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Personal loans can be one of cheapest ways to borrow: currently the top deals' interest rates hover around just 6% APR.

However, the loan market is also notoriously full of the sort of pernicious small print that should make the most hardened banks blush and can certainly make the cheapest loan deals more expensive than they seem.

In this guide we'll navigate that small print and find out how the savviest consumers score the best loans.

How much?

Those looking for a personal loan face two initial questions:

• How much do I need to borrow? and
• How much can I afford to pay back?

The more quickly the loan can be repaid in full, the cheaper borrowing is likely to be.

Right from the start, then, looking for a loan means it's time to get the spreadsheet out and decide on a realistic repayment plan.

Only with the amount and the time period more or less sorted can those looking for personal loans begin to delve into interest rates.

Rates: more is less

In general, the largest loan amounts will attract the lowest interest rates; the banks want to entice consumers to borrow larger sums so that they'll get a larger return from their investment.

However, it's not quite as simple as that.

Rather than increasing in logical steps, there's a big leap from the smallest loans to the sector of the market that runs from £7,000 to £15,000 and then a smaller interest rate increase on loans of more than £15,000.

These amounts represent the loan market's most popular products and, therefore, the area where we see the greatest competition between providers.

And, if you're looking to borrow just under £7,000, that jump from mid-market to market-leading can make a big difference.

An example

	Amount	Interest rate	Total cost of borrowing
Loan A	£6,000	16.9% APR	£1,112 over 24 months
Loan B	£7,000	6.9% APR	£514 over 24 months

Similarly, those looking to borrow just over about £15,000 could benefit from borrowing slightly less, if possible.

Another example

	Amount	Interest rate	Total cost of borrowing
Loan A	£14,000	6.9% APR	£996.64 over 24 months
Loan B	£15,000	6.9% APR	£1,525.44 over 24 months

There are two conclusions we can draw from this.

First, sometimes it actually makes sense to borrow a little more, or save a little more and borrow a little less, in order to take advantage of lower APRs.

Second, for those that really do need to borrow less, personal loans actually don't offer the best deals.

Credit cards offer revolving credit which is far more flexible for small amounts and, with the top balance transfer deals, cardholders can borrow for over a year interest free.

Budgeting for 'representative' rates

Up until now, though, we've been talking about advertised interest rates, the ones we look at when comparing personal loans.

The actual interest rates that people pay, however, can be a bit different.

In February 2011 the EU's Consumer Credit Directive came into force. Under the legislation, advertised or 'representative' must be available to at least 51% of applicants.

Previously two thirds of applicants could expect to get the advertised rate so this is quite a large change.

Coupled with the effect of the banking crisis, which has made lenders generally much more risk averse, it means that many applicants will be offered an interest rate higher than the representative rate.

Faced with a higher than expected rate those looking for a personal loan have two options: take on the extra costs or choose not to use the loan and look to borrow elsewhere.

Neither is ideal. Those that make credit agreements at a distance (online, by phone or by post) have a 14-day cooling off period during which time they can cancel the loan after receiving an interest rate that was too high.

However, choosing to do so in order to apply for a new deal can prove a problem because making the first applications means that the lender will make a full search of the applicant's file.

Full searches can damage an applicant's standing in the eyes of a creditor while they remain on file.

There is an exception to this: Nationwide offer a quotation search service which allows applicants to gauge an idea of the interest rate they'll be offered without having a full search show up on file.

Overall, though, the former option is far preferable.

Taking the fact that rates are representative into account when looking into the market is ideal.

Types of personal loan

Personal loans are frequently advertised alongside a specific use for the money: buying a car or making a home improvement.

Some providers specify that applicants are homeowners.

However, in general, the differences come down to one big difference: unsecured and secured loans.

Unsecured is what we usually mean by the term personal loan: the consumer borrows an amount without bringing any of their other assets into the equation.

Secured means that the borrower agrees to put up a possession as capital in return for borrowing - usually a house but occasionally another high value item such as a car.

Just to clarify, however, those providers who advertise borrowing for a specific use or for homeowners generally aren't secured loan providers. The application criteria - a home, for example - is separate from the loan itself.

Why do people take secured loans?

Taking out a secured loans means that borrowers risk losing their biggest investments if they fail to repay.

That's much more difficult (though not completely unknown) in the unsecured loan sector.

So why do people choose to take out secured loans?

Two reasons: first, because these products allow consumers to borrow much larger amounts and second, because providers will take the security of the asset in lieu of a better credit history.

Given that many of those excluded from the unsecured loan market are unable to borrow because they have serious debt problems in the fairly recent past it's easy to see why this sector has such a poor reputation.

Where to look

Once you've decided on your budget and the type of loan you're looking for it's time to start searching.

Banks and building societies

The obvious answer is also often the cheapest: competition among banks and building societies for new customers means that they offer some of the cheapest borrowing rates around.

Our personal loan comparison table lists these deals along with their application criteria.

Away from the mainstream

Away from the mainstream, local credit unions are also worth checking out, particularly for those who have poor credit.

You can find the unions you're eligible to join through this credit union search and read more in our introduction to credit unions.

Peer-to-peer lenders also offer personal loans away from the mainstream.

Sites such as Zopa, Fundingcircle, ThinCats, Yes-secure, RateSetter and Quakle work by hooking up those looking to borrow with lenders, other ordinary consumers looking to make money from interest just as they would with a savings account.

In other words, they're like informal loans between friends and family except that in return for their middleman role they take a fee, though this is sometimes waived or lowered for first time borrowers.

We list Zopa in our main comparison table so you can see how they compare to the high street.

'Consolidation' loan providers

Also away from the mainstream slightly, but in a less good way, is the burgeoning market in loans which combine several debts.

These providers promise those with a number of debts that they can pool them and end up with a "simple, single monthly payment" at a lower interest rate.

However, consolidation providers should be approached with caution since the loan amount, albeit at the low rate, often comes with a fixed number of repayments spread over a very long period.

That can end up being much more expensive overall.

Applications and starting repayments

As we've discussed above, personal loan providers often published specific application criteria. This can include home ownership and will certainly include annual salary and previous borrowing history.

When applicants don't meet, and preferably exceed, these expectations they can face rejection from lenders.

For more information see our check and repair credit ratings guide.

Quicker cash

When a personal loan is approved applicants will normally be issued a cheque by post around a week after the final decision.

Some lenders offer options for quicker cash - either by transferring the money straight to a current account or by offering a courier option for the cheque - but they generally charge around £50 for that couple of days fast track.

Starting to repay

The first monthly payment on a personal loan is generally due a month after the loan is issued.

Failing to make a monthly loan repayment will incur a default payment - usually around £25 - and the missed payment will show up on credit reports.

In addition, missing a loan payment means that the cost of overall borrowing will rise as the end date of repayment is pushed back.

Setting up a direct debit can help to ensure that repayments are always made on time.