Money: Secured borrowings come cheaper

Interest rates on secured loans are cheaper than unsecured loans because there is little risk from the lender's point of view. Most offer them at the standard variable rates applied to first mortgages, which average 8.17 per cent.

The terms and repayment methods are as varied as with first mortgages. All require life insurance cover. Loans like mortgages can be paid off over the life of the loan or through a lump sum at the end of the term. In the latter case you only pay interest but you will need a savings plan to pay the loan off. Anyone working on a budget should be careful to include these costs when deciding what they can afford.

If your existing lender does not offer home improvement loans, you may be able to take a second mortgage with another lender. This is a specialised market, with fewer participants. Interest rates vary widely, from Barclays' 9.7 per cent to 18.4 per cent from Beneficial Bank. Arrangement fees can be high, with the Clydesdale charging pounds 550, and First Direct pounds 395.

Unsecured loans cost more, and are given on a different basis. Lenders will check your credit history then look at your income and employment status and monthly outgoings.

Banks and building societies are keen to lend. Loans are repayable over fixed terms of between six months and 10years and can be expensive. Most have APRs of over 14 per cent, while Yorkshire Bank comes top with 25.8 per cent.

Current account overdrafts may cost the same or more than unsecured loans, but have the advantage of flexibility. The sooner you pay them off, the less they cost.