From financing facelifts to giving debts a makeover, we're suckers for personal loans

Millions take them out, says Sam Dunn, but are we running a risk?

Neither a borrower nor a lender be? Try telling that to the institutions that offer personal loans on extremely competitive terms. Even though the Bank of England increased the base rate two weeks ago, none of the big high-street banks had moved to adjust its rates on unsecured loans by the end of last week.

Neither a borrower nor a lender be? Try telling that to the institutions that offer personal loans on extremely competitive terms. Even though the Bank of England increased the base rate two weeks ago, none of the big high-street banks had moved to adjust its rates on unsecured loans by the end of last week.

And try telling it to the customers. Some 6.5 million personal loans are approved every year, each worth an average of £7,500. And with Christmas approaching, it's a fairly safe bet that many more loans will be taken out to pay for gifts, food and drink over the festive season.

It doesn't stop there: according to research by Alliance & Leicester, there is a creeping trend among borrowers to use a loan to pay for plastic surgery - a chin tuck, say, or pectoral implants - as well as cars, home improvements and exotic holidays.

"It is increasingly appearing on the radar," says Alliance & Leicester spokesman Floyd Jebson. Further research from The MarketPlace at Bradford & Bingley supports this view, revealing that 3 per cent of people taking out a loan do so to pay for plastic surgery.

One the biggest demands among those seeking personal loans is for debt consolidation - a way of spending money in order to save money. Figures from Nationwide building society show that in April 2002, less than a quarter of those taking out a personal loan with the mutual did so to consolidate their debts. By July this year, however, 30 per cent of its personal loans were to customers looking to do so.

"The cost of personal loans has gone down over the past couple of years, and people are considering [debt consolidation] more," says Michael Senior, head of personal loans for The MarketPlace.

With credit card debt needing only minimal monthly repayments, consumers can easily build up a number of debts that are more manageable if a single personal loan is taken out to cover them instead, Mr Senior explains.

"It's an ideal means of consolidating more expensive debt," he says. "However, interest rates could creep back up and now could be a good time to take out a loan when rates are still low."

According to Mr Senior, the best personal loan on offer is from Northern Rock, which charges 6 per cent on any amount up to £25,000.

Consolidation may be a step in the right direction if you are saddled with debts on several pieces of plastic. But, particularly if interest rates do continue to move upwards, borrowers must exercise a lot more care in choosing their credit to ensure they don't overstretch themselves.

"People tend not to view a loan as having a price attached to it," warns Matthew Morris, chief executive of the independent financial adviser Rickman Tooze. "Price-conscious people go into Dixons [for consumer goods] and check the tags, but [when it comes to] loans they tend to just grab the money.

"People must see the loan as having a price itself. They must ask themselves 'what is the cost?' and look at not just the monthly outgoings but the overall [bill]."

Unwary borrowers can still fall foul of expensive loan deals. Last week, a British Gas advertisement offered to replace old boilers for a 10 per cent deposit, with nothing else to pay until after the winter. The glow from your warm house would not last, however, if you were unable to settle the balance by the spring. Signing British Gas's typical five-year credit agreement to pay off the rest of the loan would see you charged an annual percentage rate (APR) of 26 per cent.

In such a case it's worth taking out a personal loan from a lender such as Nationwide, currently charging 6.7 per cent. This way you can pay the outstanding debt before the huge APR kicks in, and save yourself more than £1,000 in repayments.

The importance of being aware of such differences was underlined last week by John Tiner, chief executive of the Financial Services Authority (FSA). Outlining the City watchdog's strategy for improving people's financial education, he said the need for better consumer information and advice had never been "so urgent".

If you have a personal loan, you may be able to cut your costs by moving elsewhere. Mr Morris at Rickman Tooze says: "It's always worth seeing if you can reposition [your borrowings] - but look out for any penalties."

A number of lenders penalise borrowers for paying back loans early, so check the small print on the deal to see if this is the case when choosing a loan.

And think twice before taking out payment protection on a loan as this can significantly bump up the repayments.