Personal Loans

There are a number of ways to obtain a personal loan, over the Internet, replying to a letter received in the post offering credit, general advertisements or a visit to your local bank branch. Shop around and look for the best rate of interest and bear in mind that the longer the term of the loan the more you will pay.

Overdrafts

If you need to temporarily overdraw, it is essential that you get approval from your bank before you do so, to avoid higher interest rates and charges for unauthorised lending - typically £25.

Credit Cards

Even though they are very convenient they promote the feeling that you are not actually paying money for something you buy on a credit card. This means you can spend what you like, when you like as long as you do not exceed the agreed credit limit. However, as you approach your agreed limit, you may find that the credit card company informs you that your credit limit has been raised substantially, instead of warning you that you are nearing the limit.

If you do not pay off the balance in full each month, you will be charged interest. As time goes by, you will be paying less of what you borrowed and more of the interest as well as being charged interest on the interest allocated to your account in the previous month. Therefore after a period of time a large amount of what you owe will be accumulated interest.

Store Cards

Store cards work in the same way as credit cards but usually attract a higher rate of interest. Unless you receive other valuable benefits from having a store card, you would most likely gain from using a credit card instead.

Interest Free Credit

Before signing an interest free agreement, make sure it is exactly that. It is possible to obtain interest free goods where the total value of the item you are buying is split over a period of time and you only repay the value of the goods. However, some agreements have an interest free period only for a short time and then revert to interest bearing. To be sure, it is best to ask for a quote for the total amount repayable before signing.

Hire Purchase

The main difference between other forms of borrowing and hire purchase is that with other forms of borrowing the goods belong to you straight away, whereas with HP they become legally yours only when you have finished paying for them. If for some reason you stop paying for the goods, they can be repossessed if you have paid less than one third of the total or you can be taken to court to pay the balance. This form of credit is usually more expensive than for example a loan from your bank, also if your circumstances change for the worse during the agreement, you may lose both your goods and the money you have already paid.

Catalogues

Many people who buy goods through catalogues pay for the items they purchase on a monthly basis. The risk with a catalogue is that during the time you're paying for the items you already have, a new catalogue will arrive and you will be tempted to buy items you don't really need.

Secured and Unsecured Loans

One of the main factors in determining the rate of interest you will be charged when you borrow is whether your loan is secured against one of your assets - usually an item of significant value e.g. your house. If you fail to repay, the asset can be forcibly repossessed by the lender or at least they can make you sell the asset so that the amount can be reclaimed.

A secured loan is when you offer such an asset as security to the lending organisation. The advantage here is that you will pay a much lower rate of interest than with an unsecured loan. However when balancing this out against the fact that you may lose your home if you fail to repay, the disadvantages can be huge.

Think before taking on new commitments

Most people fall into debt through no fault of their own - often as a result of redundancy, illness or relationship breakdown etcetera. But it may be that you simply took on more credit card borrowing or interest-free loans than you could afford to repay. If so, resolve to do things differently in future. Having an up-to-date budget showing your income and expenditure will show what money you have available. Check carefully to ensure that any new commitment really is affordable before you sign up for it.

Better still, try to save up for the things you would like to have. Don't buy on impulse.

When it comes to the wise use of credit, being able to afford the repayments is not the only consideration. It is also important to match the repayment period to the 'useful life' of the thing you are buying. For example, if you are taking a loan for a holiday, you don't want to be paying for it in 3 years time!

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