Types of Loan

A bank overdraft - which is repayable on demand by the bank - is unlikely to be the best way to finance a major purchase, especially if you want to spread the repayments over a number of years. The other main options are described below.

Secured Loans

If you want to borrow to finance home improvements, a relatively cheap option is to extend your mortgage with your current lender. Alternatively, you could take out a loan secured on your home with another lender. However, the interest charged is usually higher than it would be if you simply increased your mortgage.

• For
  Relatively cheap option.
  
• Against
  The disadvantage of taking out a secured loan is that you will have to pay a fee to set up the loan. You should also be aware that with any kind of loan secured on your home, if you do not keep up repayments, you risk having your home repossessed. This is not the case if you take out a personal loan, for which no security is required.

Personal Loans

If you want to borrow between £500 and £15,000 and you are prepared to pay it back over six months or within up to seven years, a personal loan can be a good choice.

• For
  The monthly repayments are fixed for the duration of the loan, which makes budgeting easier and means that you don't have to worry about facing increased interest rates.
• Against
  If you want to repay the loan early, a lot of lenders charge an early repayment penalty, which is typically the equivalent of two months' interest.

Flexible Personal Loans

A handful of lenders offer flexible personal loans, which work a bit like a credit card.

You are given a borrowing limit when you take out the loan, there is no fixed repayment period, and you are not required to make a fixed monthly repayment (although there is usually a minimum regular amount that you have to pay).

• For
  A flexible loan can be useful if you want to be able to vary your monthly payments and you don't have a sufficiently large credit limit with your credit card.
• Against
  Interest rates tend to be higher than with a normal personal loan, so it can be an expensive way of borrowing. If you want this kind of flexibility, and have sufficient credit limit, a credit card can be cheaper.