Getting your borrowing priorities right - a loan is not just for Christmas

	Typical APR	Per Mth
	7.8%	£155.61
	8.8%	£157.75
	10.8%	£162.04
	10.8%	£162.04
* Based on £5000 over 3 years and is not a full search of the whole market

If you're thinking of taking out a personal loan to help with the cost of Christmas or are planning a big purchase in the New Year, make sure you shop around for the best deal and take all the costs into consideration. Before you take out a loan add up how much you will have to pay back to the lender including interest, fees, redemption penalties and payment protection insurance. Then take away the amount you borrowed to reveal the true cost of the loan.

Here's Moneyextra's guide to the costs to watch out for:

Annual Percentage Rate (APR)

The APR or annual percentage rate is supposed to make it easier to compare the cost of a loan against other products. The APR tells you the rate at which you will be charged interest and is calculated using a complex formula that is prescribed by the Consumer Credit Act.

But whether you will be offered a loan at the advertised rate depends on your credit profile in most cases. Legally, 66% of consumers accepted for borrowing should get the advertised typical rate but at the moment there isn't an independent body to make sure this happens.

How much and how long

As a general rule of thumb, the more you borrow, the cheaper the rates of interest. Lenders say this is because of the relatively high administration costs involved in arranging loans. So if you only want to borrow £1,000 or so it might be a good idea to put it on your credit card instead.

Generally, smaller loans or those paid back over a short timescale will have a higher APR than larger loans paid back over a long time.

But for the bigger sums, a personal loan may be your best option. Borrow £10,000, spread over a five year period, and Moneyback Bank, Abbey, Masterloan and Direct Line all offer rates of under six per cent.

The amount borrowed is repaid monthly over an agreed term agreed at the outset, which will usually range between three years and twenty five years. It is best to set up a direct debit to make the payment each month (this will usually be required by your lender).

15 July 2008 © Moneyextra.com

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Moneyextra.com recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.