What to do if you're thinking of taking out a loan

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Loan applications are being rejected thick and fast because of the credit crunch as lenders look for any excuse to turn down all but the most reliable borrowers, but an increasing number of people are needing to borrow to make ends meet each month.

With that in mind, here are 10 essential considerations for anyone thinking of applying for a loan.

The tips should help maximise the chance of your application being successful, while ensuring that you fully understand what you are signing up for. In turn this should reduce the risk of the loan becoming unaffordable and you defaulting on repayments.

1. The rate you are offered may not be the rate you applied for: Most loan providers advertise 'typical' rates of interest. At least 66% of successful applicants must be offered the advertised rates, but this means up to 34% may be offered a higher rate.

Lenders base this decision on risk-based pricing. This means those less likely to default on their repayments will be offered a lower rate of interest. This judgment is based on factors such as the borrower's credit score, previous payment history and employment status. If you need to boost your credit score read our tips.

2. Think about the type of loan you are applying for: Currently, some of the best personal loan rates are on secured loans. However, if you take out such a product the debt will be secured against your property. This means that if you fall behind on payments the secured loan company can obtain a court order to recover their loan from the equity in your house. The cheapest secured loan rate in the UK is currently offered by First Plus exclusively through Moneysupermarket at 6.6%.

If you are happy to pay a slightly higher rate of interest, you may prefer an unsecured loan. The leading unsecured loan rate is from Moneyback Bank, which is owned by Alliance & Leicester, which has a typical rate of 6.9%. While your debt won't be tied to your home, don't assume that you can get away with falling behind on your repayments - you can't.

Missed payments will considerably harm your credit score and could potentially end with a County Court Judgment (CCJ) being issued against you.

The amount you need to borrow will also influence which type of loan is most suitable - unsecured loans are generally only available up to £25,000. If you need more than that, a loan secured against your property may be the only option.

3. What's your total credit liability? The amount of credit you have available will affect your credit rating. When making a decision lenders look at all your outgoings, existing debt and the total amount of credit you have available to you. So if you have any dormant credit card accounts, close them before making an application.

4. Are you likely to be accepted? There's simply no point in applying for loans you won't qualify for as this will have a negative impact on your credit rating and hurt your chances of being approved for the next product you apply for. Moneysupermarket's Smart Search tool could be the solution as this returns loan rates you are likely to qualify for based on an assessment of your credit profile.

5. Are you eligible? You should read the terms and conditions of each loan before applying as you may not be eligible. Most loans include age limits (typically you must be aged 21 or over in order to apply and be no older than 65 at the end of the loan term); you must be permanently resident in the UK and lenders often require you to have been so for at least three years.

Other main stipulations include having a current account and a regular income - unsurprisingly a lender will not lend to you if you are unable to prove that you will be able to repay that debt.

6. Is a loan the right solution for you? In many cases some simple financial planning such as budgeting, increasing your income and shopping around for better rates on products such as car insurance and utility bills can be sufficient to put you back on track.

By contrast, if your debt situation is particularly severe and you've had a number of applications refused a debt management plan may be more suitable. For more information on debt management plans, debt consolidation and IVAs check out the Tiscali help with debt area.

7. Are there any hidden fees or charges? Look out for arrangement fees - these apply when you deal with a broker who arranges the loan on your behalf. You may be able to save money by cutting out the middle man and going directly to the provider.

Read the terms and conditions for any additional fees such as the clearing house automated payment system (Chaps) which applies for same day transfers. If you can wait a few days for the loan, you should be able to have the money transferred into your account via a free Bacs transfer, or have a cheque sent to your home.

8. Is the interest rate variable? The rates on many personal loans are fixed for the term of the deal. However, some rates are variable. You should check this otherwise you may find your monthly payments rise unexpectedly.

9. Will you be charged an early repayment charge? When you take a loan out, you are borrowing money over a fixed term. If you then repay the loan early, many providers levy a penalty charge. However, the level of these fees vary. So, if you think your financial situation may improve and that you might be in a position to repay the loan early, make sure you know exactly what you will be charged for doing so.

10. Should you take payment protection insurance (PPI)? Banks and building societies often try to sell PPI to loan customers. This is an insurance designed to cover your repayments if you find yourself unable to work due to an accident, ill health or unemployment. PPI could therefore be something you think is worth having. However, it is not compulsory and you do not have to buy it from your loan provider. In fact, it will probably be cheaper if you buy it from a standalone provider.

There are also some common exclusions with PPI. It doesn't usually cover the self-employed or students and conditions such as back pain and stress tend not to be included. It is therefore important to compare the level of cover you are getting as well as the price.

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