Borrowing

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. 

What you should know before applying for a card

Credit cards let you choose how much you borrow (subject to an upper limit) and how quickly or slowly you pay back the loan.

Compared with most other types of borrowing, credit cards are very convenient. Once you have a card, you simply use it to pay for goods and services without having to request a new loan each time.

Credit cards are issued by banks, though lots of other organisations - for example, newspaper groups and motoring associations - have teamed up with a bank to offer their readers or members an own-brand credit card. The complicated system of making sure credit card payments all reach the right destination is handled by specialist organisations such as Visa and Mastercard.

Charges

Each month, you receive a statement setting out what you have borrowed using your credit card.

This is made up of:

• your purchases made during the last month using the card
• any balance carried forward from the previous month
• any interest charged

If you pay off the whole amount you owe, usually there is no interest charge. So, provided you pay off the full balance every month, credit cards give you interest-free credit for, say, a maximum of 56 days.

If you do not pay off the full amount, you are charged interest on the whole lot. Different cards work in different ways, so interest might be charged from the statement date or from the date of each purchase.

Each month, you must pay off at least a minimum amount - for example, £5 or 3% of the balance, whichever is greater. If you miss a payment, there may be a penalty charge.

A few cards charge an annual fee.

What a credit card company charges you for the use of its card can be expressed as an 'Annual Percentage Rate' or APR. An APR takes into account:

• the interest you must pay
• any annual fee you must pay
• when and how often you pay the interest and any fee

You do not need to know how to work out an APR. The important thing is that APRs show the cost of borrowing on a standard basis so you can compare one APR with another.

The APR also lets you compare the cost of credit cards with other types of borrowing. Of course a loan with a lower APR is cheaper than a loan witha higher APR.

The APR does not take into account charges you might have to pay, such as a charge for missing your monthly repayment.

To lure customers away from competitors, many card issuers offer special, low introductory interest rates - for example, 1% a year for the first six months, or even 0%.

Check the small print of these offers carefully. Often, it applies only to any balance you transfer from another card, not any new purchases you make. And, your repayments are set first against the transferred balance, not against new purchases, so you might not get the benefit of the offer for the full six months.

Repayments

If you pay only the minimum amount each month, it can take a very long time to pay off a credit card bill.

For example, suppose:

you have a debt of £1,000;

interest is charged at 18% a year; and

you pay off a minimum 3% (or £5 if greater) of the outstanding balance each month.

It would take you 13 years to pay off the whole balance and your repayments would total £1,772.

Although credit cards can be a convenient and cheap way to borrow for a short period as they usually have a period of free credit (25 to 50 days), they are an expensive way to borrow over the long-term.

Small print

Credit cards come with a lot a small print. Particular areas to check are:

• What is the period of free credit?
• From when is interest charged - the statement date or the date of purchase?
• Will you be charged if you miss a monthly payment? How much?
• Is there an annual fee?
• What happens if you can't keep up even the minimum payment?

Risk

The biggest risk with credit cards is running up debts you can't afford to repay. Making only minimum payments each month is an extremely expensive way to borrow. If you don't keep up at least the minimum payments, the issuer can demand that you pay off the whole outstanding balance immediately. If you can't do this, the issuer could take you to court. The court would probably order you to make regular repayments based on what you can afford or could allow the lender to seize and sell some of your possessions to recover the debt. You are likely to find it hard to get another loan or credit card if you have a court order against you.

If you find yourself experiencing difficulties paying your credit card bill speak to your credit card company. Do not put this off. Credit card companies 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.

What you should know before applying for a card

Most store cards work like credit cards, except:

• You can use them to buy things only in certain shops
• You may qualify for special offers, such as discounts and late shopping night

Repayments

• The interest rate is usually higher than credit cards
• Usually there is a small reduction in interest if you agree to pay monthly by direct debit

A few store cards are a bit different from credit cards. They are called 'budget cards' (or 'revolving credit'). You agree to save a certain amount each month and can borrow a set multiple of the amount you save.

For example, if you saved £10 a month, your spending limit might be up to 24 x £10 = £240.

There is usually a minimum you must save each month - for example, at least £5 or at least £10.

Charges are similar to other types of store card and usually high compared with ordinary credit cards.

Risk

With both types of card the special offers might increase the temptation to overspend.

If you find yourself experiencing difficulties meeting your payments 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.