Five top tips for getting a personal loan

Check out these pointers before applying for a personal loan and you could save yourself a small fortune.

Now regular readers will know that I'm no fan of personal loans. While I appreciate they are the cheapest way to borrow, it all depends on what you're borrowing the money for.

All too often I've been asked in the past which is the best loan to go for, only to discover the reason it was urgently needed was in order to buy a fancy flat-screen TV or a luxurious holiday.

Fortunately the credit crunch has made most people think a little differently about borrowing to spend money. More of us are saving up for things that we want and relying far less on loans and credit. Cheap UK holidays and Staycations have risen in popularity and more of us than ever are using any extra cash to overpay the mortgage.

But what if you need a loan for something important?

Obviously compared to borrowing via a typical credit card, loans are far cheaper - the market leading loan from Sainsbury's bank charges just 7.9% APR, compared to a typical credit card which charges 16.9% APR. But are these rates easy to get?

•1.     What are your options?

Before you start applying, check if there are any cheaper ways you could borrow the cash instead.

Think about how much you really need. Could you save up for it? Or borrow from friends or family at a reasonable rate?

If you must borrow have you considered a 0% card for new purchases? The Halifax card would give you up to 9 months to repay the debt whilst paying no interest.

Alternatively, if you need cash, the Virgin card allows you to transfer money into your bank account, for a 4% fee. You've then got up to 16 months to repay back the debt, during which time you'll pay no interest.

•2.     Check your credit rating

If a loan is your only option, you may be surprised to learn that those tempting low "typical" rates aren't offered to everyone.

Lenders are in fact only obliged to give them to a percentage of their customers and unsurprisingly, these tend to be borrowers with near perfect credit ratings (as they feel more confident of getting their money back).

So if your credit history is less than squeaky clean (you've missed payments or have CCJs etc.) chances are very slim that you'll be offered the market leading rate. So you'll either be turned down or you'll be offered a loan with a higher rate.

And remember, every time you apply for credit a footprint is left on your record - too many of these in a relatively short space of time start alarm bells ringing in lenders' ears!

So before applying for a loan, get a credit check carried out and get an idea how clean your record is before deciding which one to apply for.

•3.     Compare the TARs

Obviously like anything you should take some time to shop around for the most appropriate deal first.

And while the APR is important, don't forget the arguably more important TAR. This is the "Total Amount Repayable" and tells you how much the loan will actually cost, including interest and any other costs - you may find it quite shocking!

Ensure you check TARs when comparing one loan with another to ensure you're getting the best deal.

•4.     Avoid secured loans!

The personal loans mentioned are also known as unsecured loans. It's vital to draw the distinction between these and secured loans, which require collateral such as your house or car as a guarantee.

Secured loans often seem cheaper as unlike their unsecured counterparts, they have variable interest rates.

But of course if interest rates rise, you could be left unable to meet your payments - and risk losing the roof over your head. My advice? Avoid secured loans like the plague.

•5.     Minimise your term

Finally, after investigating TARs you've undoubtedly been suitably shocked at how much your seemingly cheap personal loan will cost.

But the good news is you can keep the costs down - and the most effective way is to pay back the loan as quickly as possible. Pick the lowest term you can manage and you'll pay far less in interest.

Let's take a look at some numbers. Assuming you borrowed £3k via the market leading Sainsbury's bank personal loan (at 7.9 %APR):

Actual cost of a £3k loan at 7.9% APR

Paying back a £3k loan over 5 years would mean a total repayment of £3,641 - £641 obviously being interest.

Repay it over 3 years and it would cost £379 in interest - saving yourself £262.

And over 2 years it would cost you just £253 in interest, saving another £126. Yikes.

Moral of the story? Pay back that loan as quickly as you can and you'll minimise its cost!

Find a cheaper personal loan at lovemoney.com.

More: When you should say no to a best buy loan |Top personal loans are getting cheaper