Money: A loan down the line

SCARY but true: it is now possible to borrow pounds 25,000 over the phone. If you are considered a good credit risk, Direct Line and Coutts offer pounds 25,000 loans. The move comes after a change to the Consumer Credit Act 1974, which previously limited borrowers to pounds 15,000. So if you are planning to buy that BMW this August, there are alternatives to the car dealer's finance.

Even if you simply want to go on holiday, or pay for the decorating, there are dozens of banks, building societies and insurance companies who want to loan you money. Some lenders offer loans for specific purchases, for example, Bank of Scotland, Halifax and TSB all offer car loans.

You can borrow from as little as pounds 300. And if you want the money urgently, you can get a decision from some lenders within a few hours, depending upon the amount you want to borrow.

If you are borrowing a large amount, lenders have to be confident that you can pay the money back. "We check customers' details very carefully," said Lydia Young, of Direct Line. "We can agree a loan in principle over the phone, but we then ask a customer to fill in an application form and submit salary slips before we can give a firm agreement. But we can usually agree a loan within a few days."

Unsecured personal loans are usually available to anyone who can satisfy the lender that he or she is a good credit risk. If you are in regular employment and have lived at your present address for more than three years you stand a good chance of been given a loan.

Repayment terms vary between six months and 10 years. The longer the term, the more you will pay back. So try to pay back as much as you can, without stretching yourself too much. As a rule, don't set aside more than 10 per cent of your takehome pay in loan repayments.

Some lenders will allow you to take a payment holiday of two or three months and others, such as Sainsbury, allow you to defer your repayments. This could be useful if you know your finances are going to be stretched in the short term. But lenders offering payment holidays tend to be among the most expensive.

The amount you repay will depend on the amount you borrow, the repayment term and annual percentage rate (APR). You can also opt to take payment protection. This guarantees your loan repayments if you are unable to pay because of illness, injury or unemployment, but it will increase the cost of your loan considerably. Try to avoid this if you are in a steady job: it puts about pounds 20 a month on every payment on a pounds 5,000 loan. Watch out for the small print: Birmingham Midshires, Co-operative Bank, First Direct, Marks & Spencer and Northern Rock charge a higher APR if you do not agree to take out insurance.

There may be other costs that aren't included in the repayment tables. Capital Bank, for example, charges an pounds 85 loan arrangement fee, and Royal Bank of Scotland charges a fee of 1 per cent with a minimum of pounds 25 and a maximum of pounds 60. Most lenders want you to repay your loan monthly by direct debit. And you can pay the loan off in full before the end of the term, but you will usually be charged a penalty of one or two months' interest. If you think you can pay off the loan with a lump sum, such as a bonus from work, look for a loan that does not charge a penalty.

Most lenders provide leaflets with a breakdown of costs. Each lender should quote an APR. This is the cost of borrowing, based on the interest rate, fees and other administrative costs. But lenders do calculate APRs in different ways so they can be difficult to compare directly.

Your existing bank or building society may give you preferential rates, but don't automatically let it lend you the money. It makes sense to get a few quotes. Always look at the total cost of borrowing, not just the APR. The personal finance pages of weekend papers carry details of the cheapest rates.

If you want to borrow a small sum of money over a short period of time, you may have problems. Only a handful of lenders will lend as little as pounds 500 and the minimum repayment can be six months, but more usually a year. Taking out an overdraft or borrowing on a cheap credit card can be a cheaper and more flexible way of borrowing in the short term. There's also the advantage that you can repay the money back when you like, without paying a penalty.

q Amanda Jarvis writes for 'Moneywise' magazine.

Unsecured loans: the cheapest lenders

This table supposes a loan of pounds 5,000 over three years. Monthly premiums are shown without payment protection insurance.

Premium Loan range APR Loan term Redemption

penalties

Coutts & Co1 pounds 16461 pounds 2,000-pounds 30,000 123% 6mths-7yrs 1 month's interest

local branch

Yorkshire Bank2 pounds 16577 pounds 300-negotiable 123% 6mths-5yrs none

0800 202122

Northern Rock pounds 16610 pounds 1,000-pounds 15,0003 99% 1-7 years 2 months' interest

0345 421421

Prudential Banking pounds 16630 pounds 1,000-pounds 15,000 127% 1-5 years none

0800 000223

Hamilton Direct Bank pounds 16636 pounds 500-pounds 10,000 128% 1-5 years 2 months' interest

0800 303000

Direct Line pounds 16638 pounds 1,000-pounds 25,000 128% 1-5 years 1 month's interest

0181-680 9966

Royal Bank of

Scotland Direct pounds 16638 pounds 2,000-pounds 15,000 128% 1-5 years none

0800 121125

Lombard Direct pounds 16653 pounds 800-pounds 15,000 129% 2-5 years 2 months' interest

0800 215000

Capital One Direct pounds 16654 pounds 2,000-pounds 10,000 129% 2-5 years 2 months' interest

0800 216252

Alliance & Leicester pounds 16756 pounds 500-pounds 15,000 133% 1-5 years 2 months' interest

0990 626262

Bank of Scotland

Banking Direct pounds 16660 pounds 500-pounds 15,0004 129% 1-5years 2 months' interest

0800 805805

Notes: 1Available to account holders only; a fee of 05% (min pounds 25 is charged). 22% discount if current account also opened.

3Loans over pounds 10,000 for existing customers only, 4 Deferred payment option. Source: Moneyfacts