most ATM machines, where you are able to withdraw funds from your account by inserting your card and typing in your pin number.

There are a number of precautions you must take when withdrawing from an ATM, especially in a foreign country:
Always look behind your shoulder to make sure nobody can see your pin number

  • Never jot down your pin number especially in a place where you would store your cards. If you can’t remember the allocated pin number, some machines have the facility to change it.
  • If the machine looks tampered with or looks suspicious – DO NOT USE IT.
  • Be careful with charges. Some machines may charge you a handling fee (especially if withdrawing overseas).
  • If you are withdrawing money from an ATM machine which does not work in the same currency as yours, there may be extra charges and your might not be aware of the exchange rate used.

Direct Debits and Standing Orders

Direct debits and standing orders can normally be set up from a current account.

A direct debit is a way of paying bills or regular payments automatically at set intervals (i.e. weekly/monthly/quarterly etc). The direct debit is set up by the person who is receiving the funds (the payee/merchant) under the consent of the customer, be it a shop, insurance firm or telephone company. The amounts may vary according to how much is owed to them at the time of the payment.

A standing order is set up by the account holder and is a fixed amount at the chosen interval to the payee.

Both a direct debit and a standing order can be cancelled at any time by the account holder, although with most direct debits, you might be under an obligation – which has nothing to do with the bank (as a result of the agreement made between yourself and the payee) to first inform the payee that the direct debit will be cancelled.

Direct Debit (D/D) Standing Order (S/O)
Merchant sets the D/D up via a signed agreement Account holder (you) sets up the S/O
Paid at set intervals (either chosen by account holder or requested by recipient) Paid at set intervals (usually chosen by account holder)
Amounts paid on intervals may vary Amount paid stays the same
Usually obliged to inform recipient of cancellation of direct debit, or terminates as a result of discontinuation of service Usually not obliged to inform any party

Both direct debits and standing orders are a very convenient way of paying for services without actually physically displacing yourself to do so.

It is also beneficial because there is little risk of forgetting to pay. The payment for these is usually set up a couple of days after the deposit of monthly income or salary, to ensure that there are enough funds in the account to cover the payment.