Seven simple steps to shopping for a personal loan

Follow these essential rules, and avoid paying through the nose for that personal loan!

I don't know about you, but I absolutely HATE the adverts personal loan companies put out.

It's not just the appalling acting (bloke on the phone to loan company, turns to his wife "How much was it we need, again, darling? £15,000?" As if you'd make that call without knowing).

Far more offensive, to me anyway, is the frivolous attitude to debt they demonstrate, with a 'customer' saying how great the loan was, as it enabled them to pay for a holiday or to upgrade their car to the latest model.

Yes, personal loans can be used for such frivilous reasons, but in my view if you're getting into debt in order to keep up with the Joneses, you need your head checked.

For me, a personal loan should only be an option for far more important spending. And if you stick to these rules, you will get the most for your money.

1) DO make sure a loan is your best option

A loan is not always the cheapest option available to you - if you need less than £5,000, it can be a lot cheaper to put that borrowing on a credit card, and spread the payments that way.

There are a number of credit cards in the market which offer 0% interest on purchases, over varying lengths of time. The current market leader is the Tesco Clubcard Credit Card, which offers a whopping 12 months of interest-free purchasing. If you need longer than that, you could take out the Virgin Money card, which gives you 0% for 16 months, and transfer cash from the card into your current account. But you'll pay a 4% fee for this. Find out more

If you need a significant amount of time to pay off your debt, you may still be better off with a credit card. The lowest typical APR on personal loans available at the moment is 7.9% - both Sainsbury's and Alliance & Leicester offer this low, market-leading rate. But you can get an even lower rate on a lifetime balance transfer card: the Barclaycard Simplicity Visa charges just a typical APR of just 6.8% for the lifetime of the card, there's no balance transfer fee and you can be more flexible with your montly payments. Read When a credit card is better than a loan for more info.

The moral is: don't just automatically opt for a loan. If your credit rating stands up to scrutiny, and you don't need a massive amount of money, then a credit card may be a more sensible route.

2) DO shop around

This one is always great advice, no matter what financial product you are looking for, but is essential when shopping for a personal loan.

As I mentioned earlier, the market-leaders charge a typical APR of just 7.9% at the moment, but once you start to look elsewhere those rates soon jump up, in some cases to around 10% APR.

Make sure you get the cheapest loan you possibly can - it's bad enough having to get into debt, without paying even more for the privilege than you should do.

3) DON'T only pay attention to the 'typical' APR

Lenders can be extremely sneaky, and the APR of a personal loan is one area where they really ramp up their sneakiness.

By law, lenders only have to offer the advertised 'typical' APR to two-thirds of borrowers. If you fall into that bottom third, perhaps due to a damaged or non-existent credit record, you might apply for that juicy market-leading rate, but instead be offered a rubbish one.

So, before you apply for credit, it's wise to get a free credit report first so you can correct any errors and ensure your rating is in tip top shape. And if you do have a few financial skeletons in the closet, be warned that the loan you go for may not be as good as looks. Get your free credit report from Experian

4) DO pay attention to the TAR

While the APR can be a tad misleading, one thing that outlines your credit commitment in crystal clear terms is the Total Amount Repayable (TAR).

This is the one way of seeing in plain English exactly how much this loan is going to set you back over the entire course of the agreement.

It includes the interest you will pay, and any non-optional fees, so I would definitely recommend that you give it a careful consideration before you even think about applying.

5) DON'T sign up to the lender's PPI

Payment Protection Insurance (PPI) is an enormous rip-off. In fact, I would go so far as to say I think it is the biggest financial rip-off I've ever come across!

Be warned, your loan provider will do their utmost to get you to sign up, as they make an absolute killing from this overpriced product.

If you do want to cover your back with your loan, should you lose your job or fall ill, then make sure you shop around for a policy from a standalone provider rather than your lender.

The vast majority of the time this will save you a small fortune.

6) DO be aware of early repayment charges

Around two-thirds of personal loans are paid off early, so it is worth being clear on how much you are likely to be charged if you do manage to settle up ahead of schedule.

There is currently just one deal - the Post Office Online Personal Loan - which does not charge you anything for repaying the loan early, though the current market leaders Sainsbury's and Alliance & Leicester only charge a month's interest.

However, all lenders vary, so make sure you know exactly how much it will cost you to pay off your loan early.

7) DON'T borrow more than you need!

This goes back to those blasted adverts.

Occasionally they will come out with something like "Thanks to my wonderful loan, I managed to pay for my new kitchen, and had enough left over for a week in Majorca!"

This makes my blood boil. It's clear that not only did they borrow more than was necessary, they then consigned themselves to spending more on paying off the loan, and over a longer period of time. It's madness!

Keep your loan as small as you can, and over as short a period as you can afford. My colleague Cliff D'Arcy is absolutely spot on with his golden rule of borrowing: "Keep your interest bill to a minimum by borrowing as little as you can for as short a time as possible."

So there you have it, the seven golden rules you should follow when taking out a personal loan. Stick to them, and you'll keep the burden of that loan to a minimum.

More: How to choose the right personal loan | The ten best personal loans!