Don’t let a personal loan turn into a millstone

David Kuo, Head of Personal Finance at Fool.co.uk, says: “Today’s news that the number of personal insolvencies in the second quarter has risen 4% to 26,956 from a year ago is a timely reminder that none of us can afford to be complacent as long as we owe money.

“Whilst many of us may be able to effortlessly service our loans today, any unexpected changes to personal circumstances can quickly send us down a spiral of debt. Consequently, it is a good idea to get a flexible loan, and make extra payments when we can afford to do so.

“But before we take on debt, it is important to decide whether we need to borrow money at all. Sometimes, just delaying a purchase and putting aside some spare cash for a few months can be a considerably cheaper option.

“Taking on debt may sometimes seem like an easy option, but a personal loan can quickly turn into a millstone around our necks, which can only be removed by drastic measures.”

Five useful tips when taking out a loan

Borrow the absolute minimum you need - the more you borrow the more interest you pay.

Keep the term of your loan as short as possible while keeping your monthly repayments affordable.

If you choose a variable rate loan make sure that you budget for higher repayments.

Always compare the Total Amount Repayable (TAR) rather than the Annual Percentage Rate (APR) because APRs can be manipulated.

Always check for early payment penalties. For the majority of personal loans you be charged two months extra interest if you retire your loan early.