A recent survey by Alliance and Leicester Loans found that the most popular reason for taking out a loan was to buy a vehicle. Accounting for nearly two fifths of loans, it was followed by debt consolidation (34%) and home improvements (20%). In truth however there are countless reasons why one might be inspired to take out a loan, for many of us they’ve become an indispensable means of generating extra funds. As with any method of borrowing however it is worth looking into before you take the plunge.

Personal loans are unsecured loans that are produced for consumers who want to borrow up to £25,000 over a fixed term. This means that the lender has not secured their investment against any existent residence or shares that the consumer may have. As this is a risk for the lender, it does mean that the rates of payment are likely to be somewhat bigger than on a secure loan, reflecting the nature of the risk. As they are intended to be paid off over a fixed term, certain firms impose penalties on people who take measures to pay off the personal loans early, usually in the form of a large, accumulated interest bill.

In this situation, it may be worth thinking about a flexible loan, where these charges don’t apply. These loans are agreed at a fixed rate, meaning that they will be assessed on the up to date rate of interest and that will not change over the length of the loan itself, as the repayments are made monthly, the rate of interest paid will fall accordingly as it is calculated on the monies that are outstanding. Because of the risk involved, a consumer’s credit rating can impact the cost of repayments.

A credit history rating is worked out using a mathematical formula and by comparing the spending and repayment habits of people to see how much gamble is involved in lending to an individual. A good history will generate a good credit rating, and vice versa. Those with bad credit ratings can expect to pay higher rates of interest where repayments are concerned, but it is not continually feasible to find out what that rate is until after application for a personal loan.

Loan arrangements are generally much more flexible these days so those unsure about how much they need to borrow, in the case of a home improvements project for instance, don’t end up over borrowing just in case costs escalate. Alliance and Leicester offer a top up option on their unsecured loans so existing customers can simply update their current arrangement whilst maintaining the same monthly repayment rate.

It appears to be ideal for the consumer to take on a smaller loan that can be paid off as rapidly as possible. A huge loan taken out over a greater period of time may keep the rate of the repayments down, but the actual sum of interest paid back over this time will be more expensive than if the borrower were to borrow the same amount over a shorter term. As can be expected, there are a number of players in the loan market and competition for market share is intense. This results in some very appealing rates that often tempt consumers to switch from one provider to another. However, quitting a loan firm can incur fines & this effectively reduces the appeal of the latest offer.

It is strongly recommended to see a professional body like the FSA, who will give independent advice without any marketing language. It would additionally be wise to make use of an online loan calculator to get a better idea of the propositions scale. Loan calculators can be found lenders websites (on the Asda personal loans page for instance) or on loans comparison sites like Fool.co.uk or uSwitch.