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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 5%.
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
Loans Checklist
Loans versus credit cards
Personal loans let you borrow up to £25,000. The key sell's "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 make sure 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 periods or for small amounts are almost always expensive. But a variety of techniques can cut the cost. Many credit cards allow new customers to spend on them at 0% for up to the first year - read the 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 tough to beat, not because they're particularly cheap, but as it's difficult to do it any other way. But 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 to cut the cost of an existing loan?
Don't automatically assume switching to a cheaper interest rate will save you money. Many loans, especially older ones, have lock-in penalties. These mean even though you'll pay less interest, when you add in the fine for moving, you'll pay more overall. - Can you get a loan from your employer?
Some employers offer loans to employees, usually for buying travel season tickets so they can get to and from work. Provided the total value doesn't exceed £10,000, these loans can be made tax-free by employers, and paid back over the year from the employee's salary.
These loans don't have to be made for travel purposes, so see if your employer provides tax-free, interest-free loans - they'll be the cheapest you can get.
Secured loans versus personal loans
Most high street personal loans are 'un-secured'. 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'. I'd steer well clear of those for the following reasons.
- 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 lenders can up your payments when they like, and they often 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 Government help?
Before going for commercial debt, it's worth seeing if there are any Government loans available to you. There are two types you might be eligible for:
Local help: Since April 2013, each local authority has been responsible for providing help to residents struggling with an emergency. This can include you or your family's health being at risk, not being able to afford to buy food, needing help to stay in your own home and coming out of care, hospital or prison.
Sadly, this is a postcode lottery. Each council can choose whether to offer financial help or not, and councils can decide who is eligible. Some may give furniture or food grants, while others may give cash.
National help: The next type are budgeting loans and advances. These are only for those receiving benefits and with no or low savings. They allow for a wide range of borrowing to pay for items including school uniform or furnishings.
For more information, read the Debt Help guide.
As this is so important, and 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 Loans guide). 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. 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, repay as quickly as possible. To avoid complications, always base your 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
All advertised loan and credit card APRs are 'representative' (and have been since February 2011). This means only 51% of successful applicants are guaranteed to get those rates. This means up to 49% may end up with a more expensive loan than they expected, not to mention the applicants who get rejected outright.
The upshot is borrowers left without lending at the rate they expected are landed with a search on their credit file, which can hit their ability to get credit in future. The only solutions are to just apply for loans you're 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% rep APR (Nectar cardholders only) |
Santander 18.9% rep APR |
|
| £2,000 - £2,999 | Post Office 14.9% rep APR |
Sainsbury's 18.6% rep APR (Nectar cardholders only) |
|
| £3,000 - £4,999 | Sainsbury's 12.6% rep APR (Nectar cardholders only) |
Tesco* 12.8% rep APR |
|
| Zopa loans
(for flexible repayments) |
High credit scorers aged over 20 can try loan marketplace Zopa* eg, 14.7% for £2k loan. It allows flexible repayments, so you can overpay to clear it quicker. Read the full Zopa explanation. |
| Cheapest standard rate | Lender & Representative APRs See all official APR examples |
|
|---|---|---|
| Cheapest standard loans for £5,000 - £7,499 | ||
Santander 6.9% rep APR |
||
Sainsbury's* 6.9% rep APR for 1-3 year term Sainsbury's* 7% rep APR for 4-5 year term (Nectar cardholders only) |
||
Tesco* 7% rep APR |
||
Clydesdale Bank* / Yorkshire Bank 7.1% rep APR |
||
| Cheapest standard loans for £7,500 - £14,999 |
Derbyshire* 5% rep APR |
|
Sainsbury's* 5% rep APR for 1-3 year term Sainsbury's* 5.1% rep APR for 4-5 year term (Nectar cardholders only) | ||
| Tesco* 5.1% rep APR |
||
Nationwide* 5.9% rep APR (FlexAccount holders only) or 6.2% rep APR for everyone else 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 | ||
| Sainsbury's* 7.1% rep APR for 1-3 years Sainsbury's* 7.2% rep APR for 4-5 years (Nectar cardholders only) |
||
Tesco* 7.2% rep APR | ||
Derbyshire* 7.3% rep APR |
||
Nationwide* 7.3% rep APR for FlexAccount holders only or 7.4% rep APR - everyone else 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 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. |
|
Try Zopa for flexible loans
