How to get a personal loan

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 borrowing too much can cause debts to spiral out of control.

And beware – while borrowing over a longer period spreads the debt 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 you'll pay a massive £3,900 in interest.

Use our Personal loan calculator to find out what you can safely afford to borrow.

While generally you should try to minimise borrowing, a peculiar quirk means with loans sometimes you pay less by getting a slightly bigger loan. Here's our step-by-step guide on why and how this works:

1. The more you borrow, the cheaper the rate. To show how the trick works, let's look at this example from back in November 2021, when the best-buy personal loans looked like this (the rates are much higher now, but the principle's the same):

- For £1,000 to £2,999, the cheapest rate was 9.8% rep APR
- For £3,000 to £4,999, it's 8.1% rep APR
- For £5,000 to £7,499, it's 3.3% rep APR
- For £7,500 to £15,000, it's 2.9% rep APR

Note, for loans of £3,000 and under, always compare the interest cost under this trick with the fee you'd pay on a money transfer card. If you can clear these within the 0% period, they may be cheaper.

2. Rates fall at £3,000, £5,000 and £7,500. This is the underlying point – there are two cliff-edges where the interest rate drops, with the descent at £5,000 particularly steep. So the question is at what point is the cost of borrowing outweighed by the gain from a lower rate?

Here are a few examples of how it looks, based on borrowing over 5 years at the cheapest rates in April 2024:

- Once you're borrowing over £2,770 (at 13.5%), you'd pay less if you borrowed £3,000 (at 9.9%).
- Once you're borrowing over £4,710 (at 9.9%), you'd pay less if you borrowed £5,000 (at 7.3%).
- Once you're borrowing over £7,260 (at 7.3%), you'd pay less if you borrowed £7,500 (at 5.9%).

As you can see at these rates at this term, it can be cheaper in the long term to borrow amounts above certain thresholds.

Use the Loans Calculator to work your own figures out. If you do end up doing this, you could even use the extra cash towards your first loan repayment(s).

In fact even if you're borrowing less than these amounts, if it is a loan that lets you immediately make overpayments without penalties (as some do), it's worth borrowing more to get to the next threshold then repaying less.

Note: Above £15,000, rates are 5.9% all the way up to £25,000 so there's no rate difference to take advantage of and the trick doesn't work.

3. The fly in the ointment... representative APRs. All personal loans are 'representative' APR – and, sadly, that one word has a big impact. It means only 51% of accepted applicants need get the advertised rate. The rest may be, and usually are, charged more. Worse, it's usually only after applying – which marks your credit file – that you're told your actual rate (in a few cases, our Loans Eligibility Calc gives you the actual rate pre-application).

So there is some art as well as science in this. Acceptance is crucial, especially as a slightly bigger loan can be slightly tougher to get. Yet in general, these same thresholds apply with many lenders, so if you're borrowing just under £3,000, £5,000 or £7,500, check if shifting up to that amount is a winner.

Before jumping straight into a loan application, first consider if you could get a credit card for a smaller amount. The most important factor here, however, is your credit limit. Unless you've a large income and a good credit score, credit cards won't usually give you more than £3,000 to £5,000. So if what you need to buy's more expensive than this, you're probably better off looking for a £3,000+ loan.

But if you can buy whatever it is for £5,000 or less, you have several other options. See if any of these scenarios fit you...

• I can use a credit card and can clear it in 23 months. You can get up to 23 months at 0% interest on purchases on a credit card – only useful if you can budget to pay off your debt in that time, or you're super-organised and can 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. 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 a specialist money transfer card. These work by transferring cash from the new card to your bank account, so instead you owe the card (though there is a fee). Once there, you can spend it as you would a loan.
  
  The longest deal at the moment is a card which gives you a 0% period of up to 12 months (with a 4% fee). If you can pay the debt off in that time, or balance-transfer it once the 0% is over, this could be a good replacement for a loan.

• I'm trying to make existing card 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. See our

  Best Balance Transfers guide for the current best buys.

With all these techniques, make sure you recreate the rigidity of paying off a loan. Work out how much you need to pay off each month to clear the card within the 0% period, then set up a direct debit for that amount each month. This way you're not tempted to skip months and end up owing debt at the end of the 0% (unless you're happy to keep rolling the debt on to new balance transfer cards each time).

The ideal loan customer for a lender is someone with a good credit history (a proven track record of paying credit back on time) and a high level of disposable income.

Yet your credit history and your income are doing two different jobs in the lender's scorecard. We break it down here...

• Credit history. Your credit record counts towards whether the lender will be willing to lend to you in the first place. But crucially it also contributes to the rate it's likely to offer you. A good credit record will make it more likely you'll get the advertised rate; if your credit history's poorer, it's likely you'll still get the loan, but you'll be repriced to a higher rate, as you're a bigger risk for the lender.

• Affordability. Your disposable income dictates how much a lender will be willing to lend. This is worked out based on your income, minus rent or mortgage payments (and other outgoings that the lender estimates 'someone like you' would have, based on where you live and your number of dependants). And while you may have a perfect credit record, if your disposable income's not high enough (or not estimated to be high enough), you won't get the loan.

Our Loans Eligibility Calculator and Credit Club mimic these criteria when they're working out your loan chances. Credit Club also drills in to your affordability for loans and gives you a score ranging from 'poor' to 'very good' based on this.

There's a catch to watch out for. Some loan firms give those with lesser credit histories a higher APR than the one they advertise. You could, say, apply for a 5.6% loan, be accepted, but be given a 10.9% APR. This is because an advertised loan APR is a 'representative example' – meaning only 51% of successful applicants have to get that rate. So up to 49% of those accepted may end up with a more expensive loan than they applied for.

Some providers in our eligibility calculator will show the rate you're likely to get, though not all. We're working to get more that will though until then, sadly the only real way to find out whether you'll get the advertised rate is to apply.

Loan providers must allow you to pay off your loan in full. This is sometimes subject to a penalty which is usually between one and two months' interest. Check your individual agreement to see what your lender will charge you and ask your loan provider to tell you the total amount repayable to settle early.

Loans taken out since 1 February 2011 allow you to make partial overpayments. If your extra repayments total under £8,000 in a year, banks are not allowed to charge you a fee for making an overpayment. But if your overpayments total over £8,000 in a year then the bank is allowed to charge you so long as it has incurred a cost itself from you paying back the loan early.

We know a lot of you look for these loans that are for people with poorer credit histories (eg, you've had CCJs), but they are hugely expensive and people can find themselves stuck in a high-cost debt spiral.

It's best you see if you can get a standard loan first by checking our Loans Eligibility Calculator, as you never know. Just enter your details and it'll show you which standard loans you're most likely to get – if any – without damaging your credit score. Some other eligibility checkers also include loans with eye-watering interest rates, so you could end up with a sub-prime loan without realising.

But remember, if you can only get a sub-prime loan, ask yourself, can you really afford it and do you really need it? If in doubt, don't get one. If you're struggling with debt, see our Debt Help guide. Plus also see how to Boost your credit score.

If you've existing credit card debt, you've two main options to help shift the debt to a cheaper rate (or ideally, to 0% interest)...

• A 0% balance transfer is where you get a new credit card to pay off debt on your existing card(s), so you owe it instead, but with no interest for a set period. That way, more of your payments reduce the actual debt – getting you debt-free quicker. For most, this solution wins.
  

• A debt consolidation loan allows you to pay off multiple debts, leaving you with one larger debt which can then be paid off in fixed, monthly instalments.

If you're choosing between a balance transfer card and a consolidation loan to clear debt, here's Martin's advice...

"The cheapest balance transfers are interest-free; the cheapest loans cost 5.8%. So all being equal, balance transfers are cheaper, as long as you can keep shifting the debt to 0% when you need to.

"Yet an issue for some with bigger debt is the monthly repayment. While repaying more is better, as it clears debt quicker and you pay less total interest, that's just not doable for some, so they look at 'consolidating' card debts into a loan.

"Credit card repayments are flexible but you must meet the monthly minimum. With larger debt, this can be higher than for a loan. For example, if you owe £10,000 on a card, the minimum repayments can be around £270/mth (depending on the provider), yet on a 6.2% loan over 5 years, you'll pay around £195/mth.

"Yet as minimum card repayments are a percentage of what you owe, they drop as you clear the debt, so they'll eventually be lower than on a loan, where repayments are fixed. (Though with cards I'd always aim to repay a fixed amount to mimic a loan, to clear the debt quicker.)

"So loans have the advantage of simplicity and enforced repayment discipline. Get one, and keep making the fixed repayment, and you'll clear it within the time, while balance transfer cards' advantage is cheapness (provided you can keep getting 0% and fix your repayments).

"It's important too to understand that, with a balance transfer, creditworthiness is key in deciding whether you'll be accepted, and an affordability score (i.e. do you have enough income?) leads on deciding your credit limit.

"Yet with loans, as you're applying for a fixed amount, both credit and affordability score dictate acceptance (for example, it may say yes at £3,000, no to £10,000), making it tougher. More info on both in the MSE Credit Club."

Yes, it's possible to get a loan with a bad credit rating, but it may be more challenging to be accepted. Even if you are accepted, you'll likely face horrid interest rates of 30% or more to be able to borrow.

It's also important to make sure that if you are applying for a loan with bad credit that you ensure the lender is reputable. For example, don't just type "loans for bad credit" into a search engine and click on the first advert.

Always try our eligibility calculator first to see if you're eligible for a loan there. If not, comparison sites such as MoneySupermarket and Compare The Market may have a wider range of lenders to try.

If you are accepted for a loan, make sure you pay the monthly payment on time. Doing this will help heal your credit record, and may mean you can get cheaper credit in the future. You may even qualify for a cheaper loan to pay off the high interest one. See Cut existing loan costs for how this works.

Credit unions are independently run co-operative organisations which aim to assist people who may not have access to financial products and services elsewhere. There are about 500 in the UK providing loans, savings and current accounts. Each has its own services and rules on who can join.

Recently several credit unions have got together to offer an online portal for their loans. My Community Finance will take some details on you and the loan you want and then find if there's a credit union you're eligible for, and your loan will be processed through that credit union.

You can borrow from as little as £1,500, up to £25,000, usually for between one and five years. The representative APR is 34.5%, but credit union loan rates are capped, and the maximum you can be charged on a loan is 42.6% APR (equivalent to 3% a month).

For full details on how they work and how to find out if there's one near you, read our Credit Unions guide.

Some employers offer loans to employees, usually for buying travel season tickets so they can get to and from work. Usually these are limited to £10,000 (though your employer can choose how much it wants to offer). You pay it back over the year from your salary, usually in 10 or 12 instalments.

They're not always for travel costs, so see if your employer provides these loans and if it's flexible on the purpose – at 0% interest, these will be the cheapest loans you can get.

Before you shell out on any policy, make sure it's right for you and that you need the protection it offers. Income protection/payment protection insurance (PPI) covers you if you're unable to work and pays a cash sum each month for up to two years – which you can then use to keep up with your loan payments. You'll often have to wait up to 180 days to claim it though, plus policies are usually capped at around 70% of your normal income. There are three types of cover you can choose from:

1. Unemployment-only will cover you if you're made redundant, though you'll need to be registered with the Government as unemployed and actively seeking work to claim (it will stop being paid once you've found new employment).

2. Accident and sickness will protect you against accidents and long-term illness, when certified by a doctor.

3. Accident, sickness and unemployment will protect you against all of the above.

You don't have to take out a policy, so you'll need to decide whether the cost is worth it. If you've got savings that would cover repayments or relatives and friends that would help you out, then you may not need it. Equally, if you're not working, you'd only want to get accident and sickness, not unemployment cover.

You can't get cover for something that has already happened or if you're self-employed

If there's a "foreseeability of redundancy" – for example you've been told your job is under consultation – or you've taken voluntary redundancy, it's likely you can't claim. This may also be the case if you know some jobs in your company may be lost, or even if your employer is known to be in financial trouble. Your insurer will also want to know about your medical history, so make sure you tell it about any existing conditions. If you don't, your policy could be invalid.Many policies also exclude the self-employed, or place them under massive restrictions. For example, you may be covered for accident and sickness, but you won't be if you run out of work.

Use comparison sites to get quotes and find the right cover

Once you've decided what cover you'll need then combine quotes from Compare The Market, Active Quote and iProtect to scan the market. Once you've found the cheapest quotes, double-check details on the insurance provider's own website (as some comparison sites make a few assumptions) and examine the policy's coverage, making sure you understand any exclusions.

This is one of the most common question about loans. You should never aim just to consolidate – it's often a disaster waiting to happen. If you've a lot of small loans or credit card debts, the primary aim should be to pay them as quickly as you can at the lowest possible rate.

Don't be suckered in by the promise that a consolidation loan can save you money by reducing your outgoings to a "manageable" level using just "one single monthly payment".

They can – but the way they do this is by stretching 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, as you're paying interest for much longer.

A £10,000 loan on a high street credit card at a horrid 18% APR costs £5,240 in interest if paid off within five years. Many think shifting it to a consolidation loan at 9% APR would be cheaper – but as it's spread over 25 years, the actual interest 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 of them, and pay it off as quickly as possible.

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 more often see advertised on TV as consolidation loans, are 'secured loans'. These can be risky for the following reasons:

• Your home could be taken away

  A secured loan literally means the debt is secured on your home (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 sometimes 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 sometimes have variable rates, meaning lenders can up your payments when they like.

• 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, 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 home.

Secured loans are rarely a good move, and should be considered lending of last resort. They're only applicable in very limited circumstances. 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 the Guide To Problem Debts guide as an alternative.

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, 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 our Debt Help guide.

Once you've applied for the loan, it's already on your credit report. So assuming you applied for the cheapest loan for you, there's no point in not accepting that cash because it's not the amount you need.

You may be able to apply for another loan elsewhere to fill the gap, though the new lender will take your loan into account when deciding, and may decide that you can't afford the extra borrowing.

Have a look whether any of the credit card solutions above could work for you.

Almost every personal loan is at 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 the base rate, the Bank of England's official borrowing rate, which influences what savers earn and borrowers pay. Thus there's no impact whatsoever, whether rates rise or fall.

Typically, changes to the base rate also don't impact the rates lenders offer to prospective customers. This is because these rates tend to be based more on competition than on external economic pressures (provided all lenders are still able to make a profit).

This depends on the lender. If it's an online loan application, which you can sign digitally, you could have the cash within a couple of hours.

If you need to wait for the lender to send documents in the post, it could take up to a week.