Personal loan is what it says, a loan for you to spend as you wish. Many people use them to pay for a car, a dream holiday, home improvements, or even to pay off crippling credit card bills in one go, so allowing you to spread the repayments over a longer time at a lower interest rate. Here are the key questions to ask before making your mind up.

How much can I borrow?

Generally up to ?15,000 - but some can go as high as ?25,000 - but remember you have to be able to afford the repayments. You can often get approval in principle over the phone with the money available in just a few days.

For how long?

It depends on the lender. Some will lend for as little as six months, although a year is more common. Maximum length is usually seven years, but some firms will lend over ten years. Personal loans make most sense for people who want to repay something over a few years, if you only need the money over, say, six months, using your credit card probably makes more sense.

Where are the best places to go?

Your bank or building society, or other well-known names such as the supermarket chains. Sainsbury's and Tesco Personal Finance are just a couple of the big names offering personal loans at competitive rates. They have a reputation to defend and will not short-change you. Avoid personal loans from small firms of which you have never heard - this is a lightly regulated area and some of these loans can carry high interest rates coupled with heavy redemption penalties* should you decide to move your loan to a cheaper firm. Reputable firms generally charge penalties of no more than two months' interest if you pay off the loan early. But shop around, your mortgage lender may offer you a preferential rate, for example, but you might still be better going elsewhere.

How does the interest work?

Rates are generally fixed for the duration of the loan, which means you know exactly how much you will repay each month. The disadvantage is that you could be paying more than borrowers who take out a similar loan in six months' time - on the other hand you could pay less. Either way, you do not have to worry about your repayments soaring. Many lenders will insist that you take out a direct debit for the repayments. Generally, the interest rate falls if you take out a larger loan. The crucial rate to look for is the APR - Annual Percentage Rate* - which includes the effect of any arrangement fees you have to pay, although few lenders actually charge these today.

Will I have to pass a credit check?

Yes. Lenders want to make sure that you are a good risk and do not have a history of bad debts and unpaid loans behind you. To do this they will check your entry on credit registers. A poor credit record won't necessarily prevent you from getting a loan, but you will probably have to pay a higher interest rate. You may find it harder to get a loan if you are self-employed or are on a short-term contract.

Why are these loans often referred to as being unsecured?

Because - unlike a mortgage - they are not secured on your home. That is, if you do not repay, they cannot repossess your home. That is why the interest rate is higher than for a mortgage.

What is the insurance that is often offered with these loans?

This is insurance you buy to pay off the loan if you cannot do so, for example, because you lose your job. Think carefully whether you really need this or not. It is often expensive, and if your financial situation is precarious, should you be borrowing more money anyway? Some lenders make buying this insurance compulsory unless you are prepared to pay a higher interest rate. If you do want the insurance, ask about exclusions and small print which could make it hard for you to claim.

Does the APR cover the cost of this insurance?

Some lenders do not show the cost of the insurance in the monthly interest rate you are quoted. However, following a long-overdue change, lenders must now show the whole cost including the insurance in their APR. This makes a comparison based on the interest rate much easier and gives you some idea of the real cost of the loan plus insurance.

So is a personal loan the best way for me to borrow?

Could be. Credit card and overdraft interest rates are typically higher, and a loan gives you the certainty of being able to spread the cost over several years, and a discipline in the repayment schedule. But if you are planning a home improvement and have equity in your home, it could be cheaper to simply extend your mortgage.

Personal Loans FAQs

Q: What is APR?

A: APR is short for Annual Percentage Rate and determines the true cost of a loan, taking into account the loan interest rate and also any extra charges.

When getting any sort of borrowing - whether it is a mortgage, loan, overdraft or credit card - you will see a number of interest rates quoted and it is the interest rate with APR next to the figure quoted that is important.

Q: What is the best way of comparing loans?

A: First of all, check the APR (which is in effect the amount you'll be paying for the loan). Then, check out the terms and conditions, such as any benefits - repayment holidays for example and weigh it up from there.

Q: If I decide to repay the loan earlier than expected, what happens?

A: First of all, contact your loan lender for an early settlement statement to see how much you will need to pay to clear your debt completely. The statement will tell you how much you'll need to pay by a certain date. It will also detail how the final figure is made up.

Check the terms and conditions of your plan so you know what you should and shouldn't be charged for, as many lenders charge a financail penalty if you pay your loan off early - for example, two or three months? interest payments.

Q: I have a poor credit history - County Court Judgements (CCJ'S) and a history of arrears. Will I be able to get a loan?

A: Lenders can be sympathetic to people who have experienced financial difficulty in the past. However, in most cases, if you get accepted for a loan, it will be on the basis of it being a secured loan.

If you are accepted for a loan, the terms and conditions (and the interest rate) offered may vary from what you have seen advertised. This is because it is dependent on how great a risk you are deemed. The lenders will base their decision by using a credit checking agency to see your borrowing history.

Q: What happens if my loan application is declined?

A: There may be an instance where a lender does not wish to give you a loan and the reasons why are numerous. Generally, it is because of your previous credit history - it may show a bad debt or maybe repayments on other debts that have been missed or paid late.

Or, maybe you have a lot of debt already and the lender feels that taking on further debt may push you into financial difficulty.

The lender does not have to tell you exactly why you have been refused for a loan, but you can ask for the name and address of the credit reference agency the lender has used for assessing the loan and contact them for a copy of your credit file.