In the UK alone, there are an extraordinary number personal loans providers; including many banks, building societies and finance companies who want to lend you money. And even more bewildering are some of the deals that these institutions offer. So before committing yourself to one personal loan or another, ensure you have a clear idea of the jargon and the way the system works.

The amount and purpose of the loan

This may seem obvious but the first thing to do is work out how much you want to borrow and what you want to use it for. Don’t enter a discussion about  personal loans with a lender until you are confident about your intentions. Once you start a conversation about money, a lender may tempt you to borrow more than you actually need.

Secured or unsecured?

The next decision to make is whether you would prefer a secured or unsecured loan. A secured loan requires equity – usually your home – so if you fail to make the loan repayments, you may have to sell your property to meet the outstanding debt.

On the other hand, the interest rates for secured loans are usually lower than for unsecured. And it is normally possible to borrow more money over a longer period of time (the general maximum is ten years for a secured loan; five – or possibly seven – for an unsecured loan). It is worth noting, however, that you may have to pay a home valuation fee for a secured loan.

An unsecured loan does not require such a fee because it is not linked to any equity. This means that your home is not at risk of repossession, but any failure to make the monthly payments will lead to credit blacklisting.

As for the amount you can borrow, unsecured loans are available up to £25,000 (although you can ask for more) while secured loans can greatly exceed this depending on your income and the value of your home.

The interest rate

The interest rate of a personal loan is the percentage figure advertised by lenders. It’s known as the APR – the annual percentage rate – and indicates the cost of a loan calculated on a yearly basis.

Be wary of any rates that are advertised as monthly. When you are comparing one offer with another, you want the APR. Also bear in mind that homeowner loans are cheaper than unsecured and lenders do not always work out the APR in the same way, so always check the monthly repayments.

Period of repayment

The period of repayment of the loan can affect the rate of the APR. To see this for yourself, take a look at the loan illustrations that appear on some of the literature that lenders make available.

You may, of course, have a definite idea of the period over which you want to repay the debt. And the shorter you can make this, the less overall interest you are likely to pay.

The monthly repayment

This varies according to the APR and the repayment period. Never make a decision to accept a loan until you have considered whether you can afford the monthly repayment.

Loan calculator

Your ability to meet the monthly repayment depends on the income you have left after existing expenses. So don’t simply work out how much money is coming into your household every month; take account of your outgoings as well.

Flexible loans

Many loans have a fixed APR for their duration. Others have variable APRs, which can lead to you paying more, or less, per month than when you start the loan.

Penalties

Some people intend to settle the full amount of their loan before the end of the repayment period. Others may come into money and decide to clear their debts. Either way, you may wish to check to see if you would be liable for a penalty charge if you settle the loan early.

Credit history

Usually, you must have a good credit history to receive low rate personal loans. If you do not, you may still be able to apply for a loan but the number of lenders is limited and the APRs are high.

The lenders

Nowadays you are not restricted to banks and building societies when you are seeking to borrow money. There are plenty of other financial organisations, including supermarkets, which can offer a good deal.

Loan insurance

Most lenders will offer you insurance so that if you are ill or made redundant, your monthly repayments may be covered for a certain time. This insurance can be expensive, so read the conditions carefully.

Small print

Similarly, always read the small print of the loan agreement. It’s a pain, but the more you know about a potential loan, the more confident you will be about it.

The deals

There are some attractive deals out there for personal loans. For instance, some lenders offer you the chance to defer your repayments for the first three months. So if this suits you, why not take advantage?

FSA

If you have enquiries about deals, or any other aspect of personal loans, you can always contact the Financial Services Authority (FSA). They will provide you with impartial advice that can help put your mind at rest.