Six top tips for an affordable loan

If you're considering applying for a personal loan, make sure you follow these six top tips to get the best deal!

Choosing whether to take out a personal loan isn't a decision that should be taken lightly. For example, if you really fancy spending Xmas in the Caribbean, or you're planning to buy a brand new LCD TV just to keep up with the Joneses, a personal loan isn't the way to go.

However, if you genuinely do need some extra cash for something important, a personal loan can be a good option.

So if you are considering taking out a loan, here are some top tips for helping you find an affordable one.

1) Consider all your options

Before you jump in head first, consider whether there are any other ways you could get your hands on the cash (and no, I don't mean by robbing a bank). For example, is the sum of money you need an amount you could realistically save up for instead?

Alternatively, perhaps you could use a 0% new purchases credit card for your spending needs. The Tesco Clubcard Credit Card, for example, offers a whopping 12 months interest-free on any purchases you make. Of course, you'll need to ensure you can afford to pay off the balance in full before the end of the 12-month period, otherwise you'll be hit with an interest rate of 16.9%.

Another option might be the Virgin Credit Card which allows you to transfer money directly into your bank account. So you can use this card to pay off an expensive overdraft, for example. And the best bit is that you'll have 16 months to pay off this debt interest-free! Just bear in mind you will need to pay a transfer fee of 4%.

2) Watch out for the APR

Just because you see a loan advertised at a typical APR of 8%, this doesn't mean you're guaranteed get it. Lenders are only obliged to offer the advertised 'typical' APR to two-thirds of borrowers.

When applying for a loan, lenders will check your credit record before deciding firstly, whether to accept you for the loan, and secondly, what rate of interest to charge. So if your credit record is less than squeaky clean, it's highly likely that the rate of interest you're offered will be much higher than the rate advertised.

So it's always a good idea to check your credit rating yourself before applying for a loan - you can get a free credit report from Experian if you sign up for a 30-day trial. And if you do have a low credit score, don't think it's the end of the world - there are steps you can take to improve it. Read Improve your credit score: the quick dos and don'ts for more information.

3) Choose the loan with the lowest TAR

The acronym TAR stands for Total Amount Repayable. When shopping around for your loan, it's always advisable to compare the TAR as this is arguably more important than the APR.

That's because the TAR will tell you every single penny you'll be expected to repay for your loan - including interest and any other fees or charges. So by comparing the TAR, there won't be any nasty surprises, and the loan with the lowest TAR will be offering you the best deal.

4) Avoid secured loans

A secured loan requires you to put up an asset as security for your debt - such as your house or car.

The attraction to secured loans stems from the fact that you can usually borrow more than you'd be able to with an unsecured loan, and you may be able to borrow over a longer term.

However, secured loans tend to have variable interest rates, so this means there's a chance the interest rate could rise later down the line, and you'd be faced with higher repayments. If this means you can no longer afford to make your repayments, you could end up losing your home or car. Personally, I don't think this is a risk worth taking.

Unsecured loans, on the other hand, won't require you to provide your lender with collateral against your loan. So this means you're less likely to lose your car or home if you can't keep up with your repayments - although this still isn't guaranteed.

Unsecured loans usually have fixed interest rates, which means you'll always know how much you'll need to pay out each month - making it far easier to budget your monthly spending.

5) Avoid repayment holidays

A repayment holiday allows you to take a short break from paying off your loan - typically for three months.

But while this might sound tempting, taking a repayment holiday will actually result in you paying more interest. That's because you'll incur interest charges while you're taking your holiday. So once your holiday is over, you'll either have to increase your remaining monthly installments to pay off your loan within the original term, or you'll have to pay it off over a longer period.

So taking a repayment holiday will actually make borrowing more expensive, and can take you longer to get out of debt. Steer clear of them unless you're aboslutely desperate!

6) Size matters

Try to keep the term of your loan as short as possible and don't borrow more than you really need to. By choosing the lowest term you think you can manage, you'll pay far less in interest and therefore keep costs to a minimum.

Similarly, if you decide to borrow more than you actually need to, you're simply going to end up spending more money and more time paying off your loan.

Then again, the more you borrow, the lower the APR (typically). So if you're right on a threshold, where the APR drops if you borrow slightly more, it may be cheaper to actually borrow that extra money. Always do the sums first, and look carefully at the TAR before you make your decision, however.

The top three loans

So now you're armed with all the tips you need to get you started, let's take a quick look at three of the cheapest personal loans on offer at the moment. All of these are for loans of £7,500 or more. *

As you can see, there really are some great deals around right now. So if you are considering taking out a personal loan, make sure you follow these top tips to ensure you get the very best deal!

Finally, don't forget that if you're struggling with your finances and need to reduce your debts, lovemoney.com can help! First, adopt this goal: Destroy your debt. Next, watch this video on debt advice and this one on debt rip-offs. And then, why not have a wander over to Q&A and ask other lovemoney.com members for advice?

*Typical rate for personal loans between £7,500 and £14,999 for Nationwide, between £7,500 and £15,000 for ASDA, and between £7,500 to £14,950 for Alliance & Leicester.

More: The top 5 best loans | Three reasons not to borrow a loan today