Smarter homes

Tips to choose the right loan

With lending levels at a record high - £322 million a day - more and more people are taking out loans as an extra source of finance. In order to decide which loan is best for you, do your research and follow these tips on choosing a loan.

1. Get the right kind of loan

There are two types of loan:

a. Persona l loans

Also known as an unsecured loan, personal loans are used for purchases such as a new car, furniture or a holiday. Factors to consider:

A personal loan is not secured against your home
The amount you can borrow is based on your credit history
Personal loans offer up to £25,000
You must repay the loan within 10 years

b. Secured loans

Also known as a homeowner loan, secured loans allow you to borrow larger sums of money over a longer period of time, and are an option if you have a bad credit history. Your property is used as security against the loan. Factors to consider:

You may lose your property if you cannot keep up with repayments
You must prove your ability to repay the loan
You will be given a loan dependent on personal circumstances
You can borrow more than £25,000
You must repay loan within 25 years

2. Read the small print
Different lenders have different fees and conditions, making it important to consider the full picture before applying. Ask if an arrangement fee is added on to your loan, or if you're able to repay your loan early without a penalty charge. Look in the small print for the 'total amount repayable' or TAR, as it will give you an accurate figure of how much the loan will cost you in real terms.

3. Compare lenders
With the Bank of England raising interest rates five times between 2006 and 2007, the loans market is continually changing. Compare a range of deals and lenders using an impartial comparison service to make the right choice.

4. Dodgy lenders
Avoid being enticed by lenders advertising easy access to credit, or debt consolidation. If it sounds too good to be true, it probably is.

5. Online or high street lender?
Online loans generally offer lower interest rates, as their low overheads mean they can pass on savings to customers. Borrowing from a high street branch offers you face-to-face customer service. Alternatively, choose an online loan from a high street bank to get the benefits of both.

6. Clearing other debts
Taking out a loan in order to pay off other loans can be dangerous if you don't close off all other forms of credit. According to online comparison service uSwitch, 66% of people taking out a loan for debt consolidation ended up further in debt. Only borrow as much as you need, and think carefully about whether you can comfortably make repayments.

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