Lesson video

Welcome to the RSHE PSHE Internet safety and harms: Gambling, debt and targeted advertising.

My name is Mr. Duffy.

I'm really glad you've joined me today.

Today, we're going to look at the risks of online financial lending.

So hopefully, you did really well on your intro quiz.

We're going to look at online lending types, safe lending online, and you'll do your exit quiz at the end.

First, take a look for some key words then.

So APR.

This is the term "Annual Percentage Rate", also known as APR.

Refers to the annual rate of interest charged to borrowers and paid to investors.

APR is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan or income earned on an investment.

So for this lesson you're going to need an exercise book or paper, because there are some tasks to do along the way in which case you're going to need to write something down.

So you will need a pen or a pencil.

So pause the video.

Let's play a game of guess the APR.

Now these are typical APRs.

So all we need to do is guess the APR percentage for a payday loan, credit card, a bank loan and an overdraft.

Pause the video, make your choices, and I'll see you in a second.

So, payday loan then can be up to 1,500%.

And as you can see there it has the highest typically but it will differ from lender to lender of all forms of loans, money, credit.

Credit cards, 0% to 23%.

So 0% might be for 12 months, six months, nine months, 18 months.

It all depends on the lender, but certainly for a short period of time up to about 18 months you can get 0% on borrowing, which sometimes means credit cards can be a really good alternative to a loan, particularly if you want to pay it back quite quickly.

However, if you don't pay that loan back your interest will then start, and typically, you can be paying up to 23%, once the 0% has ended.

Bank loan.

Now this is useful, at 3.

4%, again, it will differ from lender to lender.

It can be a little bit less, maybe 2.

9, it'd maybe a little bit higher, 6.

6, depending on the type of bank loan.

Sometimes for a car you might maybe pay up to about 12%, 11%, something along those lines.

Now a bank loan, if you get one at 3.

4% and you get it over five years can be really useful.

One, the amount of interest paid is quite reasonable.

And two, you know exactly how much you are going to be paying per month.

Okay, so it be quite a useful alternative especially if you are borrowing a large amount of money.

So let's say, maybe having building work on your house then you'll want a big loan, maybe 30, 40,000 which a credit card isn't going to give you, a bank loan is a good alternative to that.

And an overdraft.

So that's on your bank account and that can be payments of around 19% up to 40%.

Having an overdraft is a really expensive way of borrowing money.

And in many cases it's worth, yes it's worth having maybe 100 pound overdraft because if for whatever reason you go into that overdraft at the end of the month, you don't want to be paying charges.

So it's there, it can be useful as a little buffer but it's not something you should be in regularly, because it can and will cost quite a lot of money to be in there.

So what is a payday loan? We see the adverts quite a lot on the telly really.

And so, what are they? So a payday loan typically is a short-term term loan originally designed to tie people over until payday hence a payday loan.

So normally, maybe you'll take out a loan, I don't know some point during your pay month, it might be in the middle, and then you pay it back at the end of the beginning of your next pay day, hence payday loan.

The money gets paid directly into someone's bank account and then they repay in full with interest.

But as we've seen, the interest is really, really high and obviously are any charges that are accumulated at the end of the month.

Normally, the person taking out a payday loan will have until the end of the month to pay that loan back.

But typically nowadays these payday lenders are now offering short-term loans up to about 12 months.

So let's take a look at a payday loan scenario then.

So Sarah's boiler has broken and she has no savings.

She does have unfortunately, a poor credit rating and has very little spare money available at the end of the month.

But her boiler needs fixing, okay? Boiler's broken, it needs fixing.

So she decides to get a payday loan.

So this is what she borrows.

She borrows 1,000 pounds over 12 months which costs her 166 pounds per month, 992 pounds of interest which means her total repayment are 1,992 pounds.

Her interest is nearly the cost of her borrowing.

Okay, so she wants to borrow 1,000, the interest is nearly exactly the same.

So what would your concerns be? Pause the video, I'll see you in a second.

So there's sort of two or three main concerns for me here.

One, is that comment, "No savings and little money available at the end of the month." Having little money at the end of the month available is she going to be able to pay the repayments back? If not, that is a concern, because she could end up in this repayment trap where she's just getting a loan to pay her loan off, which ultimately she's going to end up paying way more in interest on way more over what she intended to borrow.

And if she was to fall into arrears they'll be charges, et cetera, on top of that.

So it could cost potentially a lot of money if she can't afford those repayments.

My other concern is the amount of interest, nearly the cost of what she wants to borrow.

So she's borrowing 1,000, but she's having to pay 1,000 back, plus nearly 1,000 pounds back.

That's a lot of money to have a boiler fixed.

So those are my concerns really.

One, she hasn't got any savings, two, very little money available at the end of the month and three, the amount she has to pay back, not just the monthly repayment cost, but also the the amount of interest she's paying back.

And as I mentioned, she could end up in this payday loan trap.

Now, if she has to rollover or defer her loan or get a further loan, one, she's limited by the amount of time that she's allowed to do this.

And every time she rolls it over with a payday loan company they must give her information each time which details free advice providers.

Rolling over her payday loan might seem like a great solution at the time.

She might be thinking, "I need to get this paid back, I need to get it paid back," but it can quickly lead to problems, because she'll end up paying more interest back and other fees.

If she couldn't necessarily afford the payment in the first place, why is she going to suddenly be able to afford all these extra repayments on top of that? This could end up leading to financial difficulties and then up ultimately struggling to pay for the essentials that she needs.

Things including her rent or even food.

So what can Sarah do then? In this situation, what can she do? Pause the video and we'll see you in a second.

She needs first of all, to look for a better alternative.

It may be that she could contact the gas company, British gas or whoever it may well be EDF, whoever she's with and come up with a repayment plan or sort of a fixed payment plan where she gets maybe a service included in the boiler.

That might only cost 12 pounds a month for some form of insurance.

It might be worth contacting her insurers the home insurers, because they may cover boiler breakdown.

So rather than having to pay 166 pounds a month she takes out short-term insurance which she can do, the bank or these insurers usually let them do that.

And she may already have it.

In which case she's only paid a short six, seven, eight, depending on the price of the insurance, 12 pounds a month, something like that.

It's a lot cheaper than 166 pounds a month.

If she doesn't have any insurance and she can't get credit, because she has poor credit, she can't get a loan, if she's contacted her energy provider and there's nothing they can do, she can go to something called the CDFI, Community Development Finance Institution, or Citizens Advice and they will give her detailed advice on the alternatives.

There are charities out there and there are people out there who will offer short-term loans but with small amounts of APR, not a payday loan, which is really important that she's not swayed by these payday lender adverts.

We always see them don't we where she's on the drive boiler broke, trying to get the kids off to school, she makes the decision on the phone whilst trying to get the kids in the car.

It's quick and easy.

But that's probably the worst time to make a financial decision.

She needs to stop and think carefully about how she's going to pay the loan back.

The boiler's broken, she'd probably cope for a couple of days.

Give herself at least an hour, maybe two hours to go through finances, go through bank statements, go through paychecks, give herself, have a look at her monthly expenditure over two or three, four months.

Work out her average outtakes, her expenditure, work out her income and figure out how much she has spare realistically at the end of every month, and then come up with a better alternative.

Don't rush into a decision.

Check the lender is regulated by the Financial Conduct Authority.

That's really important.

She may go to something, a payday loan advertised on the internet.

And if they're not under or regulated by the FCA she does not touch them at all, because they could try and scam her.

So the first thing is, don't make a rash decision.

Just have a look at what alternative she has.

It may be contact her insurers.

It may be contact the energy providers.

See if there's something they can do.

Contact Citizens Advice the CDFI.

Have a look at and see if she can get a credit card if needs be, and pay it off over 12 months.

If she took a credit card at 0% for 12 months she would pay less than 100 pounds a month back.

So it'd be a cheaper alternative.

What's really important to understand certainly for Sarah is as long as you can afford the debt debt isn't necessarily bad, but debt becomes bad, if you can't afford it.

And she's got little money at the end of the month.

So she needs to make sure that she is absolutely confident that she can repay that loan.

So what is a credit card then? We've looked at what a payday loan is.

What's a credit card? Pause the video, write down your ideas and I'll see you in a second.

So a credit card lets you borrow money from a bank or building society, which you can use to pay for goods or services upfront.

You can then pay the money you spend on the credit card known as the balance, on a monthly basis.

If you pay back your balance in full each month you won't pay any interest on what you borrowed.

However, the person using a credit card will need to check the fine print.

A, how long is that 0% going to last for? And what's the 0% on? So just making sure that they've read the small print.

Typically, as I said, anything between six to 18 months.

So what is a personal bank loan? Pause the video.

We'll see you in a second.

So a personal bank loan is an amount of money borrowed for a set period within an agreed repayment schedule.

So a credit card, a payday loan is usually a short-term loan over maybe no more than 12 months.

A credit card's similar.

Generally, a short-term borrowing solution for a reasonably small amount of money maybe up to 8,000 pounds, something like that.

Typically, you won't want, maybe borrowing maybe 1,500, 2,000 pound.

Depends on what you want to spend the money on.

Some people will use a credit card to pay for a holiday, because the bank shared joint responsibility.

So if anything was to happen maybe you bought a kitchen on a credit card, eight grand kitchen, if the kitchen company goes bust, you want to get your money back 'cause you've not received your kitchen.

The bank has joint responsibility and will give you the money back.

So it can be quite a safe way to purchase things.

A personal bank loan is a repayment amount which will depend on the size and duration of the loan, but typically for the larger amounts of borrowing.

So it might be that you want to borrow 50,000 pounds for a house renovation.

You wouldn't be able to borrow that on a payday loan and surely wouldn't want to, because of the APR.

And you also wouldn't put it on a credit card, 'cause you just won't be able to get a credit card big enough typically.

So, and it's also, you're borrowing 50,000 pounds, you're going to spread that over a longer period of time.

Maybe three years, maybe five, maybe even 10, you would decide that between yourself and the bank.

So what I want you to do is copy the table out and I want you to write the pros of a payday loan, a credit card, and a bank loan.

So write down the advantages, I'll see you in a second.

So there are advantages to all three types of loans.

But it's really important that whoever's taking these particular loans out are aware of the advantages and the disadvantages which we'll do in a minute, but also how much you're going to agree paying back was really important, can they afford it? So a payday loan, it's quick.

It can be paid into someone's bank account within 90 minutes.

So it makes it a nice, quick, easy alternative.

It's easy to access.

As soon as, 90 minutes, it's in your bank, you've got it.

It's there in your hand, you can do whatever it is that you need to do with it.

And there's fewer requirements than other loans.

And there's no credit checks.

If you've got a poor credit rating it's ideal.

Credit card, interest-free spending.

And as I said, typically up to about 8,000, 10,000.

It will depend on the person getting the credit.

It all depends on their credit rating.

If they've got a really good strong credit rating, then they can borrow more, 'cause the bank trust them more, because they're going to think, "Well, he's got really good credit, he or she is going to pay it back.

Not a problem, we can lend them X amount." So it is dependent on your credit rating, but interest-free spending up to about 18 months, which is brilliant.

So buy now, pay later, spreading purchases out, improves your credit score and have purchase protection.

And that's really important, that purchase protection.

One, you're using your credit card, maybe for a holiday.

Your holiday company goes bust, your bank have joint responsibility.

The bank give you the money.

You don't have to wait around for the ATOL protected.

Maybe they're not even ATOL protected.

Some of them aren't.

You get your money back.

Your money is protected, 'cause your bank share the responsibility with you.

You got that credit card, you pay for your holiday, you put the money on the credit card, you've not paid any interest, you're building your credit score up.

So it can be really useful.

And credit score is really important when someone wants to go and get a loan.

It shows that you are a responsible lender, that they can lend to you.

It shows that you are a responsible borrower of money and more likely be lent money.

So credit score is really important.

Bank loan, not repayable on demand.

So they don't want it now.

They'll set out a term and you'll agree that term with your bank, three, five, 10 years, it's between you and your bank.

Fixed interest rates.

What a fixed interest rate means is that the interest rate doesn't change.

So if you're paying 3.

5%, that's what you're going to pay off the loan over the term.

So what that means is you will know every single month how much you are going to repay that loan.

And every month, the same amount will come out of that person's bank account.

It just makes financing a lot easier.

You know where you're at.

Sometimes you can take a repayment holiday.

This can be maybe three times over the term of the loan might just be once again, it's all dependent on the bank, but it means that I don't know, something's happened where for whatever reason, you're not going to be able to repay the loan for maybe three months.

You can ring your bank and say, "I need a payment holiday for three months," and you can stop, sort yourself out, whatever it is that you need to do, and then it'll start again, in a further of three months you'll just need to pay the interest that should have been paid on those three months at the end of the term.

And it is a low interest, high borrowing which means lower interest, but you can borrow high.

So like I said, if you've got a big house renovations that you need to make, you can do it through the bank loan and you'll pay a low interest.

So what we need to do now again, copy the table out, I want you to pause and write the cons down.

So what are the disadvantages of a payday loan, a credit card and a personal bank loan? Off you go and I'll see you in a second.

So let's look a payday loan then.

One of the biggest disadvantages with a payday loan is it can be expensive.

We already saw didn't we? Sarah there, borrowing 1,000 pounds, nearly paying 2,000 back.

It's easy to get into a trap.

It's easy to get trapped.

You can't pay the loan back, you defer or roll it over.

You end up paying more and more and you get into what we call this cycle of debt.

They actually target low income communities.

You wouldn't necessarily need to go to a payday loan, if you have good credit.

If you could afford credit and your credit rating was good and you had the money available, you wouldn't need to go to a payday loan.

It's an expensive way of borrowing.

So they actually target these low income communities and they don't help you build your credit score.

If you took out a payday loan and you got your money and you paid it back and happy days, done, whatever you needed to spend the money on has been fixed or whatever you needed it for you've spent it, but more importantly, you've paid it back within the term.

You've not built up your credit score.

So you're still not seen as someone who is a responsible borrower of money.

So lenders might look at your credit score and think, "Well, you haven't got a credit score.

Your credit score is still not good enough." So it might've been better getting a credit card and paying it off that way.

One, you'll pay far less if it's at 0%.

Two, you're building your credit score.

Now, the issue is with credit cards though, yes, they look like an attractive way of borrowing money.

However, you can get into debt and you can get into debt quickly.

12, 18 months comes around very, very quickly, and if you're only paying the minimum amount of and you're not actually paying the debt back, what will end up happening is at the end of your 12, 18 months you will then start to pay interest and that interest could end up being, I dunno, 50 pounds a month.

So you're suddenly going from playing 20 pounds a month to paying 60, 70, 80 pound a month, depending on how much interest you're paying per month and how much minimum payment.

So it be interest plus minimum payment.

You wouldn't actually pay the credit card off if you were to do that.

So if you've borrowed 8,000 pounds and you're only paying 80 pounds back or 120 pounds back but that includes the interest and minimum payment, you're never going to pay the credit card off.

That could actually negatively impact your credit score which doesn't look again, good to a bank maybe when going for a mortgage.

So it's really important that not only do you pay the interest or certainly pay the minimum balance, you actually work out how much you need to pay a month to pay the whole of the borrowing off, otherwise you'll end up paying interest and you just get into again the cycle of debt and it is limited usage.

You can't get cash back at a shop on it, because that charges you money.

You can use it obviously at point of contact, so you might use it at a shop, but it does have its limited usages.

So the personal bank loan then, disadvantage is that the fees and penalties can be high.

If you default on a bank loan, so this is outside of the holiday agreement.

So let's say for whatever reason, you didn't pay the amount, you defaulted on a payment one month, your interest and your penalty for that can be really, really high.

And that can obviously cost you more money.

And as a result of that it can increase your debt.

So let's say you took a loan out, everything's going really well, you're paying it back, there's no dramas, within 12 months, like I said it's over a longer period of time.

So maybe even within three years, circumstances have changed and you're no longer able to pay that loan back.

You could end up in arrears, which means you could end up paying lots of money in charges, et cetera.

And it can become a very big debt depending on how much you've borrowed.

And one of the disadvantages, it's a longterm repayment.

Five years paying something back can be a long time.

And you think maybe after two years, "Oh, I'd like to, I dunno, go on this really nice holiday, but I'm paying 350 pound back every month on my loan, that I took out five years ago or three years ago.

It's a big commitment." So that's certainly one of the disadvantages.

So when you're getting any form of borrowing a signature is required.

Is that true or false? It actually false.

There is no regulatory requirement for a signature.

However, having said that many lenders make it policy.

So if you're getting a loan out online, what will end happening before you've received your money, you'll go through the process and you'll be approved or whatever.

If you've been approved, they will then send out all your paperwork.

And this is usually the same for things like credit and finance.

So maybe you bought a bike, and you're paying for it on finance? They will send the finance out agreement to you.

In which case you'll go through it all and you will sign the documents.

But there is no legal requirement for signature.

And actually, in some cases, they might not ask for proof of who you are anyways.

So the signature could be anything.

But most lenders will ask for not only just a signature, but maybe a copy of your passport and a recent utility bill with your address on it, to make sure that you say who you are.

So safe lending online then.

Consider all alternatives when lending.

I think that's really important, shop around.

Nobody should ever need money instantly.

"I need it now, I need money now." It might feel like that, your car's broken down and you can't whatever, get to work, but hopefully someone can pick you up, get a bus, get a train.

But just stop and think, is this the best alternative? Am I getting the best deal for me? Can I afford this loan? Shop around, have a look.

There's loads of comparison websites out there which help as well.

Work out how much you can afford.

And that's the biggest.

Can you afford it? If you can, brilliant.

If you're in a position where you can afford, let's say, if I going to get our house renovated.

We've considered the increase in building cost and building materials.

And actually it's a cheaper alternative to get loan.

We can afford the loan, we can pay it back over 10 years, we're both in secure jobs, if something happened, if one of us lost our jobs or whatever we can still afford the loan, right? This is an affordable option let's go for it, but just make sure that it's affordable.

Always look at the APR.

How much are you going to pay back at the end of the term? Because for some time you might think, "It's not worth it." It's not worth borrowing 1,000 pounds and having to pay 1,000 pounds on top of it.

It's not worth it.

So have a look at the APR as well.

It might just be that, you save up or look for an alternative, shop around.

Never, ever borrow money on the spur of the moment.

And we see these adverts, don't we? Where the fellas car's broken down it's stuck by the side of the road and he's doing a payday loan application.

Probably not the best time to do it.

He'll have a breakdown company, because when you buy a car and you've got a car you've paid for insurance and you get breakdown cover.

It's part of what you're paying monthly, doesn't need fixing there and then.

You can get off the road and we'll take it to a garage.

And then if you need to, shop around, work out how you're going to afford the repayments.

It might be that actually if the car's that bad, cheaper to get a new car.

Then actually, you're paying less anyway than a payday loan.

Shop around, look around, look at the cheapest alternative, work out all the scenarios.

Is it cheaper to get a new car or is it cheaper to fix it? Right, cheaper to fix it.

How are we going to pay for it? Well, let's look at these alternatives.

Be careful about money, borrowing money to pay off an existing debt.

That's where you get trapped in this cycle of debt.

Just pay the debt off.

If you have debt it's very tempting to think I'll extend it further and I'll pay it off longer.

But you just get into this cycle of debt.

Try and pay the original debt off.

And if someone's struggling or whatever reason they can't pay the debt off Citizen's Advice, there's charities out there, there's people out there who will give advice.

Most of it is free.

So I really hope you've enjoyed this lesson today and I really hope you've learned something.

It's certainly something that's very, very interesting.

And it's certainly something that you might want to go and look into further.

However, if you've really enjoyed the lesson and I really hope you have, and you'd like to, please ask your parent or carer to share your work on Twitter, tagging @OakNational and #LearnwithOak.

Like I said, I've been Mr Duffy, I really enjoyed the lesson.

So I hope you have too, and I'll see you soon.

Goodbye.