Personal loans - how to make sure you get the best deal

Written by: Richard Green

If you are in need of obtaining additional money quickly, then your main choices are using a credit card or obtaining a personal loan from a bank, building society or from a specialist loan company. For short term borrowing credit cards can be useful, but for longer term borrowing a loan may seem to be the best option. Whenever you take out a loan or credit agreement, your prospective lender will assess your personal circumstances and decide whether to offer to lend you the funds you require subject to its repayment with added interest being paid.

Depending on the result of a financial health check (completed by the lender), you may be offered, on average, up to £15,000 to be paid back over a period of between 6 months to 10 years. The actual amount that you can borrow and the interest rate charged will depend on factors such as your past credit record, amount requested, duration of loan, purpose of the loan, whether the amount borrowed is secured or unsecured, and acceptance of various terms and conditions applied by the lender.

What is the difference between a secured and an unsecured loan? An unsecured loan is where the loan repayments are not tied to any additional guarantee except the loan agreement. Should you default on payments you could damage your credit rating or become blacklisted which may lead to future difficulties in taking out a new credit card, a mortgage, additional loans, or obtaining interest-free deals in shops.

A secured loan is one where you provide collateral which will guarantee the repayment of the loan should you find yourself in unexpected difficulties. This type of loan is usually secured against your house, which means that if you cannot meet the loan repayment schedule, you may be required to sell your house in order to pay back the money borrowed. Secured loans are generally seen as less of a risk by lenders, as they are likely more to recover their money if things go wrong. This means that the amount that can be borrowed is usually higher, and the rates offered are often much better than would be obtained on an unsecured loan.

An important point to note is that rates can vary considerably. On a £5000 unsecured loan repaid over two years without any adverse credit history, financial comparison site Moneynet provided results varying from an annual percentage rate (APR) of 5.5% to 15.9% which would make a difference of £525.36 over the life of the loan. Don't just take the first loan you see.

Another factor to bear in mind when looking for any financial product is to ensure you are comparing like-with-like. Different lenders calculate the annual percentage rate (APR) in different ways. Don't simply look at the monthly interest rates - these are frequently lower than the annual rate and can make you think you have got a much better deal than you have in reality.

Remember to check all the details and small print of a loan before taking out any type of financial agreement to ensure you understand what is required of you and that the loan meets your requirements. Bear in mind that in general, the shorter the repayment period of a loan, the less interest that you will be required to pay. However according to IntelligentFinance, over a third of the UK adult population are unaware that 75% of personal loan providers levy penalties on borrowers who want to repay their debt early. This could prove to be an expensive surprise and IF estimates that it is currently costing consumers about £336m a year.

Should you get rejected for a loan at a bank or building society, it is useful to know that they are obliged to explain the reasons for doing so. Any time that you are rejected you should also run a check on your credit history to make sure no mistakes have been made, and you can request that a notification of correction is made to prevent the same thing occurring in the future.

The most important things to do when looking for a loan are to:
* decide on your loan requirements
* compare as many of the products being offered as possible
* read the small print
* choose whether you are happy with the terms being offered
* ensure you can meet the repayments
* only make one application at a time.

Richard lives in Edinburgh, occasionally writing for the personal finance blog Cashzilla, and listens to music no one else likes.