Borrowing Money
09 February 2011 - Which Way To Pay

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Borrowing Money

Before deciding to borrow money it's important to work out whether you'll be able to repay it in the future. Check your income against outgoings to see what you would have left at the end of each month to repay borrowings. If you find that your spending exceeds or is close to your income already, think very carefully about whether you really can afford to borrow more. Also bear in mind that paying back loans and credit cards may become a problem if, for example, interest rates go up or you lose your job.

With a secured loan, the lender has the right to force the sale of the asset against which the loan is secured if you fail to keep up the repayments. The most common form of secured loan is called a ‘further advance’ and is made against your home by borrowing extra on your mortgage. (Your mortgage is itself a secured loan.) Because secured loans are less risky for the lender they are usually cheaper than unsecured loans.

An unsecured loan means the lender relies on your promise to pay it back. They're taking a bigger risk than with a secured loan, so interest rates for unsecured loans tend to be higher. You normally have set payments over an agreed period and penalties may apply if you want to repay the loan early. Unsecured loans are often more expensive and less flexible than secured loans, but suitable if you want a short-term loan (one to five years).