Choosing the wrong loan could cost you dear

If your New Year's resolution is the tackle your debt by consolidation, tread carefully as you could be caught out by high interest rates and over priced insurance. So warns financial search engine, Moneyfacts.co.uk. That said, Lisa Taylor of Moneyfacts makes the point that consolidating your debts onto one loan can prove an ideal solution. It could cut your monthly payments and see your interest bill lower. Also, for those less disciplined, the fixed monthly repayment might offer the structure you need to commit to repay the debt within a given time.

Firstly you need to decide if a loan is the best option for your situation. Of course 0% credit cards are the most competitive method to borrow, but this can be dangerous unless you are strong willed enough to stick to a fixed monthly payment and not to continue using your plastic. This method may also only be suitable for smaller amounts of borrowing, typically less than £5K and currently is only available up to a maximum term of 15 months.

Taylor adds that if your budget shows you need longer than 12-15 months to repay the debt, a low rate balance transfer deal may offer a better solution. First Direct for example offers a 4.9% deal for 5 years, while Citi has a Life of Balance MasterCard with a 5.8% rate until the balance is repaid. These rates are substantially lower than any personal loan rate currently on the market.

While interest rates should be relatively easy to compare and evaluate if you are getting a good deal, there is the added complication of typical and personal priced loans. In fact 89% of loans are priced on a typical rate, meaning that 66% of accepted applicants will receive the advertised rates, while the remaining 33% of applicants could be offered a higher or lower rate, depending on their individual credit rating.

The biggest area to be aware of in the loans market, however, is the insurance you may be offered. Payment protection insurance (PPI) generally provides cover against accident, sickness and unemployment, but could also include features such as hospitalisation benefit and even critical illness cover. Indeed, the difference in the most competitive and most expensive cover can add an additional £1760.40 to a £5K loan over 3 years or as much as £4157.40 to a £25K loan over 5 years.