Six top tips for taking out a personal loan

If you're thinking about getting a personal loan, make sure you consider my six smart tips before applying…

When it comes to applying for a personal loan, there is so much to consider it can sometimes feel a little like trying to map a minefield.

Therefore, to avoid making a mistake, it's crucial you completely understand the terms and conditions of your loan before signing on the dotted line.

In this article, I'll share my top tips to help you find the best personal loan deal.

1. Check your credit rating

Before you apply for a loan, you must first check your credit rating. You can find out how to do this here.

These days, lenders are more cautious about who they will (and won't) approve for credit, so it's important to know where you stand before you try to borrow. If your credit history is anything less than squeaky clean, you may find it difficult to get hold of a market leading personal loan or credit card deal.

Also, be aware that every time you apply for credit you'll leave a telltale footprint on your file - and if too many of these are visible, banks might assume you are financially overstretched and be reluctant to lend to you.

If you suspect you won't be accepted for a loan, don't just apply on the off chance you will get it. This could seriously hamper your chances of being accepted for credit in the future.

Furthermore, remember that lenders are only obliged to offer their advertised 'typical' APRs to two thirds of applicants. This means that, if your credit rating is not in tip top condition and you apply for a low rate loan, you could be offered far more expensive deal than the one you originally applied for.

2. Check out your loan's APR and TAR

Interest rates on personal loans vary widely from lender to lender.

Right now, Alliance & Leicester is offering a market leading rate of 7.9% APR on loans of £7,500 to £15,000 - but some lenders charge much higher rates of interest on loans of similar amounts, so it always pays to always shop around.

The most competitive loan rates are often on larger loan amounts, usually £7,000 and above.

If you need a smaller sum than this, it may seem as though you could get a better deal by borrowing a larger sum of money than is really necessary. However, this is never advisable as it is likely to cost you more in the long term.

It is also crucial that you check any personal loan's TAR - the total amount repayable.

The TAR represents exactly how much any loan will cost you, including interest payments and any other fees. Therefore, you must always ask your lender what the likely TAR for your loan will be before you apply.

Additionally, always check whether there is a compulsory repayment holiday, how long this lasts for and how much extra this will cost; remember, while a 'holiday' sounds like a good thing, your loan will probably begin accruing interest during the period that you spend paying nothing off your debt.

For this reason, you may find a loan that has a more expensive APR - but does not have a compulsory repayment holiday - actually works out cheaper than a 'friendlier' looking deal.

3. Ask whether there are early repayment charges

It could be that, after you have taken out a personal loan, you find you are in a position to pay it off early. Unfortunately, many lenders charge customers a hefty fee for this privilege.

Before you sign up for any loan, it's sensible to find out how much you'll have to pay if you do decide to settle it ahead of schedule.

This should help you avoid a nasty shock if you want to clear your debt early.

4. Shop around

As with any financial product, it's vital to take the time to shop around for the best deal you can find before making a final decision.

For example, it may not be the best idea to apply for a loan with your current account provider until you've looked to see if there is a better deal available elsewhere.

When comparing deals, bear in mind the interest rates and TARs payable on the loan deals you compare, and any early repayment charges they may impose.

5. Think carefully about PPI

Payment protection insurance (PPI) is designed to cover your monthly loan or credit card repayments if you are unable to meet them because of illness or unemployment.

Even though the rules around selling PPI have recently been tightened, buying a policy direct from your lender may still be an expensive mistake.

PPI policies often come with a long list of exclusions and your bank may charge more for cover than a standalone provider, so shop around for a policy and make sure you know what is covered before you buy.

You can find out more about different types of protection insurance here.

6. Make sure a loan is the right option for you

Finally, before you commit to taking out a personal loan, be sure it really is the best way for you to borrow.

If you only need a small amount of money, you may find it cheaper to borrow on a credit card. There are a number of cards on the market that offer 0% interest deals on new purchases and balance transfers for a set period of time.

Alternatively, if you will need longer to repay a debt or cover the cost of a big purchase, you could opt for the Barclaycard Simplicity Visa. This offers a fixed rate of 6.8% APR on both balance transfers and purchases for as long as it takes you to repay your debt.

Many people take out loans to consolidate old and expensive debts - but if you do use a personal loan for this purpose, you must ensure you stick to your repayment plan and avoid spending on your cleared credit cards.

If you don't, you run the risk of digging yourself into a serious debt disaster.