TAKING out a personal loan can help you pay for big expenses like a new car, home improvements or a wedding.

With households now spending more on essentials like housing, bills and food, they may have less in savings to cover the big things.

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Taking on debt should usually be a last resort and used only for necessities, but it may be needed if you’re unable to pay for things otherwise.

That’s why we’ve put together this guide with everything you need to know about taking out a personal loan, what the risks are and the best rates you can get…

What is a personal loan?

A personal loan is a type of loan that lets you borrow a fixed amount of money as a lump sum.

You can usually borrow between £1,000 to £25,000.

They’re often useful when you want to borrow a relatively large amount and would like more time to pay it back.

For example, you might want to buy a new car, pay for a wedding, fund home improvements or consolidate your debts.

When you take out a personal loan the money is deposited into your bank account as a lump sum and you’ll then pay it back in instalments over a set period.

This is usually between three and 10 years.

The longer you take to pay back your loan, the more interest you will have to pay.

How can you apply for one?

You’ll need to apply for one from a provider, which you can usually do either directly online or through a comparison website.

Some lenders might let you apply on the phone or in a bank or building society branch.

The lender will want to know your income and how much you spend each month so they can work out whether you can afford a loan.

You’ll need to provide your name, address and bank details.

The lender will do a credit check to assess your track record of repaying debts and they’ll look at your salary, income and how much you spend to see if you match their affordability criteria.

Although you can usually choose how much you want to borrow and how long for, the lender may impose limits on this if they’re unsure about your credit rating.

If your loan is approved the lender will tell you how much you can get, the amount of interest they will charge and how much you will have to pay each month.

It will also say when the money will reach your account and what date you will need to make your repayments each month.

There is a 14-day cooling off period either from when the loan agreement is signed or when you receive a copy of it, whichever is later.

This gives you time to change your mind and any money received has to be paid back within 30 days.

There may be early repayment fees if you want to repay your loan before it is due so check the terms and conditions if you want to settle the debt sooner.

How can you get the best rate?

The best way to get a good rate on your personal loan is to have a good credit rating.

The cheapest deals will be reserved for those whose credit score is good or excellent.

If you have bad credit, such as a history of arrears or defaults, you may struggle to get a good rate.

In this case you might be offered a lower amount or asked to pay a higher rate.

You can read our tips on how to improve your credit score here.

In the short term, there are still steps you can take to get the best deal for yourself.

It’s best to shop around for the lowest rates and you can do this by using price comparison websites like Compare the Market or MoneySuperMarket.

Sarah Coles, head of personal finance at Hargreaves Lansdown says: “The comparison sites break the loans down by size, so you can stick to the best rate for the amount you’re borrowing.

“However, they will rank rates by the APR, and that will depend on your credit record.

“In some cases, you won’t qualify for the loan, in other cases you will – but they will bump up the APR to reflect the fact they don’t think you’re an ideal borrower – just under half will be offered a higher rate than the APR.”

Rachel Springall, finance expert at Moneyfactscompare.co.uk, said many lenders offer their lowest advertised rates to those who borrow around £7,500.

Rates can “vary considerably” for lower amounts, she said.

What else do you need to know?

You should think carefully about how much you need to borrow and how long you want to make the repayments for.

If you over-estimate how much you need to borrow, you’ll end up paying interest on money you don’t need.

But if you underestimate you could end up borrowing the rest far more expensively.

When it comes to the repayment term, Sarah Coles says you should consider that “the longer you borrow for, the lower your monthly repayments”.

“However, the more interest you’ll end up repaying overall, and the bigger the risk that your life will change while you owe the money, which could make it harder to repay,” she says.

You should make sure you have enough disposable income to cover the monthly repayments as missing a payment could damage your credit score.

If you might want to repay early you should check the early repayment penalties so there aren’t any surprises later down the line.

Another thing you should note is that it will show on your credit record when you apply for a loan.

That means the more loans you apply for, the more it will affect your record.

“You should look for a search engine that lets you check your eligibility first so you don’t end up applying for loans you don’t get – or you get but at a far higher rate than you expected,” Coles says.

“You need to put a fair amount of detail in, so it’s worth assuming this process will take a little while, but it’s time well spent.”

Rachel Springall says you should also consider whether you have other options rather than taking out a personal loan.

“It may be cheaper to use a credit card rather than a loan for small amounts, but borrowers will need to set themselves a strict repayment plan to pay off the debt, as they can be flexible with minimum repayments,” she says.