How to choose a loan

Traditionally, the first port of call for a loan was your bank. But these days you can apply for a loan with all kinds of companies from supermarkets, finance houses and specialist loan companies to banks and building societies.

The trick is to choose a competitive loan that suits your particular circumstances. To get the right loan for you, you need to ask a few essential questions...

Is the loan secured?

Loans can be secured or unsecured. A secured loan is one that is tied to your home. Be very careful if you are opting for a secured loan as failure to keep up the repayments could mean you have to sell your home.

Unsecured loans are not tied into anything. But if you fail to make repayments, you could end up being credit-blacklisted.

What is the APR?

In general, the more money you borrow, the lower the interest rate will be. The best way to compare rates is to look at the Annual Percentage Rate (APR) offered. Confusingly, different lenders calculate this in different ways, so when looking at loans always make sure you are comparing like with like.

How long will the loan last?

Loans are usually repaid in monthly instalments over an agreed period of time. The longer the repayment period, the more interest you will have to pay. So in general, you should always choose the shortest period you can afford.

What if I want to pay it off early?

You usually can, but it might cost you. Loan providers often charge you a penalty for repaying the loan early.

How much is the monthly repayment?

Before agreeing to any loan, find out exactly what the monthly repayments will be. You need to know that you'll be able to afford that amount every month.

Are there any repayment penalties?

Although some lenders will charge you a penalty if you repay your loan early, some companies now offer what are called flexible loans. These allow you to pay back the loan whenever you want. This could be useful if, for example, you know you are due for a bonus or tax rebate or inheritance.

Do I need loan insurance?

You may want to consider loan insurance so that your loan would be paid off if, for example, you were made redundant or fell sick and were unable to work.