Cheap Loans

Loans can be vicious, even the best deals have more tricks than Paul Daniels' sleeve. Yet it is possible to beat the system and borrow cheaply. This is a step-by-step guide, with daily updated best buys and a unique calculator to pare your costs to the bone.

• Loans v credit cards
• Secured v Personal loans
• Choosing the right loan
• Best Buys: The UK's Cheapest Loans
  • Cheapest uninsured loans: 7.9% for £7,500+
  • Cheapest flexible loans
  • Easier to obtain loans
  • Cheapest insured loans
  • The Loan Calculator
• Your Questions Answered

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. 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%. 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.

As this is so important, in case I haven’t made the point strongly enough yet, here it is writ 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.

The UK’s Current Cheapest Personal Loans

Having used the 'Which loan is right for me?’ table hopefully you'll now know exactly which type of loan is right for you! So here are the current best loan deals...

Cheapest loans without insurance

Quite simply, find the loan with the lowest APR (Annual Percentage Rate) of interest for the amount you are borrowing.

Do beware though, all the top loans compared below are 'typical rates', which means only 66% of those accepted actually need be given these rates; depending on your credit score you may pay a lot more (see lower credit scorers' loans if that’s an issue).

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 Moneyextra*, 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.

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; currently, 9.6% APR is available for loans of £4,000, for example.

Cheapest loans with flexibility

Adding flexibility to loan repayments is useful, but it isn’t cheap. There is a way round this using my 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 likely to want to either substantially overpay or clear your debt early with a lump sum, two loans will allow it, and the shorter loan term should make up for the costlier interest rate.

• Ability to overpay at 8.99%.
  
  Fully flexible loans have all but died out, yet it's still possible to get a good rate and overpay. Norwich and Peterborough BS charges a typical 8.99%, and lets you increase your monthly payments (though you'll need to go through a full financial review to decrease them).
  
  Paying the balance off in full is allowed, though incurs a one month interest penalty
  
  
• 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, and 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 as 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 via doing 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 with it, 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 (though many smaller ones still require you to have savings).

  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%, but never more than 27%, lend up to £10k, and you can usually borrow 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 Credit Unions work, how to find out if there is one near you and the other financial products that may be on offer read my guide to Credit Unions. Also feedback in the forum what you think of Credit Unions so that other MoneySavers can learn form your experiences.

If no one will lend you the money cheaply, consider not borrowing it, that’s usually the best option. If the idea of the loan was to cut the cost of existing debts then 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 twelve 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 me start by making this as loud as I can….

Get PPI from the loan company and you’ll almost always pay many times more than needed, often wasting £1,000s.

This happens because lenders needn't include the insurance cost in the APR. So often they lower the rates, making the loan look cheaper, and load the cost onto the insurance, which is then pushed as hard as possible.

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 two 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 the 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.
  
  

How much do you want to borrow £

What's the interest rate? %

How long do you want to borrow for? months

YOUR CURRENT LOAN

How many months are left? months

How much do you repay per month? £

What will it cost to pay off your existing loan now?
(Ring your bank and ask it for a figure) £

YOUR NEW LOAN

What's the best interest rate you can get for a new loan? %

What can you afford to repay each month? £

What's the interest rate? %

How long do you want to borrow for? months

For the most accurate answer, use the APR (Annual Percentage Rate); banks will quote this on their websites or in-branch.

Answering Your Questions

Q. Should I get a consolidation loan to put all my debts into one big pot?

A. 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 and 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% costs £5,240 paid off in five years, many think shifting it to a considation loan at half the rate 9% is cheaper, but as its spread over 25 years, the actual cost is £15,200 which is 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 twenty two and pay it off as quickly as possible.

Q. They won’t lend me as much as I need. What should I do?

A. 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 is 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.

Q. What will happen to my loan if UK interest rates change?

A. Almost every personal loan is a fixed rate; thus 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.

However the change in the base rates 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 predictions of long term interest rates than the UK base rate.

Q. What’s the impact of the credit crunch on loan rates?

A. The Credit CrunchThe Credit Crunch

This is the name given to the current phenomena that banks and other big financial institutions are struggling to find money to borrow. As they can’t find money to borrow they’ve less to lend out, which means the cost of debt is increasing, and its availability is decreasing. In other words it’s getting more difficult and more expensive to borrow.

Q. How quickly will I get the money?

A. 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.

Q. What is a homeowner loan?

A. Simply put 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, this is because those who do own homes are less likely to go bankrupt or default as the risk for them is bigger.

Q. Is it worth getting a loan for a car from the dealer?

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).