HOUSEHOLDS have been warned about new loans that could see you spending more on your debts.
People with poor credit scores may find it harder to borrow from banks or get credit cards.
And when they do, often have higher rates of interest on their borrowing.
Some lenders are offering loans where they reduce these high rates of interest if you make your debt repayments on time.
But this style of loan could leave you struggling to make a real dent on the amount you owe.
Fresh warnings have been issued about these types of loans after guarantor lender, Amigo, launched a new product.
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It was accused of handing out “irresponsible” loans, lending to customers who couldn’t afford to repay in 2020.
Now, it is offering a new loan which will see borrowers’ interest repayments reduce by up to 15 percentage points if they pay back on time, according to the Financial Times.
Other companies are offering similar loan repayment terms.
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For example, LiveLend will reduce your interest when your credit score goes up.
For every 25 points your credit score increases, your loan rate will go down by 2% if you keep up to date on repayments.
But borrowers have been warned that their loan repayments won’t reduce as much as they think.
Because the interest is front loaded you mainly pay the high rates at the start.
That means cuts later down the line don’t actually save you that much.
Sara Williams, founder of debt news website Debt Camel, said: “Cutting interest rates may sound good, but it’s easy to assume your repayments will fall more than they will because the early repayments in a loan are almost all interest so will be at the initial high rate.
“So reducing the rate during the loan will not cut the repayments to what they would have been if the loan had been at the lower rate from the start.”
She said that on one LiveLend loan for example, when the interest rate was cut from 12.9% to 10.9%, the monthly repayments only dropped from £211.41 to £206.38.
It comes as more households are turning to relying on credit and finance to help them through the cost of living crisis.
And an investigation by The Sun revealed hard-up households are being targeted with mis-leading adverts for loans with rates as high as 1,721% on Facebook.
In recent years the City watchdog has cracked down on high cost credit, including doorstep lending, rent-to-own, overdrafts and payday lending.
It follows The Sun’s Stop The Credit Rip-Off campaign to help the millions of families who fall prey to doorstep and legal high street loan sharks.
A report from the Financial Conduct Authority (FCA) in 2019 found that nearly 3million people use high cost credit.
Ways of avoiding high cost credit
There are a number of ways of swerving high cost credit options.
You may be able to borrow from a local credit union. These are small not-for-profit groups that help people save and borrow money.
Sometimes they are for people living in a particular community or for people who work in a particular type of job.
You can find out which credit union you are eligible to join by searching here or by calling the Association of British Credit Unions Limited (ABCUL) on 0800 015 3060.
If you are struggling before payday, ask whether your employer could give you an advance on your wages.
If you are on benefits and facing a wait for your first payment you can speak to your Jobcentre Plus adviser to see if they can arrange a short-term advance that will have to be paid back when your benefit comes through.
If you’re after a new sofa or washing machine then it might be worth considering whether you can buy it second-hand.
Use websites like Freecycle to find items for free in your local area.
You’ll also be able to find goods nearby on local Facebook groups, eBay and Gumtree.
If you’re taking out a loan, you’ll want to get the best deal.
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To compare loans, you can use a comparison tool.