Five tips for finding the best personal loan for you

The market is full of banks, credit unions, finance companies, payday lenders and others, all offering hundreds of personal loan products.

So it's no wonder people get confused and overwhelmed and end up with a product that does not quite fit.

This also probably explains why the number of complaints received by the Financial Ombudsman Service in 2016-17 was up by 11% on the previous year, with people as young as 18 being lent large sums of money.

Most of the complaints were about personal loans provided by banks.

For many people, personal loans are the best way to consolidate debt and borrow money for life experiences and purchases.

Credit cards can be a trap if not used correctly. Many people can't stop spending if there is available credit, which means if you lack self-control a credit card can be the worst thing you can get.

When looking around for a personal loan, there are five key things to consider:

A good interest rate

Make sure you are getting the best rate for your personal loan. Rates vary and a small difference can add up over time.

However, also bear in mind that a lot of lenders "risk weight" their rates based on your credit score and the overall strength of your application.

You may have to opt for a slightly higher rate while you build and improve your credit score for future purchases.

Set-up fees and charges

Some lenders charge administration fees for setting up a loan. This needs to be factored into your decision.

You also need to be wary of some lenders offering a lower interest rate but loading up on application fees, risk fees, etc. This can lead to quoting a low indicative rate while in effect the real rate is actually a lot higher.

Early repayment penalties

Some lenders may penalise you financially for paying off your loan early.

Paying it off ahead of time means lenders miss out on receiving all the interest that they would have otherwise earned.

This can be a crucial element in choosing the correct personal loan.

My advice in most cases is to choose a variable rate loan, as they usually have no early repayment fees.

You should also get the longest term available as this will minimise your standard repayment. However, if you can make additional payments or lump sum reductions then you should absolutely do so.

You should aim to get the facility paid off as quickly as possible. The quicker you pay off the loan in full, the less interest you will incur

Late payment fees and interest

While it is important to make your repayments on time all the time, sometimes things go wrong and you don't want to be hit with heavy charges as a result.

The best way to avoid incurring such fees and penalties is to set up a direct debit. All financiers will offer this facility and some insist on it.

All you then have to do is manage that account and make sure you always have sufficient funds to make your repayment.

Apart from obviously saving you money by not having to pay these unnecessary fees, it will also provide a great reference to the lender for any future finance requests.

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