Choosing the right personal loan for your needs can be tricky, and if don’t know what you are getting yourself into then you could end up in financial difficulties. Here are some top tips to use when choosing a personal loan:

Secured vs. unsecured

A secured loan is a loan that is secured against collateral, such as your home. Secured loans have better rates than unsecured loans, but they are more risky because you could lose your home if the repayments are not met. If you are borrowing a small amount of money and have good credit, then go for unsecured loans.

Borrow as little as you can over a short period

The more money you borrow over a longer period of time, the more interest you are going to pay. Borrow as little as you can afford to, and pay it back as quickly as you can so that you minimise the interest payments.

Fixed vs. variable

Most personal loans have fixed interest rates. This means that the monthly repayments will remain the same throughout the loan period. However, some lenders offer variable or flexible loans. These loans are good if the rate goes down, but remember budget for the rate going up as well.

APR

APR or Annual Percentage Rates determine the amount of interest you pay yearly on the loan. Although a low APR might seem appealing, be careful because this is not the only charge that you are liable for when paying back your loan.

Typical APR

If you are comparing APR, then it is good to understand the concept of ‘typical’ APR. Although you may qualify for this rate, it pays to remember that unless your credit history is good, you will end up paying a higher APR than the typical advertised rate.

TAR

A better way to look at how much a loan will cost is the TAR or Total Amount Repayable. This will show you exactly how much you will repay to the lender. The lower the TAR then the better the overall package is.

Shop around

The most important thing to do before getting a loan is to shop around. Before you sign anything, make sure that you have looked at all possibilities for your needs. If you can separate all the various features of a loan and concentrate on the features you require, you can find the best rates for your needs.

Look online

Although your bank may have a good deal, most of the best loan deals are to be found online because of the low overhead costs associated with online companies. You can find many web sites that will allow you to compare the best personal loan prices, helping you to get the best deal for your needs.

Beware of PPI

When securing a loan, it is likely that you will be offered PPI or Payment Protection Insurance. This insurance covers your payments in case of illness, accident or unemployment. Although this insurance may help you, very few people are eligible to claim under its terms, and it is very expensive. Look to see if your current employer covers some of these items, or find a cheaper stand-alone policy that will cover you.

Early settlement

Nearly three quarters of all loans are paid off early, so it pays to know the charges for doing so. Although charges can still be high, more and more lenders are scrapping the charges altogether. Finding a lender that does not charge for early repayment might save you a lot of money.