Personal loans

There are a number of ways to borrow money to fund consumer purchases such as cars, electrical equipment and holidays.

Before entering into any borrowing you should be aware of the different forms and the advantages and disadvantages of each.

Personal loans

What you should know before you approach a lender

Loans can be secured or unsecured.

• secured loan is one that is tied to your house - this means you might have to sell your home if you can't keep up with repayments
• unsecured loans are not tied into anything, but if you default on your repayments you could end up being credit blacklisted preventing you from taking out new credit cards, a mortgage or even taking advantage of an interest-free deal in a shop

When looking at loans remember to shop around. In general the more you borrow, the lower the interest rate but rates can vary dramatically. The shorter the period of the loan, the less interest you will pay.

Only apply for one loan at a time and always check the small print for penalties.

Comparing Deals

When comparing deals look at the Annual Percentage Rates (APRs) of interest charged. Don't pay attention to the monthly interest rates advertised by shops - these are always lower than the annual rate and can mislead you into thinking you've go a better deal than you really have. Always ask the lender what their APR is before you sign an agreement - if they don't make it clear then walk away. Generally, the lower the APR the better the deal for you.

If you find a deal with a low APR, ask the following questions:

• Do the charges included in the APR vary or is the rate fixed? If the charges are variable, your repayments could go up or go down. If the rate is fixed, your repayments will stay the same.
• Are there any charges that are not included in the APR? This could include something like optional payment protection insurance or an arrangement fee. If so, make sure you understand what they are and when you would have to pay them.
• When and how often you pay the interest charges? Find out if, for example, you suddenly have spare money, can you pay the loan off early without penalties?

Repayments

Loans are repaid in monthly instalments over an agreed period. This amount of time is usually fixed and if you want to pay off the loan earlier you might have to pay a penalty. The longer the repayment period, the more interest you will pay.

Flexible loans, which let you pay back the money whenever you want, are becoming more common but the interest rate charges is often higher.

The most importants thing are to:

• make sure you know exactly what the monthly payments will be
• how much you will pay back in total
• whether realistically you can afford it

Risk

The main risk is that you cannot keep up the loan repayments.

If you find yourself experiencing difficulties repaying a loan speak to your lender. Do not put this off. Lenders do not want you to default on your repayments and will be prepared to talk to you about how to solve any repayment problems you have.

Debt counselling offers more advice on dealing with debt.