For those who need to borrow, loans can be vicious, even the best deals have more tricks than Paul Daniels' sleeve. Yet carefully beat these traps and it's possible to borrow for as little as 6%.
This is a step-by-step guide, with daily updated best buys and a unique calculator to pare your costs to the bone.
In this guide
Quick Resources:
Loans Checklist
Loans versus credit cards
Personal loans let you borrow up to £25,000, the key sell being you get "structured repayments" so you know how long you're borrowing for and what it'll cost each month. Yet in general, borrowing on the cheapest credit cards substantially undercuts the cheapest loans; meaning in many circumstances they should be used first.
- Are you trying to make existing credit card debts cheaper?
In most cases a loan won't be cheapest for you. Credit card balance transfer deals are designed to allow you to shift other cards' debts to them at a special cheap rate, usually much cheaper than the best loan rates.
This doesn't mean you need to keep shifting debts between short term 0% deals; some cheap deals last until ALL the debt is repaid (see Best Balance Transfers). Though do ensure you make at least similar repayments to what the loan would cost each month. - Do you want to borrow for under a year or less than £1,000?
Loans over short time periods or low amounts are almost always expensive. Instead there are a variety of techniques possible that cut the cost. Many credit cards allow new customers to spend on them at 0% for up to the first year - read 0% cards guide.
Providing you can make the purchase on a card, and will definitely pay it off before the 0% deal ends, that's the best option (read Short Term Interest Free Loans for full details). -
Need to borrow for a specific purchase / a lump sum?
Here loans are difficult to beat, not because they're particularly cheap, but as it's difficult to do any other way. However if you're money-savvy, there's a way to replicate the facilities of a loan using a credit card, cutting the interest rate to around 7% APR . Read Cut Price Plastic Loans.
- Looking to try and cut the cost of an existing loan?
Don't automatically assume that switching to a cheaper interest rate will save you money. Many loans, especially older ones, have lock in penalties which mean even though you'll pay less interest, when you add in the fine for moving, overall you pay more.
Secured loans versus personal loans
Most high street personal loans are 'un-secured'. Rather annoyingly, that sounds like a bad thing, but it isn't. The alternative, and the kind you'll see mountains of TV ads for, are 'secured loans', and for the following reasons I'd steer well clear...
- Your home could be taken away
A secured loan literally means the debt is secured on your house (or something else you own), meaning if you can't repay, the lender can repossess your home. With unsecured loans, it's much much less likely this will happen. - Personal loan rates are fixed, secured are usually variable
Almost every unsecured personal loan is at a fixed rate; you know exactly what you'll pay from the start, and it won't change if the UK's interest rates do, or on a lender's whim.
Yet secured loans have variable rates, meaning the lender can up your payments when it likes; and they often do like to! In the past secured loan rates have been known to double, hitting people's pockets hard. - Secured loan repayments are stretched over many years
Secured lenders often promise "one easy low monthly repayment". While it may sound good, it's done to stretch the debt over many years, so you pay more, and more, and more interest, costing you a fortune. -
Are you eligible for an interest-free Social Security loan?
Before going for commercial debt, it's worth seeing if there are any loans available from the government's social fund available to you. There are two types and both are for people without savings of their own.
The first are crisis loans, which are for emergencies or disasters, such as the roof falling in, or something that endangers your house or family. Anyone who doesn't have existing savings can apply.
The next type are budgeting loans, which are only for those receiving benefits. These will allow for a wide range of borrowings. For example, to pay for needed school uniforms or furnishings.
For more information read the debt help guide
As this is so important, in case I haven't made the point strongly enough yet, here it is written large…
Secured loans give the lender security, not you. It's far, far, better to take a normal unsecured personal loan than one secured on your house.
Secured loans are rarely a good move, and should be considered lending of last resort. They're only applicable in very limited circumstances (see the Secured Loan article). Those with reasonable credit scores should consider a personal loan, cheap credit card deals or even extending their mortgage instead. Those with a poor credit history looking at secured loans as a way out should read my Step-By-Step Guide To Problem Debts as an alternative.
From this point this guide's a secured loan-free zone ↓
Choosing the right loan
Some of the lowest interest rate loans can be the most costly due to nasty hidden costs. Yet before you pick the type of loan it's crucial to decide one thing.
How much, for how long?
The formula's simple. Borrow as little as possible, repaying as quickly as possible. To avoid complications, always base borrowing on what you can comfortably afford to repay (preferably after Doing A Budget), as over-borrowing can cause debts to spiral out of control. Also question everything: can you avoid any debt? The loan calculator has a special 'how much can I borrow' option to work it out for you.
Beware - while borrowing over a longer period spreads the debts and decreases monthly repayments, it massively increases the interest you'll repay. Borrow £10,000 at 7% over three years and the interest cost is £1,100. Borrow the same over 10 years and it's £3,900.
Beware 'representative' rates
Since February 2011, all advertised loan and credit card APRs are 'representative' - this means only 51% of successful applicants are guaranteed to get it. This means up to 49% may end up with a more expensive loan than expected, not to mention people who get rejected outright.
The upshot is borrowers left without lending at the rate they expected, with a search on their credit file, which can hit ability to get credit in future. The only solutions are only apply for loans you are pretty sure of getting, or use the (very rare) loans that tell you the rate you'll definitely get (like Nationwide below).
| Cheapest std rate | Lender & Representative APRs See all official APR examples |
|---|---|
| The cheapest loan for smaller amounts using a credit card | A few specialist credit cards can effectively be turned into lump sum loans eg, £3,000 over 16 months at the equivalent of 6.3% APR. This is far cheaper than the standard loans below, full step-by-step in the Cheap Credit Card Loans. |
| £1,000 - £1,999 | Sainsbury's* 18.6% if repay in 1-3 years or 18.7% for 4-5 years (Via MoneySupermarket, Nectar cardholders only) |
| Santander*/A&L;* 18.9% |
|
| £2,000 - £2,999 | Post Office* 14.9% |
Sainsbury's* 18.6% if repay in 1-3 years or 18.7% for 4-5 years (Via MoneySupermarket, Nectar cardholders only) |
|
| £3,000 - £4,999 | Sainsbury's* 12.8% if repay in 1-3 years or 12.9% for 4-5 years (Via MoneySupermarket, Nectar cardholders only) |
Post Office* 14.9% |
|
| Zopa loans
(top credit scorers) |
High credit scorers can try loan marketplace Zopa* eg, 10.2% for £3k loan, it allows flexible repayments (read Zopa explanation). |
| Cheapest standard rate | Lender & Representative APRs See all official APR examples |
|
|---|---|---|
| Cheapest standard loans for £5,000 - £7,500 | Sainsbury's* 7.8% rep APR for 1-3 year term Sainsbury's* 7.9% rep APR for 4-5 year term (Nectar cardholders only) |
|
A&L;* 8% |
||
Santander* 8.3% |
||
| Cheapest standard loans for £7,501 - £15,000 |
Sainsbury's* 6% rep APR for 1-3 years
Sainsbury's* 6.1% rep APR for 4-5 years (Nectar cardholders only) |
|
M&S;* 6% (must be over 30 or a homeowner) |
||
| Tesco* 6.1%
|
||
Nationwide* 6.3% for FlexAccount holders only
Nationwide* 6.4% Nationwide tells you before applying the rate you'll get if accepted, via a credit 'soft search', so you avoid a higher than expected rate and a wasted credit check(though it could still reject you). |
||
| Cheapest standard loans over £15,000 | Nationwide* 7.8% (7.9% for £20k+) - FlexAccount holders only Nationwide* 7.9% (8% for £20K+) - everyone else |
|
Sainsbury's* 8% rep APR for 1-3 year terms Sainsbury's* 8.1% rep APR for 4-5 year terms (Nectar cardholders only) |
||
A&L;* 8% |
||
| Cheapest standard loans for over £25,000 | Maximum personal loan borrowing is £25,000. If you need more, be very careful, it's a huge commitment. You can combine loans, or add the debt to a remortgage, though that often means extending the term, more interest and securing the debt on your house. |
|
High credit score? Try Zopa
While it may still be possible to get loans over £5,000 cheaper with credit card loans as explained above, it's unlikely as the more you borrow the tougher it is. If you've a decent credit score it's worth a check at the lower end of the scale though. See Cheap Credit Card Loans.
It might be cheaper to borrow more
One thing it's worth being aware of is when borrowing close to one of the rate boundaries above. If there is a huge rate cut for borrowing eg. £5,000 instead of just £4,900, it could work out cheaper to borrow MORE.
Take this quick example. If you need to borrow £4,800, and the best rate you can get is 11.9%, over three years you'll repay £5,730. Borrow MORE in the first place, £5,000, and in total you'll repay just £5,710.
Want more loan options?
These cheapest loans are updated daily. If you want to see a list of many available loans then online loan comparisons like Moneyfacts and MoneySupermarket* give a wider range, though may miss some of the top payers above.
However for those with a good credit score, there's an alternative. Zopa* is a unique internet marketplace which couples people who want to lend with those who want to borrow. On application it gives you a credit score, and if you get its top A*, A or B ranking, you can borrow. The bonus here is that you can repay early without facing a penalty.
Loan rates vary daily and are determined by the amount needed and length of borrowing. For A* or A grade credit scorers wanting cash over 36 or 60 months, it can beat some loan rates, particularly on smaller amounts. For example, 10.2% representative APR is currently available for loans of £3,000.
Loans with flexibility
One of the main ways to add flexibility used to be via the Cheap Credit Card Loans loophole, which allows total flexibility and rates cheaper than loans, but it's only for the financially savvy as it's easy to mess up.
However if you are considering either substantially overpaying or clearing your debt early with a lump sum, there are some options.
-
EU rules mean early part-repayments are allowed
Thanks to a change in rules on 1 Feb 2011, you can make partial overpayments on loans taken after this date. Banks may charge you for this, however only up to 1% of the amount repaid (if the loan is for over a year) or 0.5% (if under a year). -
Full early repayment
Loan providers must allow you to pay off your loan in full. This is subject to a penalty which is usually 1 or 2 months' interest. You should check your individual agreement to see what this is. - Higher credit scorers earning £12,000 plus.
Borrow from the loan marketplace Zopa* (see above) and you are allowed to shorten the repayment term, which effectively allows you to pay off more quickly. Also you can pay off in full without penalty.
Cheap, easier-to-obtain loans
Let me be blunt. The impact of the credit crunch and ensuing recession has been a tightening of lending criteria. This means it's getting more difficult to find someone who'll lend you cash. Even if one does, the rate will be higher.
First, treble check you're borrowing the absolute minimum needed, as lower amounts make it easier. Plus ensure you've checked your credit files to ensure it isn't a simple error that's hitting your credit worthiness (read the Credit Rating guide).
After that, there are three main options:
-
Step 1. Use a credit estimating loan comparison service.
Price comparison site MoneySupermarket has developed a facility with credit reference agency Equifax. This enables you to answer a few questions that will estimate your credit score, and show you which loans you're most likely to be accepted for.
To do it, use its Smart Search* facility. It's worth understanding that MoneySupermarket doesn't automatically include every lender. Yet if you've a poor credit score, sacrificing the comparison of some more competitive lenders to see what you're most likely to be accepted for should help.
A big warning though; the Smart Search includes some secured loan products in the comparison, so always check the ones it suggests. For all of the reasons above these are costly and can be dangerous, and only useful as a very last resort (read Secured Loans).
Step 2. Check out your own bank.If it looks like you're not going to get a particularly good rate after using the loan comparison service, check the standard loan rate from your own bank to see how it compares.
This is because it knows more about you, and credit scoring is about predicting your behaviour, so that extra data may help. If its advertised rate is cheaper, it's worth calling in for a chat, as there's a chance your bank will give you a loan in circumstances others wouldn't.
-
Step 3. Consider a credit union loan.
Credit unions are independently-run local co-operative organisations that aim to assist people who may not have access to financial products and services elsewhere. There are 500 in the UK providing loans, savings and current accounts, each deciding its own services and rules on who can join.
All credit union loans have no hidden charges, no penalties for repaying early and include life insurance for the loan as standard. Traditionally a union only lent to people that also held savings with it, but the larger ones can now lend you money regardless of this.
To find interest rates, length and amount of loans available and whether it'll lend to you, contact your local union. As a guide, most offer a rate around 13% APR, but never more than 27% and lend up to £10k. You can usually take out a personal loan for up to five years, possibly 10, and a secured loan for up to 10 years, possibly 25.
For full details on how they work, how to find out if there is one near you and the other financial products that may be on offer read the guide to Credit Unions. Also tell us in the forum what you think of Credit Unions so other MoneySavers can learn form your experiences.
If no one will lend you the money cheaply, it's usually best not to borrow at all. If the idea of the loan was to cut the cost of existing debts, please read the Problem Debt Help Guide.
Cheapest loans with PPI
Payment Protection Insurance (PPI) is supposed to cover you in the event of accident, sickness or unemployment for 12 months. If you have no other funds, wouldn't be covered by work-based benefits, and don't have any other insurance policies that would cover your repayments for a year; then getting a policy may be a sensible move for you.
Let's start by saying this as loud as we can….
Get PPI from the loan company and you'll almost always pay many times more than needed, often wasting £1,000s.
If you already have PPI on a loan, you may want to take a look at the PPI Reclaiming guide.
How to get the cheapest insured loan
Step 1: Apply for the cheapest uninsured loan.
Simply use the uninsured loan list above to find the right lender.
Step 2: Analyse your PPI requirements.
While most PPI cover is pretty similar, they're not identical; it's worth working out what you need before you start. For example, if you're not working, then you want to only get 'accident and sickness' not unemployment cover. If you're self-employed, some policies won't cover you, so either choose one that does or again just opt for 'accident and sickness'.
Step 3: Use the cheapest standalone insurer.
There's a growing industry of small insurers looking to provide reasonable cover that vastly undercuts the banks' own. These include JustClick4Cover, Paymentcare* and iProtect. For full details and comparisons see the full Loan Insurance article.
If you are really set on just getting the loan and insurance together for the convenience, then never compare using the interest rate, but ask "what's the total cost, including insurance?". It is possible to compare these costs on MoneySupermarket*. Just do a comparison but ensure you click the "include payment protection" option.
The Loan Calculator
Below is a unique calculator designed to help you work out the cost of a loan, plus whether you can save by switching. It has three options...
- How much will a loan cost? Enter the amount you want to borrow, and the interest rate you've found, and it'll tell you the monthly repayment, and the overall interest cost.
- How much can I afford to borrow? Fill in the monthly payment you can afford (having done a budget), as well as the interest rate and term you've decided on, and it'll calculate the maximum lump you'll be lent.
- Will I save money by switching loans? If you've an existing loan, the switching process isn't as straightforward as you may expect (read the full Existing Loans article). But fill your details in here, and the calculator reveals whether you'll actually be better off by moving to a cheaper lender.
For the most accurate answer, use the APR (Annual Percentage Rate); banks will quote this on their websites or in-branch.
Answering your questions
Should I get a consolidation loan?
This is the most common question I'm asked about loans, and let me be honest, it does fill me with despair. Consolidating is never an aim in its own right. In fact, it's often a disaster waiting to happen. If you have a lot of small loans or credit cards with debts on, the primary aim should be to pay them off as quickly as you can at the lowest possible rate.
The reason I'm so frequently asked this is that consolidation loan providers have spent countless millions trying to push the public's confusion over these deals to make them seem attractive. Often the key claim is they can save you money by reducing your outgoings to a "manageable" level using just "one single monthly payment".
Yet to do this, consolidation loans stretch your borrowing over a longer period, maybe 15, 20 or even 25 years. That means the amount you pay back is going to be huge. A £10,000 loan on a high street credit card at a horrid 18% APR costs £5,240 paid off in five years. Many think shifting it to a consolidation loan at 9% is cheaper - but as its spread over 25 years, the actual cost is £15,200, nearly three times more.
Worse still, many consolidation loans are actually secured loans and thus you pay more, for longer, and are risking your home. The key aim is to cut the interest costs of your debt, whether that's on one loan or 22 and pay it off as quickly as possible.
What if I need to borrow more than they'll lend?
Once you've applied for the loan, it's already on the credit file. So assuming you applied for the cheapest loan for you, then there's no point in not accepting that cash because it's not the money you need. The answer's relatively simple - just apply for another loan to fill the gap. Providing you haven't been turned down due to a credit score issue, this isn't likely to be too difficult.
What will happen if UK interest rates change?
Almost every personal loan is a fixed rate; so the rate and repayments you are given at the outset are fixed over the life of the loan, regardless of what happens to base rate. Thus there's no impact whatsoever, whether rates rise or fall.
But a change in the base rate will affect those looking to get a new loan, yet it's not an exact relationship. As loans are borrowed over the long term, the rates lenders set depend more on the City's predictions of long term interest rates rather than the actual UK base rate.
Will the credit crunch impact loan rates?
The Credit Crunch means it's tough for lenders to borrow money. As they've got less money, they've less to lend to us. That means it's getting progressively more difficult to borrow and even if you can borrow, you're going to pay relatively more for it compared with standard interest rates.
How quickly will I get the money?
That depends on the lender. There are some which make a big play on giving you the cash instantly straight from a bank branch, though invariably you'll pay a lot more for these. It's worth asking yourself whether the extra day or two's speed is worth paying a much higher interest rate for the five-year life of the loan.
Alternatively some of the cheaper loans do allow you to pay a delivery fee of around £50 to get the money quickly. This can be set as a default option, so be careful.
What is a homeowner loan?
Put simply a homeowner loan is when a company requires you to own or have a mortgage on your home before it'll lend. These are usually, but not always, secured loans, where if you can't repay they can take your house. However some unsecured personal loan companies do require their customers to be homeowners, because those who do own homes are less likely to go bankrupt or default as the risk for them is bigger.
Are car loans straight from the dealer worth it?
Car dealerships often quote a 'flat interest rate' rather than the Annual Percentage Rate (APR) that banks use. This makes expensive loans look cheap. Double the flat rate to get a rough APR e.g. a 6% flat rate is 12% APR. Always compare loans based on the total amount you'll repay (see Flat Rate Loans and Interest Rate Guide).
Don't be a flat rate fool
When buying a car you need to be particularly careful as most dealerships will quote a flat rate of interest, rather than an APR which most banks use. This mightn't sound a big deal, but actually we're talking thousands of pounds.
It works like this.
- APR Rate: This is the interest you are charged on the outstanding debt. So borrow £5,000 over 5 years and in the first year you'll be paying interest on quite a hefty chunk. However, in the last year you'll probably only have around £1,000 left to pay off, so you'll only be charged interest on this.
- Flat Rate: This means you are charged the interest on the original amount you borrow, no matter how much you have paid off. So with our £5,000 loan over five years, even in the last year you're still paying interest on £5,000 despite the fact you've paid most of it off.
So this means if you're offered a flat rate of 6%, which sounds very cheap, it's actually roughly equivalent to an APR of 12%, which is way over the odds.
The easy way round this is always ask the question "what is the total amount I will repay including all charges?" and compare like this. In fact car dealership loans are rarely competitive (unless they've an interest-free promotion) and you'd be much better off simply going for a normal personal loan.
Which? launches collective energy switching campaign
Retailers in extended warranty shake-up
Rise in first-time buyers predicted
Will the big freeze hit energy bills?
Benefit cap 'could hurt couples'
"Wish I'd been stupid enough to get PPI in the first place"
Surprise call from Ed Davey, Energy Minister – on collective switching
A warning to freelancers and the self-employed everywhere
A dragon in the Napoleonic wars
Student loans will be interest free for many 2012 starters
