Borrowers have never had it so bad, so time to review your choices

Anyone attempting to secure a personal loan will find it has become a difficult and expensive business. Lenders are still hesitant to loosen their criteria, and even people with impeccable credit ratings are struggling.

The credit drought has led to the Office of Fair Trading planning to investigate loans. "A lot of lenders are protecting their bucks and are reluctant to lend to new borrowers," says Olivier Beau de Loménie, managing director of the loan comparison site TheLendingWizard.com. Even those that do manage to obtain a loan are faced with rising costs; in the past 12 months, the average rate for a personal loan of £1,000 has risen to 19.8 per cent, up by 1.9 per cent, according to comparison site Moneyfacts. With such unfavourable conditions, where can consumers turn for affordable credit?

Use a credit card

Smaller personal loans in particular have risen notably in the space of a year, with loans of £5,000 seeing the biggest rise of 2 per cent. Although the average credit card rate has increased from 16.9 per cent last year to 17.7 per cent, anyone looking to borrow a smaller amount may well find it cheaper to use a credit card. The Barclaycard Simplicity Visa, for example, charges just 6.8 per cent.

Borrowers may want to take advantage of credit cards with introductory bonuses. "Customers looking for short-term borrowing could consider a card offering a 0 per cent introductory purchase deal. As long as you repay the debt within the term of the deal you will be charged no interest at all," says Michelle Slade, an adviser at Moneyfacts. The longest deals at present are Marks & Spencer Money MasterCard, offering 0 per cent for 10 months, and Halifax All in One MasterCard, which offers 0 per cent for nine months.

Zopa.com

Zopa provides an online financial exchange service bringing borrowers and lenders together, without the need for banks. Potential borrowers are placed into one of five categories – A*, A, B, C or Young, with A*s posing the least risk of defaulting and therefore gaining access to the best rates. Unlike banks, Zopa takes into account a wide set of circumstances to assess credit worthiness, including assets such as a collection of cars or even an eBay rating. Also, with fewer overheads, Zopa lenders offer better rates: borrowers in the A* market are currently enjoying an average rate of 8.1 per cent on loans of £5,000 over three years. "At the moment, we're undercutting banks radically because of their reluctance to lend," says Martin Campbell of Zopa. Borrowers are able to borrow between £1,000 and £15,000, which can be repaid over three or five years, although there are no early repayment charges. There is also a flat fee of £118.50 for all loans.

Credit unions

More than 300 independent credit unions are members of the Association of British Credit Unions Limited. With credit unions, individuals who share a common bond, often dictated by their job or where they live, come together to save and borrow money with each other. Originally, anyone looking to borrow would need to be an established member of the credit union before being able to apply for a loan. However, as credit unions have developed, borrowing has become a more immediate option for members.

"Traditionally, credit unions required you to save for a while before they would lend to you but, as they've grown, some of them allow you to join as a member and get a loan relatively quickly," says Mark Lyonette, the association's chief executive. Credit unions on average charge 12.7 per cent. All credit union loans include life insurance for the loan as standard.

Go to your mortgage lender

Homeowners can choose to release equity from their properties by borrowing additional funds through their mortgage lenders. "Further advances are still typically lower than personal loan rates and are very much akin to a standard mortgage rate," says David Hollingworth of mortgage brokers London & Country. However, because mortgages are paid over a longer period of time, they can end up costing more over the lifetime of the debt.

Alternatively, homeowners can remortgage through a different lender and get extra funds by applying for a bigger loan than needed. As long as there are no early repayment charges, remortgaging is a good option for those with enough equity in their properties as they can scan the whole of the market and secure a better rate.

Those on a flexible or offset mortgage may also be able to borrow back money they have put into the mortgage. Northern Rock, for example, allows customers to borrow back some or all of any overpayments they have made on their flexible fixed mortgage at the rate of their home-loan deal.