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
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% |
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| 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%
|
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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) |
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A&L* 8% |
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| 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. |
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High credit score? Try Zopa
