Personal loans guide - Tiscali

Personal loans are a popular way of borrowing money, but first time borrowers should be wary of hidden traps. Fall in one, and excessive amounts of interest are charged.

Personal loans are typically for amounts of between £5,000 and £25,000 (although some lenders cap advances at £15,000). Generally anyone aged over 18 (a few lenders stipulate age 21) can apply for one.

Typical rates of interest charged on personal loans vary from between 6% annual percentage rates (APR) to 13%, although some lenders charge much more and should be avoided.

If you approach a bank or building society for a loan, be sure to ascertain whether you are taking out a "secured" or an "unsecured" loan. The former means that your have committed your home to pay off the loan in the event that you default, whereas with an unsecured loan you do not have to put up collateral and your home cannot be repossessed. Clearly, unsecured loans are preferable wherever possible.

Most personal loans are for inflexible fixed-terms, which means that you may have to pay a redemption penalty of typically two months' interest if you want to pay off the loan before the end of the agreed term. Try to avoid such loans as you may well want to clear the debt early.

For instance, the average term requested by Barclays Bank borrowers at the moment is 40 months but in practice most pay off their loans within 14 months.

A number of lenders quote competitive rates but with the hidden proviso that you take out their cover for sickness or unemployment. This can add considerably to the cost of your loan. Make sure you know exactly what the terms of the loan are before signing up.

For instance, you may not need this cover if it's offered by your employer and the policy may not cover you at all if you are self employed. Check the small print of the policy - when will cover start to pay if you are sick or become unemployed and what are the exclusions?

Remember that for small purchases, you may be better off borrowing on your credit card. There are some very competitive credit card rates and if you pay the debt after only a few months, it can work out cheaper than borrowing through personal loan.