People take out personal loans for all sorts of reasons, from restructuring their finances through debt consolidation, investing in their properties via home improvements, or financing the purchase of a new vehicle. Whatever the reason for searching for a loan may be, it's important that you get the best deal you can, and to do this you need to understand the basics behind personal loans.



The most fundamental choice you have to make is whether to go for a secured loan or an unsecured loan. Secured loans rely on using the value of the borrower's property to stand as collateral, or a guarantee that the loan can be repaid even if the borrower stops making payments. Unsecured loans offer no such guarantees to the lender, and so are harder to get - you need a better credit rating. Obviously, if you don't own your own home or are not a mortgage payer, then the choice of a secured loan isn't open to you, but if you do, then you will be able to borrow more money over a longer period, and your application stands a better chance of being approved, even with a blemished credit record.

The next thing you need to look at is the APR of your loan. This is a basic measure of how expensive your loan will be to repay, and takes into account the standard interest rate charged along with any charges wrapped into the loan such as arrangement fees. The lower the APR, the better. Be aware though that you might not be offered the APR you see in the advertisements, as this figure by law is the one which will be offered to at least two thirds of successful applicants. If your credit rating is impaired, you may be offered a loan at a higher rate.

Having established the APR of the loan you're thinking of applying for, you need to check whether this rate is fixed or variable. A variable rate means that the lender can push the APR up or down over the term of your loan, which will obviously have an effect on the size of your repayments. A fixed rate gives you the reassurance of knowing exactly how much you'll repay each month, but is rarer to find on a secured loan than an unsecured one.

The length of the repayment term is more important than you might think. Choosing a lengthy repayment term will mean each monthly repayment is lower and this might well look attractive when making your application. However, the longer you take to repay the loan the more interest you'll have to pay in total. It's not unusual to have to repay double the amount you've borrowed once the loan term gets into the region of decades rather than a few years.

Some loans, especially unsecured ones, offer a facility known as payment holidays. These let you skip a certain amount of monthly payments each year, which can be handy for people with variable income such as seasonal workers. Note however that interest will still be charged during the 'holiday' month, which can soon mount up if you use the feature a lot.

Finally, you should check whether you can repay your loan in full at any time without paying a penalty. Early repayment charges effectively lock you in to a single loan and deprive you of the chance to switch to a better deal at some point in the future, although such charges are usually the price you have to pay for an attractive deal.