Personal loans come in two main forms. A secured loan is backed by an asset, most commonly a vehicle, which the lender can repossess if you default on repayments. Because the lender has that security, interest rates on secured loans can potentially be lower. An unsecured loan requires no asset as security but typically carries a higher interest rate to reflect the greater risk to the lender. Knowing which type suits your situation is a useful starting point before you begin comparing products.

Lenders advertise their most competitive interest rates, which are typically reserved for borrowers with strong credit histories and stable incomes. The rate you are actually offered will depend on your individual financial profile. If your credit history is limited or you have had some past issues, the rate offered may be higher than the headline figure. Understanding this before you apply helps set realistic expectations and makes it easier to compare what different lenders are offering you rather than what they advertise.

Each time you apply for credit, the lender conducts a credit enquiry that is recorded on your credit file. Multiple enquiries in a short period can signal to lenders that you are under financial pressure or shopping desperately for credit, which can work against you. Rather than applying to several lenders at once to see who approves you, it is worth doing your research and comparing options before submitting a formal application. A finance broker can help you compare your options.

The interest rate is not the only cost attached to a personal loan. Establishment fees, monthly account-keeping fees and early repayment charges can add meaningfully to the total cost over the life of the loan. The comparison rate, which lenders are required to display alongside the advertised rate, factors in most fees and gives a more accurate picture of what the loan will actually cost. Comparing products on the comparison rate rather than the headline rate is a more reliable way to assess the true cost.

Lenders will assess how much you can borrow based on your income, expenses and existing debts, but that figure is not a target. Borrowing more than you need increases your repayments, extends the time you are carrying debt and increases the total interest paid over the loan term. Being clear about the amount you actually need before you apply, and sticking to it, is a simple discipline that makes the loan easier to manage.