How to choose a personal loan

Navigating the personal loan market doesn't have to be daunting - let Moneywise TV show you how to pick the right deal for you.

Many of us need a financial leg-up at some point, which is where a personal loan can come in handy. But there are some things you should ask yourself before you apply...

The first point to consider is whether a personal loan is the right kind of borrowing at all.

The minimum loan providers will offer is £1,000. But even if you need more, it could make sense to opt for a 0% credit card and escape paying interest altogether. If you take this route though, be absolutely sure you can clear the balance before the 0% period expires. After this rates soar to an average of 18.6% - far more than you'd pay with a personal loan.

There is nothing to distinguish between personal loans except price so shop around for the cheapest on comparison websites. But be warned, providers only have to offer advertised rates to two-thirds of applicants, so the rate you see might not be the one you get. If you have glitches in your credit record for example you will be charged more.

The size of your loan will also determine the rate you pay. Quoted APRs generally refer to loans between £7,000 and £15,000. Borrow more or less and the rate could be higher.

The maximum you can borrow is £25,000. If you're offered more than this, beware. The deal is likely to be a secured loan, which is a totally different ball game. Like a mortgage, this borrowing is secured against your home so if you default on payments your home is at risk.
The other consideration is the time over which you borrow, which can be between 12 months and five years. A shorter term means higher repayments but you pay less interest overall. Most comparison sites have calculators which show how costs vary over different time periods - have a play to see what you can realistically afford each month and choose the shortest term possible.

If you're likely to pay the loan off early, look at the small print because there may be a charge. Fully flexible loans shouldn't incur any fees but not all loans will so check first.

Some loans also offer repayment holidays or allow you to defer your first payment.

Finally, you may be offered Payment Protection Insurance alongside your loan but this is rarely a good idea. Premiums are expensive and there's a high chance it won't pay out if you do need to claim in the event of accident, sickness or unemployment. It's much better to save for your own contingency.

Your Comments

You start by saying you can't borrow less than £1,000 which may betrue for many High St lenders but you've ignored the fantastic service provided by Credit Unions to people of all ages, backgrounds and circumstances. Credit Unions don't push you towards loans larger than you need and do encourage you to save wherever possible so you're less reliant on loans in future. Any surplus is recycled into loans for other members of pays an annual dividend or both. It's an easy way to help your local community too!