How To Choose The Perfect Loan

There's often a reason to borrow some money. Maybe a family wedding is coming up, a child is off to university or you need to make some much needed improvements to your home. Whatever the reason, don't just pick the first loan your bank offers you. Shop around and you might save money on the repayments.

Here are some areas to look out for.

An Interest In Interest

The most important aspect of the loan is how much you will have to repay. This is calculated on a number of variables, including your credit score. Most loans give an example of the rate you might expect, called the 'typical APR'. However, many people are not typical, and don't qualify for this rate.

Once you've discovered what rate you will be offered, it's time to look at the fine print and see exactly how much you will have to repay. Even loans with the same annual percentage rate (APR) can vary in the repayment amounts. Look out for the total amount repayable to see exactly how much interest you will be charged for the loan.

Do You Need Protection?

Many loans offer payment protection insurance (PPI) so that you can continue to pay if you become ill or lose your job.. PPI is currently under investigation by the Office of Fair Trading because of the way it is sold. PPI is sometimes added to the amount you borrow, so that you end up paying interest on it. An option to consider instead is income protection insurance. This can be cheaper than PPI and will protect about 85% of your income instead of the payments for a single loan.

• Office of Fair Trading Tips For Getting Out of Debt

Watch Out For The Fees

It's worth checking to see if there are any arrangement fees for the loan and whether these are being added to the amount borrowed. This is another way in which you can end up borrowing more than you thought and making higher payments. It's also worth checking whether there's a penalty for settling the loan early. This is one way that lenders get compensation for lost interest.

To get the best out of a loan, borrow only what you need and don't allow any fees, charges or insurance to be added. You should also pay it back over as short a period as possible to reduce the overall interest charges.

Credit Scoring

The final aspect that will affect the amount you can borrow, the interest rate you get and the repayment period offered is your credit score. Your credit score comes from a variety of factors totted up by lenders to assess your suitability for credit. The credit score takes into account:

• how long you've been at your current address
• whether you're married with children
• your employment status and salary
• how much previous credit you have had
• how well you have paid off previous credit
• whether you have had defaults, arrears or County Court Judgements (CCJs)

More Information:

• Using Your Credit Card To Build Credit History
  Let’s say you want to buy a house, but you need to get a mortgage to help pay for the house. However, you have no credit history to speak of, so how can you apply for the mortgage to get your dream home?
• FSA Credit & Debt Advice section