Even borrowers with decent credit records may struggle to obtain the best interest rates on unsecured personal loans as the consequences of the credit crunch continue to make for challenging lending conditions.

Loan providers have toughened up their lending criteria, leading to nearly two million adults being turned down for unsecured personal loans in the six months to September 30, compared with 1.39 million in the previous six months, according to MoneyExpert.com, the comparison website.

If you are turned down for credit, where can you go if you need to borrow, say, £10,000 for a wedding, new car or home improvements? We look at the options and weigh up the pros, cons and costs of each.

Your mortgage

If you wanted to draw down £10,000 from your mortgage and pay it back over five years on the same low rate as your mortgage, say 5.75 per cent, the monthly repayments would be in the region of £192.

David Hollingworth, of London & Country Mortgages, the mortgage broker, says: “If you approach your existing lender, you may be expected to pay an arrangement fee of a few hundred pounds and perhaps some valuation fees if it needs to revalue your house. If you have come to the end of your deal, you could simply apply for a larger mortgage and obtain the extra cash in one remortgaging transaction.”

Borrowers would be well advised to pay off any additional borrowing over a shorter term than the usual 25 years of a mortgage or risk negating the interest savings made by borrowing on a lower rate. Some lenders actually allow borrowers to specify a shorter repayment term for any extra cash drawn down.

Proceed with care when looking at this option, which is effectively a secured personal loan. Allison Crawford, of Standard Life Bank, says: “Be realistic about the additional monthly repayments and ensure that they are affordable, particularly if your circumstances change.”

Secured personal loans

Standalone loans secured against your home could provide a competitive deal for those spurned by providers of unsecured loans, but you should act with caution. Lisa Taylor, of Moneyfacts.co.uk, the comparison website, says: “I would still suggest this type of borrowing should be used only when you have run out of other options, particularly as some secured loans carry interest rates of more than 20 per cent.”

However, there are competitive rates to be had for those with decent credit histories. Fair & Square (www.fairandsquare.co.uk) is a new company, owned by Barclays, which specialises in secured lending. Its says that a typical APR on loans from £10,000 is 6.9 per cent and that it operates a 30 day cooling-off period, during which borrowed funds can be returned without charge if you change your mind.

Be aware that most secured personal loans carry hefty set-up fees. Fair & Square charges £950.

Ask the family

Research by Skipton Building Society suggests that Britons are owed more than £251 billion by family members - an increase of more than 80 per cent on the £14 billion they were owed ten years ago.

Unsurprisingly, these debts are having an adverse affect on some relations, with 17 per cent of those surveyed by Skipton admitting that they had fallen out with loved ones over borrowings, with some individuals left feeling that their relatives had taken advantage of them.

Nearly 10 per cent of people who had lent to family members also said that they felt that it had taken too long for them to get their money back and 7 per cent reported that the borrower had made no attempt to repay the debt.

One way to avoid falling out with your nearest and dearest if they are kind enough to lend you cash is to put the agreement in writing, specifying how much is owed and when it should be repaid.

Working out an interest payment should also silence any further grumbles and ensure that both parties feel that they are benefiting from the transaction.

Social borrowing

Zopa (www.zopa.com) is an online marketplace where individuals lend and borrow money secured from other people, rather than banks, with both parties entering into agreements in exchange for solid interest rates.

Borrowers must confirm their identity, have a good a track record of repaying debt and an income large enough to support their borrowings. Zopa says bad debt is only 0.1 per cent since its launch in 2005 and that it checks all borrowers' ability to repay.

Borrowing £10,000 over 36 months might carry a typical APR of 6.8 per cent for those with the cleanest credit records. Those with less than perfect histories might be asked to pay up to 10.3 per cent.

Case Study

Robert Marsh, a 39-year-old IT contractor from Nottingham, borrowed £13,000 through Zopa to cover some of the costs of buying an investment property and to help to pay for his wedding to his wife, Ying Chen.

Mr Marsh, pictured with Ying Chen, secured an interest rate of

8.5 per cent and while he may have been able to obtain a lower rate from a more traditional personal loan, social borrowing through

Zopa appealed to him for a number of reasons. “I liked the idea of borrowing from people like me, as opposed to the high street banks,” he says.

The loan from Zopa also had the advantage of a comparatively low set-up charge of 0.5 per cent of the total loan value, and there is no penalty to pay if the couple want to pay off the debt early.

Mr Marsh adds: “This suits us very well. Although we have a repayment schedule of three years, we are really aiming to clear the debt sooner.”

Five ways to improve your credit rating

Don't take a scatter-gun approach.

Wait until you are accepted or rejected before going elsewhere - every time you apply for credit it has a detrimental impact on your file.

Make sure that you are on the electoral roll, especially if you have moved recently.

Most lenders go through the two main credit reference agencies for information on your financial history: Equifax (www.equifax.co.uk, 0870 0100583) and Experian (www.experian.co.uk, 0870 2416212). You can check your file for as little as £2 and correct any mistakes.

Even if you had trouble paying debts in the past, you may be able to present your creditworthiness more favourably. James Jones, of Experian, says: “If you defaulted on a credit repayment but there was a good reason, say a relationship breakdown, you can ask the agencies to note this on your file.”

Close unused credit facilities. Lenders will take into account any available credit in your name. Mr Jones says: “If you don't want to lose these cards entirely, ask the card company to lower your limit.”