Choosing an unsecured loan

With the festive period now over, people's thoughts may be turning to how they manage the debt they have accrued in the lead up to Christmas or potentially securing finance for planned purchases in 2012.

According to independent financial research company Defaqto, average interest rates for loans of £5,000 have increased over the last twelve months whereas the average rate for a loan of £10,000 has decreased - at the same time, however, it is important for people to look beyond the headline rate when arranging a loan, to ensure it provides the features they need.

Defaqto data shows that over the last year the average interest rate for a loan of £5,000 has increased from 12.6% APR to 13.2%; however for loans of £10,000 the average rate has reduced from 9.8% to 9.2%.

However, if someone is thinking about arranging an unsecured loan they should avoid the assumption that - although important - the only factors worth considering are whether they can obtain a loan and, if they can, the rate they will be charged.

David Black, Defaqto's Insight Analyst for Banking, outlines a number of other features that people should consider when comparing loans to ensure they select the right product for their needs:

Does the lender have a facility where someone can get an in principle quote without leaving a ‘credit-application search' on their credit report?

At present, a limited number of lenders - including Nationwide Building Society, Ratesetter.com and Zopa.com - offer this facility. However, if the borrower accepts the quote and proceeds with the loan application this will leave a record on their credit rating
Does the loan have a fixed or variable interest rate?

94% of unsecured loans have a fixed interest rate, which gives the borrower absolute certainty about the amount of the monthly repayments required provided that the repayment schedule is adhered to
Will the borrower be charged an arrangement fee?

20% of unsecured loans charge an arrangement fee - arrangement fees currently vary from £0 up to £200

If someone wants to repay the loan early will an early repayment charge be levied, and, if so, how much will it be?

19% of loans do not levy an early repayment charge
42% of loans have an early repayment charge of 30 days or one months' interest
36% of loans have an early repayment charge of between 58 days and two months' interest

Does the loan offer a deferred start? If so, is it obligatory or optional?

73% of loans don't offer a deferred start
1% of loans offer an interest free deferred start
24% of loans offer the option of a deferred start
2% of loans have a compulsory deferred start