Repayments

STEP TWO:
Choose your repayment method. The basic choice is between repayment loans and interest-only deals. Repayment deals are by far the most popular. Each month you pay interest on your loan plus a slice of capital. This slice eats away at the size of your debt which is guaranteed to fall to zero at an agreed point in the future – normally after 25 years. Interest-only deals look a lot cheaper (take a look at the Mortgage Affordability calculator at www.thisismoney.co.uk to see how payments compare with repayment deals) but as the name suggests you are only paying the interest. If that’s all you do then after 25 years you will still have to find a way to clear your debt. In the past people did this with the proceeds of an endowment policy, but bad performance, means these rarely live up to expectations. So you should only go interest-only if you have a far better investment in mind or are convinced you will have another way to clear your debt. Fortunately you can switch from repayment to interest-only terms at any time for free, and you can split your loan so some is on one system, some on the other.