Once you’ve chosen which type of loan is for you, the next step is to shop around for the one with the best value.

Pay careful attention to the APR. It sounds obvious, but research from Alliance & Leicester has found that one in three consumers overlook the most important factor – the rate of interest they will be charged, known as the annual percentage rate or "APR" – when choosing a loan. Yet all banks’ loan rates are not the same, and a difference of even a couple of percent will make a massive difference to how much you end up paying. So not looking for a low rate loan could prove costly. You could end up paying twice the amount you need to in the long run.

But there’s more to it than just the APR.

"Too many of us are guilty of focusing purely on the cheapest interest rate when we take out a loan and forgetting to look for the pitfalls and restrictions imposed by the lender,” says Sean Gardner, Chief Executive of MoneyExpert.com. "There has been such an emphasis on rate in the current loans marketplace that many people are oblivious to the finer details of the product. This leads to many people paying penalty charges for early redemption charges unnecessarily."

Always compare the Total Amount Repayable (TAR) as well as the Annual Percentage Rate (APR) because APRs can be manipulated.

Lenders usually charge tiered interest rates, which mean that lower rates are generally applicable on higher amounts. Look closely to see the rates each lender charges on different loan amounts as you could end up paying less by taking out a larger loan.

Shop Around

Do not put your trust in one bank and simply assume that they will give you the best deal. Intelligent Finance estimates that personal loan borrowers across the UK lose over £1bn a year by saddling themselves with uncompetitive and inflexible loans.

"People’s failure to shop around creates a bonanza for big high street banks,” says Grenville Turner, Chief Executive of Intelligent Finance. “It allows them to get away with offering less competitive products than they would if customers were just a little more astute. People need to be less accepting and a little more questioning when choosing their financial products."

The internet can be a huge help, even if it’s just for your initial research to get an idea of the market – it’s quick, easy and allows you to compare a huge number of options to make sure you get a competitive deal. Many high street banks charge the highest rates for personal loans, while internet rates are often lower for the same bank than on the high street. And if you do find a lender that you like then check out their website rates before applying.

Consider moving your existing loan to a lower rate. Government statistics show that 83% of the UK is paying over the odds for the money that they borrow. Some of the best deals available can be half as expensive as high street lenders. Don’t stick with an unsatisfactory loan just because you’re too lazy to assess your options.

"It is fair to say that lenders are fighting for customers and as a result borrowers have never had it so good, but only if they actually take advantage of the deals on offer by transferring or consolidating debts to lower rate deals," says Richard Mason, loans and insurance director at moneysupermarket.com.

Don't put your home at risk by taking out a secured loan, and avoid payment protection insurance unless you're absolutely sure you need it – it won’t increase your chance of being accepted. For most people, it’s just a huge added expense (as much as 20% extra on top of the loan) that will make it even more difficult to pay back your debts and may tempt you to be more reckless with money than you would otherwise have been. If you must, look for a stand-alone payment protection insurance policy instead.

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