Borrow sensibly

Secured borrowing generally means you'll have a lower monthly repayment, but this method of borrowing is usually secured on your home. To lower your payments, you will need to extend your borrowing period – this will mean that, overall, you'll pay back more, because you'll be paying more interest. Secured borrowing tends to be better suited to someone who wishes to borrow a larger sum over a longer period of time.

You must think carefully before securing other debts against your home, as your home may be repossessed if you do not keep up with the repayments on your mortgage.

If you don't own your home, or you don't want to secure a loan on your property, personal loans, overdrafts and credit cards are all unsecured borrowing options that may be available to you. And they may be more suitable if you want to borrow money for a shorter period of time.

• Personal loans are usually repayable in fixed monthly instalments by Direct Debit/standing order over a set period, usually between one and ten years. They are popular options if you want to borrow between £1,000 and £25,000, but you may be able to borrow more or less, depending on the lender.
• Overdrafts are good value if you just need a line of credit to dip into and out of, but if you go over your overdraft limit you will incur charges.
• Credit cards require a minimum monthly repayment, but they allow you to pay off your debt in your own time, and you can always make lump-sum payments. Be aware, though – if you only make your minimum payments each month, you will end up paying back more in interest in the long run.

What are you borrowing for?
Ask yourself: Do you really need to borrow the money? And why? Then pick the appropriate way to borrow.

What can you afford?
Deduct your total monthly outgoings from your income to find out how much disposable income you have. But don't commit the whole lot of your remaining income to loan repayments in case you need extra cash. Use our Budget Planner   to work things out for yourself.

At the simplest level, the APR (Annual Percentage Rate) relates to the total charge for various types of credit, which includes the basic rate of interest you pay and how often you pay interest as well as most other foreseeable charges such as arrangement fees and annual fees.

But the APR is only a guide – it may not include additional charges you may incur such as early-repayment charges for loans and late-payment charges for credit cards. Also, you may not be eligible for the rate you see featured in an advert.

The EAR (Equivalent Annual Rate) relates to overdrafts, specifically the full percentage cost of using them. Like APR, EAR takes account of the basic rate of interest and how often you pay it. But it also accounts for the effect of compounding interest, that is, interest accruing on interest. This would occur if you do not make any repayments on the money you've borrowed through the use of your overdraft facility. The EAR does not take into account possible additional charges that you may incur.

To get a true comparison on loans, focus on the actual amount you will repay and over how long. For tips on comparing credit offers look at the Money Made Clear website.


How long to repay?
Aim to repay the loan as quickly as possible (although watch out for early repayment charges). Lenders often charge lower interest rates if you borrow larger amounts or pay back over a longer period. But the longer you borrow, the more you repay and this could be a problem if you lose your job or income falls.

Making multiple applications can damage your credit rating, so do not keep on applying.

Credit score: You can check your credit report with credit reference agencies online and improve your chances of being approved for credit by lenders.

• Your credit rating, or score, is used by lenders to assess the risk of offering you credit and is calculated based on information in your credit report and the answers you provide in, say, an application for a credit card.
• Your credit report will contain information on things such as whether you rent or own your home, your recent address history, your annual income and details of your outstanding credit card and loan balances.
• Each lender decides what score is needed before offering you credit. You can check your credit report and get a copy from one of several agencies online.