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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:
Loans Checklist
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.
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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...
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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.
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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...
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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.
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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.
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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.
Beware 'representative' rates
All advertised loan and credit card APRs are 'representative'. This means only 51% of successful applicants have to get those rates. So, up to 49% may end up with a more expensive loan than they applied for (if they get accepted at all).
Sadly, the only real way to find out whether you'll get the advertised rate is to apply, though this leaves a search on your credit file, which can hit your ability to get credit in future. The only solutions are to apply for loans you're pretty sure of getting, or use the loans that tell you the rate you'll definitely get.
MSE Loan Finder
Select the amount you wish to borrow
To narrow down your selection, slide the slider to display the results.
| Cheapest standard rate | Lender and 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 at 0% for 32 months, though there's a 4% fee. This is far cheaper than the standard loans below, full step-by-step in the Money Transfers. |
| £1,000 - £1,999 | Sainsbury's 18.4% rep APR for 1-3 year term Sainsbury's 18.5% rep APR for 4-5 year term (Nectar cardholders only) |
Marks & Spencer* 18.5% rep APR (existing customers only) Marks & Spencer* 18.6% rep APR (new customers) |
|
| £2,000 - £2,999 |
Hitachi* 7.9% rep APR for £2,500 - £2,999 only (2-5 year term) |
Post Office 14.9% rep APR for £2,000 - £2,999 |
|
Sainsbury's 18.4% rep APR for 1-3 year term for £2,000 - £2,999 Sainsbury's 18.5% rep APR for 4-5 year term for £2,000 - £2,999 (Nectar cardholders only) |
|
| £3,000 - £4,999 |
Hitachi* 7.7% rep APR for 2-5 year term
|
The AA* 7.9% rep APR (plus get a year's free AA breakdown cover)
|
|
| Zopa loans
(for flexible repayments) |
High credit scorers aged over 20 can try loan marketplace Zopa* for, eg, 7.8% for a £2k loan. It allows flexible repayments, so you can overpay to clear it quicker. Read the full Zopa explanation. |
| Cheapest standard rate | Lender and Representative APRs See all official APR examples |
|---|---|
| Cheapest standard loans for £5,000 - £7,499 | |
Sainsbury's* 5.3% rep APR for 1-3 year term Sainsbury's* 5.4% rep APR for 4-5 year term (Nectar cardholders only) |
|
Hitachi* 5.3% rep APR for 2-5 year term
|
|
Clydesdale*/ Yorkshire* 5.4% rep APR |
|
Marks & Spencer* 5.5% rep APR (existing customers only) Marks & Spencer* 5.6% rep APR (new customers) |
|
| Cheapest standard loans for £7,500 - £14,999 |
|
HSBC* 3.9% rep APR (from £7,000, current account holders only) |
|
Sainsbury's* 3.9% rep APR for 1-3 year term Sainsbury's* 4% rep APR for 4-5 year term (Nectar cardholders only) |
|
Hitachi* 4.1% rep APR for £7,500 - £10,000 only (2-5 year term) | |
Tesco* 4.1% rep APR | |
The AA* 4.1% rep APR for 2-5 year term (plus get a year's free AA breakdown cover)
|
|
| Cheapest standard loans over £15,000 | |
First Direct 4% rep APR (1st Account holders only) |
|
Clydesdale*/ Yorkshire* 4.9% rep APR |
|
Hitachi* 5.7% rep APR for 2-5 year term
|
|
The AA* 5.8% rep APR for 2-5 year term (plus get a year's free AA breakdown cover)
|
|
| 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 remortgage, though that often means extending the term, more interest and securing the debt on your house. |
It might be cheaper to borrow more
It's worth being aware of this when borrowing close to one of the rate boundaries above - which are set by lenders. If there's a huge rate cut for borrowing, say, £5,000 instead of just £4,900, it could work out cheaper to borrow MORE.
Take this quick example. If you need to borrow £7,400, and the best rate you can get is 5.6% rep APR, over three years you'll repay £8,056. Borrow MORE in the first place, £7,500 - and you can get a lower 4.3% rep APR, and in total you'll repay just £8,010, cutting the interest you pay.
The bigger the APR gap between the two loan bands you're looking at, the better this works. If you're close to a lending band boundary, it's worth checking our loans calc to see if you'd be better off borrowing more.
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 such as Moneyfacts and MoneySupermarket* give a wider range, though may miss some of the cheapest options above.
Peer-to-peer lending
It sounds funky and different. But for borrowers, getting a peer-to-peer loan is pretty similar to a bank loan, except rates can be cheaper and they’re flexible, so you can repay when you want.
These loans from the two biggies, Zopa* and Ratesetter*, tend to be especially competitive if you have a reasonable credit score and are borrowing smaller amounts.
- What is peer-to-peer lending? It matches borrowers and lenders (savers), cutting banks out of the equation. People with spare cash can usually get higher returns lending this money than from saving. Similarly, people looking to borrow can usually get lower APRs than from standard loans.
The lending sites do all the organising though, so as a borrower, your relationship and repayments are through them. - How cheap are they? They run a marketplace matching savers with borrowers. Rates depend on how good a risk you are. At the time of writing, the cheapest £2,000 standard loan is 14.9% APR. But peer-to-peer lenders are 8.7% - 9.5% APR for the same value (though you need a decent credit score).
- Initial applications don’t hit your credit score. With normal loans, the only way to find out the rate you’ll get is to apply – which leaves a mark on your credit file. Here, peer-to-peer lenders 'soft search' your credit history – which future lenders can’t see on your file. So it has no effect – and it tells you your rate and the lending fee.
If you do actually get the loan, though, it’ll go on your credit file and your repayment history will be recorded. - What are flexible repayments? Most loans require you to pay on a schedule. If you want to part-pay or fully pay early, there’s somtimes a penalty. With flexible repayments, you can repay early in part or in full without a penalty.
- Is it safe? The industry's currently unregulated, but FCA regulation will start in April 2014. In many ways though, this is to protect savers, not borrowers (as if it went bust and didn’t collect your cash, you wouldn’t be that upset). However, all major sites have their own safeguards in place to make sure you pay the money back, and that lenders don't lose out.
For more information, see our Peer-to-Peer Lending guide for savers.
Loans with flexibility
However, if you're considering either substantially overpaying or clearing your debt early with a lump sum, there are some options.
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Early part-repayments are allowed
If your loan was taken out on or after 1 February 2011, you can make partial overpayments on your loan. Banks are still allowed to charge you, but only up to 1% of the amount repaid (if the loan is for over a year) or 0.5% (if under a year). -
Full early repayment
Loan providers must allow you to pay off your loan in full. This is subject to a penalty which is usually between one or two months' interest. Check your individual agreement to see what your lender will charge you. - Higher credit scorers earning £12,000 plus
Borrow from the loan marketplaces Zopa* or Ratesetter* (see above for full explanation) and you're 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 credit crunch mean that lenders tightened their criteria, meaning it's now much more difficult than it used to be to find a bank or other lender willing to lend to you.
First, treble-check you're borrowing the absolute minimum needed. Lower amounts are easier to borrow. Plus, make sure you've checked your credit files to ensure a simple error isn't hitting your creditworthiness (read the Credit Rating guide).
After that, there are three main options:
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Step 1. Use a credit estimating loan comparison service.
Price comparison site MoneySupermarket has a facility with credit reference agency Equifax which shows you the loans you're most likely to be accepted for. You need to answer a few questions to estimate your credit score.
To do it, use its Smart Search*. It's worth understanding MoneySupermarket doesn't automatically include every lender. If you've a poor credit score, sacrificing comparing some more competitive lenders to see what you're most likely to be accepted for should help.
A big warning, though. Smart Search includes some secured loan products, so always check what it suggests. These are costly and can be dangerous, and only useful as a very last resort (read the Secured Loans guide).
Step 2. Check out your own bank.
If it looks like you're not going to get a particularly good rate after using the loan comparison service, check the standard loan rate from your own bank to see how it compares.
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. There's a chance your bank will give you a loan when others wouldn't.
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Step 3. Consider a credit union loan.
Credit unions are independently-run local co-operative organisations which 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 has 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.
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 lend up to £10k and offer a rate of around 13% APR, but never more than 27%.
For full details on how they work, how to find out if there is one near you and the other financial products that may be on offer, read the Credit Unions guide. Also tell us in the forum what you think of credit unions, so other MoneySavers can learn from your experiences.
If no-one will lend you the money cheaply, it's usually best not to borrow at all. If the idea of the loan was to cut the cost of existing debts, 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 12 or 24 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's start by saying this as loud as we can….
Get PPI from the loan company and you'll almost always pay many times more than needed, often wasting £1,000s.
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 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 more details and comparisons, see the full Loan Insurance guide.
If you're 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's possible to compare these costs on MoneySupermarket*. Just do a comparison but ensure you click the "include payment protection" option.
Answering your questions
Should I get a consolidation loan?
This is one of the most common question about loans. You should never aim to just 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 to stretch 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 a much longer time.
A £10,000 loan on a high street credit card at a horrid 18% APR costs £5,240 in interest if it's paid off within five years. Many think shifting it to a consolidation loan at 9% APR is 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.
What's the difference between secured and unsecured loans?
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'll see mountains of TV ads for, are 'secured loans'. I'd steer well clear of those for the following reasons.
- 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 lenders can up your payments when they like, and they often 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 Government help?
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, while 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 the Debt Help guide.
As this is so important, and 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 Loans guide). 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.
What if I need to borrow more than they'll lend?
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's relatively simple - just apply for another loan to fill the gap. If you haven't been turned down due to a credit score issue, this isn't likely to be too difficult.
What will happen if UK interest rates change?
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
But a change in the base rate will affect those looking to get a new loan, although it's not an exact relationship. As loans are borrowed over the long term, the rates lenders set depend more on the City's predictions of long-term interest rates rather than the actual UK base rate.
Will the credit crunch affect loan rates?
Lenders have tightened borrowing criteria since the credit crunch. It's now comparatively more difficult to get a personal loan than it was before the crunch happened.
However, if you can get a loan, you'll benefit from historically low interest rates. The Government has provided banks with a source of cheap money, which means that they can offer loans at low interest rates compared with a few years ago.
How quickly will I get the money?
That depends on the lender. There are some which make a big play on giving you the cash instantly straight from a branch, though invariably you'll pay more. It's worth asking yourself whether the extra day's speed is worth paying a higher interest rate for the life of the loan.
Alternatively some of the cheaper loans 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.
What is a homeowner loan?
Put simply, 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, it can take your house.
However, some unsecured personal loan companies do require their customers to be homeowners, because those who do own homes are less likely to go bankrupt or default as the risk for them is bigger.
Are car loans straight from the dealer worth it?
They can be - especially if you can get a 0% deal (though this is more likely if you've a decent deposit.
But if you can't get a 0% deal, check that the interest rate on what you're being offered is an annual percentage rate (APR). Car dealerships sometimes quote a "flat interest rate" rather than the APR. If it doesn't say APR - check.
Flat rate loans make expensive loans look cheap. Double the flat rate to get a rough APR, eg, 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).
Don't be a flat rate fool
When buying a car you need to be particularly careful. A few dealerships will quote a flat rate of interest, rather than an APR. However, most use the normal APR, like banks. It's always worth checking though, as while this might not sound a big deal, we're talking thousands of pounds.
It works like this
- Annual percentage rate (APR): This is the interest you're charged on the outstanding debt. So borrow £5,000 over five years, and in the first year you'll be paying interest on quite a hefty chunk. However, in the last year you'll probably only have around £1,000 left to pay off, so you'll only be charged interest on this.
- Flat rate: This means you're charged the interest on the original amount you borrow, no matter how much you've paid off. So with our £5,000 loan over five years, even in the last year you're still paying interest on £5,000 despite the fact you've paid most of it off.
So this means if you're offered a flat rate of 6%, which sounds very cheap, it's actually roughly equivalent to an APR of 12%, which is way over the odds.
The easy way round this is to always ask the question "what is the total amount I will repay including all charges?" and compare like this.
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