Loans Guides

Ten tips for taking out a personal loan

Are you considering a personal loan? Check out our top 10 tips to ensure you get the best loan at the best price... (Updated 21/7/09)

Taking out a loan is a big deal, but knowing what to look for and shopping around for the best deal could save you hundreds if not thousands of pounds.

Here we present to you our top 10 tips for choosing the right personal loan for your circumstances…

Before you take out any loan, you should always read the small print carefully and consider consulting an independent financial adviser if you are unsure of the options available to you.

• 1. Check your credit report before you apply
• 2. Make a budget
• 3. Don’t borrow more than you need
• 4. Know your APR
• 5. Watch out for delivery charges
• 6. Watch out for payment holidays
• 7. Check for early repayment charges
• 8. Shop around for PPI
• 9. Don’t leave too many footprints
• 10. Be careful with car loans

1. Check your credit report before you apply

Not only will checking your credit report reveal to you how you look to prospective lenders, it also gives you the opportunity to correct any information that is wrong and give yourself the best chance of being approved.

2. Make a budget

If you are planning to take out a loan, it’s crucial that you make a budget and stick to it. You need to work out carefully how much you can afford to borrow without stretching you finances and ensure that you will be able to meet you monthly repayments. Download our guide to saving money in every area of your life for tips on cutting your everyday costs.

3. Don’t borrow more than you need

While it may be tempting to add a little extra to the loan amount to treat yourself, don’t do it. Borrowing more will cost you even more in interest in the long run, and you’ll likely be in debt for longer, so only borrow what’s necessary and resist spending more of tomorrow’s money today.

4. Know your APR

APR stands for annual percentage rate. It tells you how much a loan will cost you in interest per calendar year and it allows you to compare loans against each other. Companies are required by law to publish the APR, and to be considered the “typical APR”, it must be the rate offered to at least two-thirds of the loan applicants that get approved for that loan. Before you sign up for a loan, make sure you know exactly what rate you are being offered.

5. Watch out for payment holidays

Some lenders may offer to defer your repayments for a few months at the start of the loan. However, you will still be being charged during this time and your future repayments will be larger to compensate. Your total amount repayable will be larger too, so avoid this if possible.

6. Check for early repayment charges

If you think there is a chance you might be able to pay off your loan early, you need to check the early repayment charges that different providers charge, before choosing your loan.

7. Shop around for PPI

Payment protection insurance (PPI) is expensive and you need to check you don’t already have a policy that would cover your payments in the event of job loss, accident or injury. Even if you decide you need PPI, don’t buy this from your loan provider. Instead, shop around for the best price, and read the small print carefully.

8. Don’t leave too many footprints

When you apply for a loan online, you can often get an instant decision, but don’t be tempted to apply for five in the same week. A record of each application you make is left on your credit report, which lenders check before approving a loan. Having lots of applications on your record makes you look desperate and less likely to be approved.

9. Know the risks of secured loans

If you have a less than perfect credit rating, you are more likely to be approved for a secured loan than an unsecured loan because lenders see them as less risky. However, there’s a lot at stake when you enter into a secured loan agreement, and if you don’t keep up with repayments you risk losing your home, so don’t sign up unless you’re 100% sure that you will be able to meet your repayments. Read our guide to secured loans for more information.

10. Be careful with car loans

While “balloon payment” schemes can be appealing – you defer part of the payment till the end of the loan, thus reducing the loan amount and the monthly payments – you have to pay a final fee before the car is yours. Be realistic about whether or not you will be able to afford the final payment – if not you could end up with a loan for far longer than you wanted. Chek out our guide to car loans.

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