Loans

Usually we need to borrow money to fund a holiday, purchase a new car, carry out some home improvements or to consolidate debts.

When you take out a loan, you repay the initial amount you borrowed plus interest charged over the whole period of the loan, plus any fees and charges.

When you apply for a loan, many lenders will try and encourage you to take out payment protection insurance which is designed to give you peace of mind that repayments will be covered in times of crisis such as illness or unemployment.

However, the Financial Services Authority (FSA) has found that more than two thirds of banks, finance companies and stores are failing to explain what it covers, how it works and what it costs. Loan insurance itself is not the problem. Borrowers often need that added layer of protection in case things go wrong. The issue is that many are paying an exorbitant amount for a policy they will never use, never needed in the first place, or could have got a lot cheaper elsewhere.

There are two types of loans - secured and unsecured. With a secured loan, the lender has a legal charge over your home, so that if you default on repayments, they can possess that property and sell it to get their money back. So think carefully before proceeding with any loan which might put your home at risk.

Rates for unsecured borrowing vary considerably, meaning it certainly pays to shop around for cheap personal loans. During the last few months of 2007, the cost of borrowing began to spiral as the global credit crunch forced banks to tighten their lending. Nevertheless, there are still some good deals to be found if you have an exemplary credit history.

If you have a got a bad credit history or suffered financial problems in the past, you choices are limited but can still get what are known as a bad credit personal loans from a specialist lender. Loans for bad credit are charged at a premium, so be prepared to pay higher rates of interest than standard loans.

Aim to repay your loan over the shortest period you can comfortably afford, since the shorter the term, the less interest you pay.