For those who need to borrow, loans can be vicious - even the best deals have more tricks than Paul Daniels' sleeve. And a price war between loan providers means you can now borrow for as little as 3.9% a year, the lowest we've ever seen.
Borrowing should always be budgeted for, and carefully planned, so you know how you will afford the repayments. This is a step-by-step guide, with daily-updated best buys and a unique calculator to pare your costs to the bone.
Best buy personal loans:
Credit cards can be cheaper than loans
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.
But much depends on why you're getting a loan, and how much you want to borrow. We've spelled out the most common situations, and where you might want to think about a credit card instead of a loan.
When a loan's better than a credit card (borrowing £5,000 or less)
The most important factor here is your credit limit. Credit cards won't usually give you more than £5,000, and that's provided that you have a good credit score. So if what you need to buy is more expensive, you're probably better off looking for a £5,000+ loan.
I can use a credit card to pay and can clear it in 20mths.
The easiest way to buy something new and borrow for free is to use a 0% Spending Credit Card to pay for it - provided that the retailer accepts credit cards.
You can get up to 20 months 0% on a credit card, but this is only useful if you can budget to pay your debt off in that time, or you're organised enough to balance transfer the debt to another card before the 0% period ends.
This technique's also only useful if the retailer takes credit cards. And some - most notably car dealerships - often don't. But, there's still a way to use a card to beat a loan...
I can't pay directly on a credit card or I need longer than 20 months.
Don't worry, even if you can't pay the retailer directly on a credit card, you can still pay by card, it's just slightly more complex.
You'll need to get a specialist Money Transfer card. These work by transferring cash from your new card to your bank account, so you owe the card instead (though there's usually a 4% fee to do this). Once there, you can spend it as you would a loan.
The top deal at the moment is a card which gives you debt at 0% for 32 months. So if you can pay the debt off in that time, or balance transfer it once the 0% is over, this could be a great replacement for getting a loan.
I'm trying to make existing debts cheaper.
In most cases, a loan won't be cheapest. 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.
But a credit card's not always the best option...
I want to borrow more than £5,000
Most credit cards won't give you a credit limit higher than £5,000, so if you want to borrow more, you might be better checking out the best buy loans below.
I'm trying 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. Our guide to Cutting Existing Loan Costs has a calculator showing you if you'll gain by switching.
I think I can get a loan from my 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.
Choosing the right loan
Loans have never been as cheap as they are right now. A combination of access to cheap Government money, and a price war between competitive lenders mean that rates have plummeted over the past couple of years.
But even the lowest interest rate loans can have 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.
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. Use the calculator below to play around and find out what shortening or lengthening the loan does...
The Loan Calculator
We've designed a unique calculator 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 guide). But fill your details in here, and the calculator reveals whether you'll actually be better off moving to a cheaper lender.
If you just want to skip straight to the loans tool, click to see the best buys.