The Bank of England and policymakers are rightly worried UK personal borrowing is dangerously high. Yet fierce market competition continues to drive rates lower, and latest cuts mean today's cheapest loans undercut anything previous - they're now half the pre-credit-crunch cheapest.
This isn't likely to last too long though, as there's talk of policy intervention to push prices higher to cool demand. So in a couple of years we may look back to find this is the all-time sweet spot for cheap borrowing. For those who want to take advantage, here are my 10 must-knows...
1. Debt's like fire, use it right and it's a powerful tool; get it wrong and it burns. Always be tough on yourself and be critical about whether you really need to borrow - if not, wait and save instead. The worst thing to borrow for is just to willy-nilly fill gaps in your lifestyle. That risks a debt spiral.
Borrowing is best for planned, needed purchases, eg, the fridge/freezer must be replaced or to pay annual car insurance, as it's cheaper than monthly. If you are going to borrow, minimise the amount, repay as quickly as possible, and ensure repayments are comfortably affordable. If not, don't do it.
2. Super-low rates mean rejections are common - ALWAYS use a loans eligibility calculator to see who'll say yes. The only way to know if you'll be accepted is to apply, yet that marks your credit file, and too many marks hurt your creditworthiness. So first use our Loans Eligibility Calculator which matches you with the cheap lenders most likely to accept you.
Amy used it: "Using your guide and eligibility calculator I've been accepted at a rate of 3.1% meaning I've slashed the interest of my loan from a whopping £7,700 to around £750."
It's also worth (especially if you're rejected) checking your free credit report & score via the MSE Credit Club, which details what's wrong and how to fix it.
3. LOAN BEST BUYS from 2.8%. The rate you pay depends on how much you're borrowing. Many rates - especially for larger amounts - are at all-time lows.
Unless stated, the rates are for 1-5-year borrowing - note that repaying quicker is cheaper as less interest accrues. Always ensure you pay on time or you may get a charge & a credit black-mark.
- £1k-£1,999: Zopa's* 9.5%-9.9% rep APR, Hitachi* (2-5 yrs) 12.7% rep APR.
- £2k-£2,999: Zopa's* 6.9%-7.9% rep APR, Ikano* 7.9% rep APR.
- £3k-£4,999: Zopa's* 5%-6.9% rep APR, Ikano* 5.2% rep APR.
- New. £5k-£7,499: Hitachi* (2-5 yrs) is 3.4% rep APR, TSB* 3.5% rep APR.
- New. £7.5k-£15k: M&S Bank* (1-7 yrs) & TSB* are 2.8% rep APR.
4. Sometimes, bizarrely, borrowing more is cheaper. A peculiar quirk means you can sometimes pay less by getting a bigger loan. This is due to the fact rates decrease at set thresholds (as you can see above). Let's use an extreme example...
If you wanted to borrow £4,900 over 5yrs, the cheapest loan's 5.2%, meaning a total repayment of £5,575. Yet borrow £5,000 and the rate drops to 3.4%, which means total repayments are £5,444 - that's £231 LESS interest.
So if you're borrowing a couple of hundred pounds or so less than a threshold (so £2,000, £3,000, £5,000 or £7,500) use a loan cost calc to see if you'd be better off borrowing more (assuming you're accepted for the cheapest loans).
5. Borrowing under £3,000? Check 0% credit-card loans instead. Loans always charge interest, but credit cards can be 0%. So if you can get one and use it right, it's cheaper. And as card credit limits for most people are £3,000 or less, this is mainly for smaller amounts. There are two routes...
- If your loan is for something you can pay for on a credit card: Pay for it on a top 0% spending card and it's at no cost whatsoever.
- If you need your loan in cash: A few 0% credit cards have a special feature called a money transfer. This lets you pay money directly into your bank account, so you can use it as a loan and owe the card at 0% instead. To find which you're most likely to get, use our 0% Money Transfer Eligibility Calc.
The top money transfer deal is 41 mths 0% from Virgin Money (eligibility calc incl pre-approval / apply*) but there's a one-off fee of 3.8% of the amount transferred. If you can repay quicker, a 36mth 0% Virgin Money card (eligibility calc incl pre-approval / apply*) has a lower 2.9% fee. Both are far cheaper than a standard loan, but if you're new to this, be careful - read our full Money Transfers guide first.
Whichever card you get, make sure you follow our golden rules...
a) Never miss a min monthly repayment or you could lose the 0% deal.
b) Always clear the card or do a balance transfer before the 0% ends, or rates jump after to 20.9% rep APR with the Virgin cards (see APR Examples).
c) Don't withdraw cash - it's rarely at the cheap rate.
d) While credit cards allow flexible repayments, to replicate a loan, set up a direct debit to fix repayments so you clear it before the 0% ends.
6. Beware: a 2.8% APR doesn't always cost 2.8% - it can be a lot more. All personal loans are 'representative APR', sadly meaning only 51% of those accepted need to get the advertised rate. The rest can be charged more (with no limit on how much).
Unfortunately there's usually no way to know the exact rate before applying. Though anecdotally, the higher your loan eligibility score for a lender, the more likely you are to get the advertised rate.
7. Already got a loan? Rates are so low you may be able to save £100s. Rates have fallen so much it's worth checking if you can get a new loan to repay your existing one and slash the cost.
Becki emailed: "Big thank you. I took out a loan at a terrible rate - £7,500 interest on £15,000. I applied for a cheaper loan after your email. Interest around £1,000 - I used it to pay off the previous one, saving £6,500."
However, as there can be early exit penalties of a couple of months' interest, to check you'll save is more than just getting a cheaper APR...
- Step 1: Ask your current lender for a settlement figure. This is how much it'll cost to repay your loan in full (ie, the amount you'd need a new loan for).
- Step 2: Check remaining repayments with current lender. Find out what your monthly repayments are and how many you have left. Then multiply the two to see how much it costs to just keep repaying.
- Step 3: Find the cheapest new loan for the settlement figure. Use our free Loans Eligibility Calc to show the likely cheapest deal you can get.
- Step 4: Find out which is cheaper. Use our Loan Switching Calculator to see if it's cheaper to get a new loan or keep paying the current one.
8. Got a Nationwide current account? A trick to beat the cheapest loans. If you've got (or get) a Nationwide current account, it promises that if you're accepted for a loan elsewhere, it'll beat it by 0.5 percentage points. But it excludes peer-to-peer lenders (so Zopa is out). This means a 2.8% loan becomes 2.3%.
9. Getting a loan to repay credit cards? That's not usually the cheapest way. Many with lots of debts look to 'consolidate'. Yet all that means is having all your debts in one place. While it can reduce what you pay each month, as it takes longer to repay, it'll cost you more in total. If possible, instead focus on cutting the rate, as that's what dictates real costs.
If you've credit card debt you want to shift to a loan, instead look for a top 0% balance transfer, where a new card repays debts on old card(s) for you, which usually easily undercuts the cheapest loans.
10. If you're borrowing for a car - a loan is just one option. Car finance is complicated, and there's so much choice there's no easy answer - it depends on your priorities and the car. Just getting the cheapest loan is a simple option, you own the car and you have to repay the loan. Yet our full Car Finance section has guides on the other options...
- PCP deals - Roughly a loan to part-pay for the car, then after a set time you can decide whether to give it back or pay the remainder.
- Leasing - A long-term rental & servicing agreement. You don't own the car.
- Hire purchase - You hire it over the long term with an option to buy.
PS: Can't sleep because of debt? My aim above is to cut the cost of borrowing. Yet if you're panicking because of debt or struggling to even make minimum repayments, it's likely time to draw a line under it all and get free help from a non-profit debt-counselling charity.
These include Citizens Advice, StepChange and National Debtline - they're there to help, not judge. The most common thing I hear after is "I finally slept last night". If you're really struggling with your debt emotionally, Christians Against Poverty can help too. More info in our Debt Crisis Help and Mental Health & Debt guides.
This article first appeared in the weekly email on 31 May 2017.