Your Money Loans: Beginners' borrowing

If you need a loan you get an overdraft. But costs vary, and you can make big savings by being selective. Simon Read goes shopping

Although many of us are likely to want an overdraft at some time or other, overdraft facilities and costs are not high on most people's list of priorities when it comes to choosing a bank account.

Instead we tend to choose our current account facilities on the basis of convenience or history. This means we pick the branch nearest home or work, or we follow our parents by opening an account at the same bank and branch that they use.

Neither course is very sensible, particularly as we are probably less likely to change our bank account than to change a partner. Which means we often get stuck with paying high charges and fees and get little understanding. Why do we put up with this? In most cases the answer is simply ignorance.

Today a current account is simply one of the many products sold by the high street banks. Forget the idea of a friendly Captain Mainwaring-type bank manager sitting in his office at the bank and calling you in for a cosy chat and a cup of tea. Those days are long gone.

Nowadays, if you are contacted by a real human being at the bank it's most likely one of the sales force trying to sell you insurance, or one of the back office staff bringing the cheerful news that they're charging you pounds 10 for going overdrawn - and, of course, that they will have to charge you a further tenner, or possibly more, for telling you that they're charging you that pounds 10 in the first place.

It's a system you should use to your own benefit - by shopping around for the best deals. An overdraft can be a flexible and easy way to get a loan, but in the wrong hands, and with the wrong bank, it can be an expensive and disastrous way to borrow.

It's a question of working out what amount you need and when - then finding the cheapest and most effective borrowing to meet your own requirements. A personal loan could be a better option in many cases, for instance, but this will depend on how long you need to borrow for.

For short-term borrowing, an overdraft can be ideal. But the golden rule is to arrange an overdraft before using it. An agreed overdraft with the Abbey National, for instance, carries a very reasonable 11.9 per cent APR.

But go into the red without discussing it first, and you'll be charged 29.5 per cent APR, plus a monthly fee of pounds 12, and a further pounds 7 fee every time you go further overdrawn.

So if you were overdrawn by just pounds 10 for a day, you'd be charged pounds 12. If you then took out a further pounds 10 from the cash point during that day, you'd be charged a further pounds 7 - so borrowing just pounds 20 for 24 hours could cost you a staggering pounds 19, plus, of course, a few pence in interest charges. Abbey are not the only sinners. Often lenders also sting the unwary borrower hard.

If you need to dip further into the red, then you should be looking for an account with the lowest charges and fees. The best comparison is to look at the monthly interest rate charged, as this is what you actually pay.

You should be looking to pay less than 1 per cent a month. The Abbey National charges 0.94 per cent, the Alliance & Leicester 0.76 per cent, Britannia 0.95 per cent, Halifax 0.98 per cent, Nationwide 0.97 per cent, and the Woolwich 0.76 per cent. Conspicuous by their absence from the list are the big banks, which tend to charge around 1.5 per cent a month.

Also check on monthly overdraft fees: while Abbey National, First Direct, Halifax, Nationwide and Woolwich charge no fees, NatWest charges pounds 9 and Lloyds pounds 8, while most hover around the pounds 5 mark.

If you're going to have to borrow more money, or you need it for a longer period, then you really should be thinking about a personal loan. In general you'll need to be borrowing at least pounds 500 for at least six months, although many lenders will lend a minimum of pounds 1,000 for 12 months.

As with overdrafts, costs vary tremendously so its really worth shopping around. You could even try Marks & Spencer, which offers a range of loans, charging 17.9 per cent APR on pounds 500, but just 13.9 per cent APR if you borrow more than pounds 10,000. In fact, that's true of most lenders: the more you borrow, the cheaper the rate will be.

One advantage personal loans have over other forms of borrowing, including credit cards and overdrafts, is that you know exactly how much you're going to repay from the outset.

It means that monthly budgeting is easier, although, if you want to repay the loan early, most lenders will charge a redemption penalty of two months' interest.

How much should you pay for a personal loan? Many of the best deals come from direct lenders. Bank of Scotland Banking Direct, for instance, charges 14.9 per cent APR on borrowings of pounds 500 or more, while Direct Line charges 16.5 per cent APR for pounds 1,000. In both cases, you need to be an existing customer of the firm to get the best rates