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Can you afford to borrow?

Before deciding to borrow money it's important to work out whether you'll be able to repay it in the future. The Money Advice Service budget calculator will help you 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. The Money Advice Service interactive debt test will help you check whether you have - or are likely to have - problems with borrowing.

• Use the Money Advice Service budget planner Opens new window

• Use the Money Advice Service interactive debt test Opens new window

Types of loan

Secured loan/'further advance'

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.

Secured loans are mostly suitable for borrowing large amounts of money over the longer term, for example for home improvements.

Unsecured loan

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).

Credit Union loan

Credit Unions are mutual financial organisations which are owned and run by their members for their members. Once you've established a record as a reliable saver they will also lend you money but only what they know you can afford to repay.

Members have a common bond, such as living in the same area, a common workplace, membership of a housing association or similar.

Credit Unions are regulated by the Financial Services Authority (FSA), and money saved in one is protected by the Financial Services Compensation Scheme on the same basis as it would be if it was held in a bank or building society.

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

Moneylines

Moneylines are community development finance institutions that lend and invest in deprived areas and underserved markets that cannot access mainstream finance. They provide money for:

• personal loans
• home improvements
• back to work loans
• working capital
• bridging loans
• property & equipment purchase
• start up capital
• business purchase

Overdraft

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. Overdrafts offer more flexible borrowing than taking out a loan because you can repay them when it suits you, but they're not usually suitable for borrowing large amounts over a long period as the interest rate is generally higher than with a personal loan. You need a bank account in order to have an overdraft.

Buying on credit

Buying on credit is a form of borrowing. It can include paying for goods or services using credit cards or under some other credit agreement. Read 'Buying on credit: options, pros and cons' to find out more - under 'In this section' at the end of the page.

More useful links

• Types of borrowing - Money Advice Service Opens new window

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

• Example commercial website comparing loans Opens new window

• Further example commercial website comparing loans Opens new window

• Managing debt

• APR - check the meaning Opens new window

• How to shop around for financial products