In these difficult economic times many people are finding themselves forced to take out a loan to cover bank overdrafts, college fees, home improvement, weddings, mortgages, vacations and even day-to-day expenses.

Before you start shopping around for a loan you need to understand that your credit history (previous loans and how you handled the repayments) is vitally important and will influence the kind of loan – if any – you are offered. Also calculate your debt –income ratio to see how much of your income will go to loan repayments.

The ideal loan should have low interest. The higher the interest the longer it will take you to pay it off. Shop around for the lowest APR (annual percentage rate) but also take into account hidden costs. You need to clarify what are the charges you would face if you didn’t stick to the repayment plan and if you miss a payment. Even if your current bank claims to give preferential rates to its account holders you could still find lower rates elsewhere. Read the small print. Find out if there will be an early repayment charge if you decide to pay off your debt early. Consider taking out Payment Protection Insurance. PPI covers payment of your loan if you are unable to meet the payments one month. However carefully read the policy’s long list of exclusions and shop around for the cheapest policy. Loan repayments should be easily within your ability to cover each month, the interest should be low and there should be as few hidden and extra costs as possible.

Peer-to-Peer Loans

Unfortunately conventional loans are often limited or even unavailable to people with a bad credit score, unemployed or young borrowers. Many people are also fed up with banks and are looking for an alternative avenue. This is where peer-to-peer lending comes in. Thanks to the Internet social lending between individuals is now possible on social lending marketplaces. With peer-to-peer lending you cut out the middleman and can make a direct loan. However, loans of this nature should not be undertaken independently. It is essential to go through a respected and reliable peer-to-peer lending site.

Sites like Prosper allow you to post the amount you wish to borrow and list the purpose of the loan. Investors then review the loan listings and choose who they wish to lend money to, according to their own criteria. The site offers loans from $2,000-$35,000 with loan terms of 3 to 5 years. At Prosper the borrower makes fixed monthly payments with no hidden fees and fixed rates start from 6.73% APR for best borrowers. Borrowers and investors’ identities are not revealed. There are no penalties for early repayment or partial prepayment.

Peer-to-peer lending has opened up a world of opportunities for both borrowers and lenders who want to invest. Our choices are no longer limited to the high street bank and the terms of peer-to-peer borrowing are remarkable attractive.