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MONEY COMMENT
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Five years ago, I had a frightening level of debt spread across various loans and cards. I considered a consolidation loan, which is a good idea if you replace expensive debts with a single cheap loan. However, despite a frantic struggle at times, at no point did I consider rolling up my debt into my mortgage. In a recent article, we wrote about the dangers of borrowing money against your home. It's sensible enough to take out a mortgage to buy your home, which generally increases in value over the long term. Also, many of us increase our mortgages to pay for home improvements, which add value to our properties. What I can't understand is when some of us unlock the value within our homes to pay for holidays, cars and - worst of all - debt consolidation. Okay, borrowing against your home is the cheapest way to raise money but it's not without its risks. We've all heard the mortgage wealth warning, "Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it". It's a terrible reminder to the owners of the half a million homes repossessed over the last twelve years. On the other hand, if we default on unsecured loans and credit cards, it's highly unlikely that we'll end up losing our homes. What's most likely is that the lenders will agree a payment plan, freeze the interest and write off some of our debts. However, if we roll up unsecured debts into our mortgages, we risk losing our homes if we still have budgeting problems. With base rates at a 48-year low, you don't need to take risks with your home when it's so easy to find unsecured personal loans with APRs below 7% (that's about a quarter of the interest rate I paid on a loan that I took out around 1990)! Here are seven practical tips on getting the best deal for a personal loan: 1. Your first port of call should be the Fool's Personal Loan Centre, where you can apply online for several of the cheapest deals around. 2. Aim to repay your loan over the shortest period you can comfortably afford, since the shorter the term, the less interest you pay. 3. The most expensive lenders will charge you up to eight times as much interest as the cheapest. As Bruce Jackson would say: strewth! So, shop around and go for the loan with the lowest "charge for credit" and total amount repayable. Have a look at the bottom line: your monthly repayment times the number of repayments, plus fees (if any - see 6). 4. Don't buy "Payment Protection Insurance" (PPI). These are optional sickness an unemployment insurance policies that all lenders "recommend strongly". PPI gets the "hard sell", so lenders often give you a "protected" loan without prior approval. It's far too expensive and is incredibly poor value for money, so give it a wide berth. Trust me, I worked in the PPI industry for over ten years. I promise PPI is one of the most lucrative products for lenders, they make billions from it every year! 5. Don't bother with payment holidays and other gimmicks, just go for the cheapest bog-standard loan. 6. Don't pay arrangement fees and watch out for early repayment charges (some lenders charge heavy penalties for early settlement). 7. Even saving £2 a month over five years reduces the cost of your loan by £120, so don't go to your bank unless it's prepared to haggle and beat the best deal you've found.