Thinking about taking out a loan to pay off all those Xmas excesses? Then check out the cost of the loan you’re offered.

Only recently the Department of Trade and Industry changed the rules forcing lenders to provide clear upfront information to enable borrowers to compare the costs of personal loans and shop around.

The new rules mean that before you sign a loan agreement, lenders have to clearly set out the main elements of the loan: -

· The total amount to be borrowed· The total amount to be repaid
· The frequency of payments and the instalment value
· The APR (Annual Percentage Rate of interest)
· The costs if you pay late or default
· The cost of any early settlement or redemption penalties

It’s worth searching the Best Buy tables to find the lowest APR but remember, if it says APR Typical, it doesn’t necessarily mean that that’s the interest rate you’ll be offered – the rate you’re offered will depend on your personal credit rating. APR Typical simply means that at least two thirds of the lenders new customers can expect to get that rate or cheaper. Your personal credit rating could put you in the one third who are quoted for a more expensive loan!

Although there are more than 30 loans available at the moment with interest rates below 7%, only borrowers with an excellent credit history can expect to qualify for those rates. And as lenders are finding bad debts an increasing problem, it’s becoming even more difficult to qualify for these super low rates. Everybody else will end up paying more.

And if you’re tempted to shop around for the best rates by applying to lots of lenders, take our advice – DON’T.

Most people don’t realise that each time they apply for a loan, a record of each application is added into their credit record which is held by the big credit rating agencies such as Experian. In the lending industry, these loan applications are known as footprints and each successive footprint will reduce your credit rating. This makes it more difficult for you to obtain a cheap loan and in some circumstances, it might mean you are refused altogether.

The other aspect to watch out for is Payment Protection Insurance (PPI). Most lenders will try to persuade you to take out PPI with them but many will fail to point out the full cost of that insurance.

Take a look at the following. The figures show the true costs quoted by each of the lenders for PPI to protect a 3-year loan of £3,000 *

Smile Loan £566.53
Ryanair Personal Loan £486.72
Virgin Personal Loan £486.72
Moneyback bank Personal Loan £417.96
Nationwide Personal Loan £325.44
Northern Rock Personal Loan £228.24

· We’ve calculated these costs by subtracting the full cost quoted for the loan without PPI from the full cost quoted for the same loan but with PPI. Figures provided by Moneysupermarket.

The first point you’ll notice is that the most expensive on this list is almost 150% more expensive than the cheapest - not a lot to Smile about! So is the PPI quoted by Northern Rock, a bargain? We decide to check it out.

We got an independent PPI quote from British Insurance Ltd for a sum to cover the typical monthly loan repayment of £92 per month. The monthly cost they quoted was just £3.63 per month - equivalent to £130.38 over the full 3-year term of the loan we’re comparing. This was a full £97.86 cheaper than Northern Rock.

So even Northern Rock, the cheapest of the 6 we investigated, was ripping us off!

The moral of this story – always buy your Payment Protection Insurance independently and never from your loan provider! And how can you find a really cheap PPI quote from British Insurance? By clicking here of course!