Loans are useful because:
- You can borrow more than you can on a credit card or overdraft: You can take out a personal loan for any amount, usually between £500 and £25,000. You may even be able to borrow more than this via a secured loan (see "Taking out unsecured versus secured loans" later in this chapter for more details).
- The rate of interest is normally fixed: You know exactly how much you have to pay back over the term of the loan, making it easy to budget
- You know when the debt will be cleared: Loans have a fixed repayment schedule, unlike an overdraft or credit card where you pay the money back as and when you can. If you lack the discipline to do this, a loan could be the answer.
- A loan is easy to arrange: Loans can be arranged through the post, over the telephone, or via the Internet. There is no need to make an appointment to see your bank manager. The money is sent to you by cheque or transferred to your bank account within days.
- Your borrowing is limited: You get a specified amount of cash - you can't keep dipping in and taking more, as you can with an overdraft or credit card
As long as you can afford the monthly repayments and shop around for the cheapest deal you can find, a loan can be a good choice for borrowing money.
A personal loan isn't always the ideal way of borrowing money. You might want to think twice if:
- You need to borrow only a few hundred pounds: The smaller the sum you borrow, the higher the rate of interest you pay. Borrowing an amount under £1,000 is extremely expensive in terms of interest charges. Most lenders also have a minimum that you can borrow: If you need less, you may find yourself taking out a bigger loan simply in order to get the money in the first place. This isn't a wise move. You may be better off borrowing smaller sums on a credit card or extending your overdraft instead of opting for a loan.
- You can repay the money in a couple of months: The shorter the loan's term, the bigger your monthly repayments, so work out whether you could afford them if you take a loan out for just a year or so. If there's a chance that you'll be able to clear the loan even sooner, you may be charged a redemption penalty for doing so (see "Watching out for early redemption penalties" later in this chapter). If this is the case, you may be better off borrowing on a credit card with a 0 per cent introductory period for several months instead. This may be enough time to repay your borrowings - without having to pay any interest at all. (See Chapter 5 for more on credit cards.).
- You're borrowing £20,000 or so to improve your property: If you already have a mortgage, it might be cheaper to ask your mortgage lender to extend your home loan rather than take out a personal loan particularly if you need money to build an extension or otherwise fix up your home. Although interest rates on personal loans have fallen, they still tend to be higher than mortgage rates (the cheapest loan is around 6 per cent compared with mortgage rates of less than 5 per cent). So you pay less interest if you increase your mortgage instead. This may also be easier to arrange than a personal loan because you already have a relationship with the lender.
Think carefully before extending your mortgage and overburdening yourself. Your home is at risk if you can't keep up the repayments on it, whereas if you take out an unsecured loan to pay for your extension, your home is safe (even if you default on the loan payments). Don't gamble with the roof over your head.
