Borrowing - A double edged sword

“Neither a borrower nor a lender be/For loan oft loses both itself and friend/And borrowing dulls the edge of husbandry.”  - Hamlet Act 1 scene III

However prudent Polonius’ advice to his son may have been in ancient Denmark, it is unrealistic in the today’s world of mortgages, credit cards and hire purchase agreements: lending is a fact of modern life.

It can be daunting finding the type of loan that suits your circumstances, but there are essentially two different types of loan: secured and unsecured. Each has its advantages and disadvantages, each providing a measure of predictability, enabling you to plan your finances effectively.

A secured loan is a loan given under an agreement that is “secured against” collateral – an asset, such as your home. Secured loans are taken out at more competitive rates of interest than unsecured loans, but they do mean that you could lose the asset involved - such as your home - if the repayments are not met.

If you are borrowing a small amount of money and have good credit, then an “unsecured” or personal loan is most probably the better option. Most personal loans have fixed interest rates - the monthly repayments will remain the same throughout the loan period. Some lenders do offer variable or flexible loans – all well and good if the rate goes down but it is wise to budget for the rate going up at least a point as well.

Some dos and don’ts                                                                                                                            The APR or Annual Percentage Rates determines the amount of interest you pay yearly on the loan. Although a low APR might seem appealing, be careful because this is not the only charge for which you are liable when paying back your loan.

·         Do shop around.

·         Sign nothing until you have looked at as many possibilities for your needs as time and opportunity allow.

·         To find the most appropriate rate for your needs, aim to separate the various features of the proffered loan and focus on the specific features you require.

·         Almost three quarters of all loans are paid off early, so it pays to know the charges for doing so.  Although charges can still be high, more and more lenders are scrapping the charges altogether - finding a lender that does not charge for early repayment might save you a lot of money.

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