They’re always dropping through the letterbox; they’re constantly advertised on TV; they even pop up when you’re surfing the net. With offers of loans coming at us from all directions today, choosing the right one can pose a dilemma. But to get the best deal you need to do some careful homework. Interest rates vary from around six per cent up to thirty per cent – which knocks the shine off that new car and puts a dampener on those home improvements.

Finding a loan

The traditional route is a bank or building society, but many good deals can be found through brokers and even supermarkets. Loans for specific items such as new cars are also available, often with lower interest rates. Most brokers claim to help find you a loan at the lowest possible rate. They earn their money in a commission from the finance company which agrees to provide the loan, although be aware that some brokers also charge the customer a fee for arranging the loan.

It used to be a question of going cap in hand to the lender. Today, finding a loan is a relatively painless process which is, usually completed over the phone or online.

Choosing the right loan

It all boils down to balancing the amount you want to borrow with the time you think it will realistically take to repay the money.

Loans are repaid in monthly instalments over an agreed period. The longer the repayment period, the more interest you will pay, so go for the shortest one you can manage. This amount of time is usually fixed and if you want to pay off the loan earlier you might have to pay a penalty, which will be detailed in the small print.

Flexible loans, which let you pay back the money whenever you want, are becoming more common but the interest rate charged is often higher.

Online applications

You will need to fill in a short form over a secure server giving personal and financial details including loans you already have, employment, family, how long you have lived at your current property.

You should get an email back instantly saying your application has been received.

You will receive a loan from the lender or broker within 24 hours or at longest within a few days. Checks will be made with credit reference agencies for a history of arrears or court judgements against you. These will not necessarily put off the lender but you will be asked about the circumstances of any defaults.

You may then be offered a loan on the phone which will be confirmed in writing. You accept the terms or say no if you don’t like the offer. The actual arrangements can take a few weeks until money is deposited into your bank or building society account.

The bottom line

It is most important that you know exactly what the monthly payments will be, and how much you will pay back in total. In general the more you borrow the lower the interest rates will be.

Take extra care when comparing products as lenders calculate the annual percentage rate (APR) in different ways. Make sure that you're comparing like with like. Shops often quote monthly interest rates which are always lower than the annual rate but they can be misleading. Look at the total amount you will have to repay. This will be detailed on the form you have to sign when agreeing the loan. If possible pay off the balance on credit cards every month. Credit cards frequently charge a much higher interest rate than other types of loan.

Possible Pitfalls

It is almost too easy to borrow money today. Lenders have no qualms in offering you more than you have asked for or in establishing that you can actually afford to make the repayments. The Citizens Advice Bureaux say that people seeking advice owed on average nearly 14 times their monthly income. New debt enquiries have increased by 44 per cent in the last six years, with CABx now dealing with over one million new debt enquiries annually.

Loan insurance may be offered so you can continue to repay the loan if you fall ill or are unable to work. Check the conditions very carefully to ensure that you will qualify and that the insurance payments are reasonable.

Lenders, including banks, will often suggest you consolidate your debts. On the surface this seems like the simple solution, but be careful it is not a viper’s nest. In effect you are borrowing more money to get out of debt, and may end up paying more in the long term. It is absolutely essential to thoroughly check options, liabilities and small print before committing.

Remember that if your bank or building society turns down your loan application, it is obliged to explain the main reasons for doing so.

Top tips

• Borrow only as much as you can afford to repay.
• Pay off the loan as soon as possible.
• Repay store cards and credit cards in full each month.
• Do not be tempted by free gifts when choosing a lender.
• Do not allow yourself to be pressured into taking out a loan.
• Make an informed choice by carefully studying the all the terms and conditions.
• Scrutinise the costs and small print before taking out payment protection.
• Be very wary of invitations to consolidate all your debts.

If you have problems with repayments you should consult an experienced adviser, for example, at a Citizens Advice Bureau or the Consumer Credit Counselling Service, both of which offer free, impartial advice.

www.nacab.org.uk/index.ihtml

www.cccs.co.uk/

Further independent advice on planning for credit and debt is offered by the Financial Services Authority:

www.fsa.gov.uk/consumer/financial_planning/index.html