Reading a credit agreement

Before a regulated credit agreement is signed in the UK, the lender has to give you key information in a standard format, usually called pre-contract credit information. It is often a dull-looking table. That table is the most useful thing in the whole process, because every lender has to fill in the same boxes.

Adverts and web pages are written to persuade. The summary is written to inform. When the two seem to say different things, the summary and the agreement are what count.

Amount of credit

What you will actually receive or what will be paid on your behalf.

Duration

The term: how many payments, how often, and when the first one falls.

Borrowing rate

The interest rate, and whether it is fixed or can change.

APR

The annual cost of the credit including compulsory charges.

Total amount payable

The amount of credit plus the total cost of credit.

Charges

Fees for setting up, for missed payments and for other events.

Ask for the summary in writing and take it away. Nothing honest needs to be signed on the spot.

Before you sign: have the pre-contract summary in your hand and read every box, not only the first line.

The interest rate is the price of borrowing the money itself. The APR, or Annual Percentage Rate, folds in the interest and most of the compulsory fees and expresses them as one yearly figure. That is why the APR is the better number for comparing two agreements of a similar size and length.

Watch for the word representative. A representative APR is the rate that at least half of successful applicants for that kind of product received. You may be offered a different rate. The rate in your own agreement is the only one that applies to you.

And remember what neither figure tells you: how much you will hand over in pounds. For that, go to card four.

Before you sign: find your own APR in the agreement and check it matches what you were told.

The term is how long you take to repay. Stretch it and each monthly payment shrinks, which feels kinder. But you are borrowing the money for longer, so interest has more months to build up and the total goes up.

Doubling the term roughly halves the payment and roughly doubles the interest. The figures are arithmetic, not a quote, but the shape holds for almost any fixed-rate loan. You can try your own made-up numbers in the visualiser on the home page.

A longer term is not always wrong. Sometimes a lower payment is what keeps a budget standing. The point is to choose it knowingly, with the total in front of you.

Before you sign: ask what the total would be over a shorter term you could still afford.

Every regulated agreement must show the total amount you will pay if you keep to the schedule. It is built from two parts.

Amount of credit+Total charge for credit=Total amount repayable

The total charge for credit is all the interest plus the compulsory fees. Subtract what you borrowed from the total amount repayable and you have the cost of the loan in pounds. That figure is harder to ignore than a percentage.

Some agreements also show a figure for the total cost if a rate changes or if you take optional extras. Read those lines too.

Before you sign: subtract the amount borrowed from the total and ask yourself if the difference is worth it.

Some fees are compulsory and already counted in the APR. Others only apply if something happens, so they are not in the APR at all. The agreement should list both kinds. Read the second kind with care, because it is where costs pile up when life goes off script.

• Arrangement feeCharged for setting up the agreement. Sometimes added to the balance, so you pay interest on it too.
• Late or missed paymentA fixed charge each time a payment is missed or late. Can repeat month after month.
• Default chargesCosts that apply if the agreement is formally broken.
• Optional extrasInsurance or add-ons sold alongside the credit. Optional means you can say no.

Lenders in the UK must treat charges for missed payments as a reflection of their actual costs rather than as a punishment, but they can still add up quickly. If a fee is not explained, ask what triggers it and how much it is, and get the answer in writing.

Before you sign: list every fee that could apply to you and what would trigger it.

For most regulated consumer credit you have the right to repay all or part of what you owe early. Ask the lender for a settlement figure: the amount needed to clear the agreement on a given date. Interest for the remaining months is generally reduced because you are no longer borrowing the money.

On some fixed-rate agreements the lender may be allowed to charge a limited early repayment fee to cover its costs. The agreement should say whether this applies and how it is worked out. Mortgages and some larger loans have their own early repayment rules, which can be much higher, so always read that section.

• Ask whether partial early payments reduce the term or the monthly payment.
• Ask how long a settlement figure stays valid.
• Keep written confirmation once an agreement is fully paid.

Before you sign: find the early repayment section and note any fee it mentions.

This is the single most important line in some agreements, and it is easy to skim past.

Secured borrowing is sometimes offered as a way to consolidate smaller unsecured debts. That can turn a debt that could not cost you your home into one that could. It deserves independent, free advice before you agree to it.

Before you sign: check whether the agreement mentions any security, charge or asset, and what happens to it if you fall behind.

Most regulated consumer credit agreements in the UK come with a right to withdraw within 14 days, usually counted from the day after the agreement is made or from when you receive your copy, whichever is later. You do not have to give a reason.

Withdrawing is not free money. You must repay what you borrowed, plus interest for the days you had it, normally within 30 days of telling the lender. What you avoid is the rest of the agreement: the remaining interest and the long commitment.

• Some types of credit, such as many mortgages, follow different rules.
• Tell the lender in a way you can prove, and keep a copy.
• The cooling-off period is a safety net, not a reason to sign without reading.

Before you sign: write down the last day you could withdraw and how you would notify the lender.