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Overdrafts

Overdrafts are like a 'safety net' on your current account; they allow you to borrow up to a certain limit when there's no money in your account and can be useful to cover short term cashflow problems.

Some bank accounts have a free overdraft built in. If yours doesn't, you'll have to ask your bank for an authorised overdraft facility. Their decision will be based on your bank record and you may have to pay a fee to set it up. You don't have to use an authorised overdraft, but it's there if you need it and you won't pay extra charges for accidentally going overdrawn.

You have to pay back your overdraft plus interest. Rates differ between banks and can be fixed or variable. There may also be an arrangement fee and monthly charges.

Unauthorised overdrafts

If you go overdrawn without your banks authorisation, the charges are likely to be high. Your bank may also bounce (refuse to pay) cheques you write or refuse to pay direct debits and charge fees for each refused transaction. They may also charge additional administration fees.

Personal loans

With a personal loan you borrow an agreed sum and pay it back with interest over a certain length of time (usually one to five years). Interest rates can be fixed or variable. You normally have to stick to a payment schedule. Personal loans can be handy for covering large expenses like buying a car or equipment.

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, where they can take whatever you've secured the loan against (like property) if you don't repay it. So interest rates for unsecured loans tend to be higher.

What does APR mean?

APR stands for annual percentage rate. It shows you the actual cost of the loan, as a yearly interest rate. It includes charges and fees as well as interest to help you compare loans on equal terms.

• Information on APR from the Money Advice Service Opens new window

Pros and cons of personal loans

Pros:

Cons:

Points to watch out for

Shopping around for loans

There's a wide choice of loans available, so shop around for the best deal. Compare interest rates, APR, terms (like charges and penalties for paying the loan off early) and how long you can borrow for. You can use the Money Advice Service's online calculator to work out typical monthly repayments.

• Compare borrowing costs with the Money Advice Service loan calculator Opens new window

• Compare current loan rates online Opens new window

Can you afford to borrow?

Whether borrowing through an overdraft or a loan, be sure you can afford the repayments. If you can't, your debts can quickly spiral out of control.

It may be that you don’t have a bank account, have a bad credit history (or no credit history at all) and feel that you won’t be able to get the normal low cost credit available from banks or building societies.

The table below provides details of various lenders and their typical rates, showing the savings you could make:

Follow the link below to find a Credit Union near you or by looking in the Yellow Pages under 'Credit Unions'.

• Credit Unions - find one near you Opens new window

• Take the Money Advice Service debt test before you borrow Opens new window

• Use the Money Advice Service budget calculator Opens new window

More useful links

• The Money Advice Service - impartial information about your money Opens new window

• Managing debt

• Main ways to save or invest your money

• Tax on bank and building society accounts

Useful contacts

• Money, tax and benefits contacts