LINE OF CREDIT BORROWING VS. INSTALMENT LOANS (UK)

A line of credit, also referred to as a “personal revolving credit line/open line of credit/open-end credit line”, is a relatively new type of borrowing/loan offered by financial institutions to the subprime market. Of course, those with good credit histories/scores, with no CCJs against them have enjoyed this type of credit for years, the most common examples being credit cards or bank overdrafts.

A line of credit is a type of loan that gives the borrower access to a set amount of cash. The borrower can draw on this as and when they need to until they reach the credit limit. As the outstanding balance is paid off, along with the interest, the borrower can continue to borrow as required. So, borrowers pay the debt as they would any other loan, for example an instalment loan, the difference being that the user can borrow up to the credit limit again without going through another loan approval process. Both SafetyNet Credit and Tappily are sister companies who offer this line of credit finance, along with Polar Credit and Drafty.

Instalment loans differ from line of credit borrowing in that you immediately receive the full amount of money you want to borrow, and you pay it off—sometimes with interest—in regularly scheduled payments, known as instalments. You typically owe the same amount on each instalment for a set number of weeks, months, or years. Once the loan is paid back in full, the account is closed. High cost, short term instalment loans, like payday loans, are the go-to credit solution for those who are in need of instant cash, perhaps for an unexpected bill, who have no or a poor credit history/score, cannot provide a guarantor, or have a CCJ against them, and have been refused loans in the past due to these factors.

This of course will mean that a higher interest rate will be charged as the lender is effectively taking a gamble on lending to a borrower who might not be able to pay the money back in a timely manner or in full. Lenders such as 118 118 Money, Lending Stream, Bamboo Loans,Everyday Loans, CashASAP (who also offer the traditional payday loan) Cashfloat Loans,DotDot Loans, Likely Loans, Loanpig, Loans2Go, Moneyboat and Savvy Loans all offer instalment loans. If you are considering taking out an instalment loan, it is very good advice to shop around, as, although all these lenders are regulated by the FCA, the interest rate/representative APR they quote can vary wildly. For example, an instalment loan of £2000 over 2 years with 118 118 Money would cost you £967 (plus the original loan sum), with the interest rate fixed at 41.2%pa (Rep 49.9%APR), whereas with Savvy Loans, a loan of £400 would cost £399.98 (plus the original loan sum) – so almost double the original loan (fixed interest at 291.50% (Rep 1259.2%APR)!

What are some of the Pros of a Line of Credit?

• You only borrow the money you need.
• You only incur interest on the borrowed funds.
• Repayments options are flexible.
• You have constant access to funds.
• Very few restrictions on use.
• Up to 100% of credit limit may be used with no restrictions.
• Some lenders, like Safety Net Credit, offer a “Smart Top-up” option, whereby your bank account is automatically topped up before you enter into your overdraft.

What are some of the Cons of a Line of Credit?

• Monthly/annual maintenance fees (whether you use the facility or not).
• Variable rate increases if interest rates increase.
• Higher rates compared to fixed rate/instalment loans. With the greater flexibility for borrowers, the intrinsic risk for lenders forces this.
• Temptation to spend more due to ease of access to funds.
• Fees/APRs vary widely by lender.
• Credit score can decrease if balance is persistently high.

What are some of the Pros of an Instalment Loan?

• Fast access to money to cover a large expense.
• Regular and predictable repayment arrangement which can help with budgeting.
• Can improve credit scores if account managed well.

What are some of the Cons of an Instalment Loan?

• They are fixed term, so typically you cannot add to the original loan amount should you find you need more cash.
• Some instalment loans have long repayment terms, so it is worth checking to see if there are penalties in the terms and conditions for early repayment.
• If the instalment loan charges interest, it may depend on your credit score as to how much you pay. Obviously, those with lower scores will be charged a higher rate.

As can be seen from the information above, there are pros and cons to both types of loan, and it is down to the borrower to do their research to establish which one would be more suited to their financial situation, and the reason for the loan. A line of credit might seem a better option as it appears to have more flexibility, but some customers have complained that they did not realise that interest is added daily as a percentage of the loan balance. If you’re with Drafty, you’ll be charged 0.18% per day (so 18p per £100) which is one of the lowest daily charges; SafetyNet Credit are at the other end of the scale and charge 0.8% per day; to put this is context, if you were to borrow £500, after 40 days, you would owe £660, a sizeable £160 interest payment.

Another common complaint with line of credit finance is that some lenders take repayments (as they have seen money deposited in the account) with no warning, and in some cases, customers claim, the repayment amount has left them with no available cash for everyday expenses or has caused them to go overdrawn with the bank – the very thing they had been trying to avoid!

Both types of loan have had criticism aimed at them for being unaffordable, with lenders failing to establish that the borrower already had multiple loans, or had obvious red-flag issues, such as gambling problems etc. Equally, some customers have complained that the interest rates charged have left them in a worse situation than before they had the loan, and also that the lenders are completely unhelpful if a borrower’s financial situation changes, and instead of helping, merely hassle via emails, telephone calls and letters.

If you have had a line of credit or instalment loan and feel you have been treated unfairly, either at the application process stage (you believe you should not have been given the loan) or if your circumstances changed and your lender would not help and your debt is growing, then Redbridge Finance may be able to help you. Go to www.redbridgefinance.co.uk and we will assess if you could be entitled to a refund.