How to get a loan

How to get a personal loan
Find the cheapest borrowing, from 6.1% for £7.5k+

The most affordable loan rates have remained relatively steady lately, although they are nearly twice as high as they were a few years back. If you NEED to borrow, this guide provides comprehensive information on the lowest-cost loans – including how to secure them and potential pitfalls to be aware of. Additionally, our Loans Eligibility Calculator assists in identifying loans that are more likely to approve your application.

Best-buy personal loans

Under £3,000: from 13.5% APR
£3,000 – £4,999: from 9.7% APR
£5,000 – £7,499: from 7.2% APR
£7,500 – £15,000: from 6.1% APR
£15,001 – £20,000: from 6.1% APR
£20,001 – £25,000: from 6.1% APR
Over £25,000: from 6.4% APR

What is a personal loan?

Personal loans, often referred to as unsecured loans, involve borrowing a specific amount of money from a lender with the commitment to repay it through fixed monthly installments over a predetermined period.

The lender imposes an interest charge as the cost for providing you with the loan, meaning you repay the principal amount plus the interest accrued. One key benefit is that you receive the funds upfront, allowing you to distribute the expense of a purchase over several months or even years.

This guide not only highlights the most affordable personal loans but also considers whether alternative financial solutions, such as credit cards, might be more cost-effective for your needs. Additionally, we feature our innovative Loans Eligibility Calculator, designed to indicate which lenders are likely to approve your application before you even apply.

What can I use a personal loan for?

Although you can technically use a personal loan for any purpose, lenders typically inquire about the reason for your loan. Most commonly, personal loans are obtained for:

• Home renovations
• Purchasing a new vehicle
• Wedding costs
• Emergency expenses (such as car or home repairs)
• Debt consolidation (exercise caution with this option)

Loan need-to-knows

1 – Only borrow what you truly need and aim to repay it as swiftly as possible

The principle is straightforward: borrow minimally and repay quickly. To avoid financial stress, always base your borrowing on what you can comfortably afford to repay, ideally after creating a budget. Over-borrowing can lead to escalating debt.Be cautious – extending the repayment period lowers monthly payments but significantly increases the total interest paid. For example, borrowing £10,000 at 7% interest over three years will cost you £1,100 in interest. Stretch the same loan over 10 years, and the interest balloons to £3,900.

2 – … yet strangely, it can sometimes be cheaper to borrow more – but proceed with caution

Although minimizing borrowing is typically advisable, there’s an odd phenomenon where you might end up paying less interest by opting for a slightly larger loan. Here’s a step-by-step guide to explain why and how this happens:

– The principle of “the more you borrow, the cheaper the rate” can significantly impact your borrowing strategy. To illustrate this, let’s revisit an example from November 2021, where the best-buy personal loan rates were structured as follows (note that current rates may be higher, but the underlying concept remains unchanged):

• For loans between £1,000 and £2,999, the lowest rate was 9.8% representative APR.
• For loans between £3,000 and £4,999, the rate dropped to 8.1% representative APR.
• For loans between £5,000 and £7,499, the rate was further reduced to 3.3% representative APR.
• For loans between £7,500 and £15,000, the rate was 2.9% representative APR.

It’s important to note that for loans of £3,000 or less, you should always compare the total interest cost using this method with the fees associated with a money transfer card. If you can repay the loan within the 0% interest period offered by the card, this might be a more cost-effective option.

– Interest rates decrease at three key borrowing amounts: £3,000, £5,000, and £7,500. The crucial aspect here is the “cliff-edge” effect where the interest rates significantly drop, particularly steep at £5,000. The main question is at what borrowing point the benefit of a lower rate surpasses the cost of borrowing more.

Below are a few examples, based on borrowing over 5 years at the lowest rates available in April 2024:

• Borrowing just over £2,770 at 13.5% is more expensive than borrowing £3,000 at 9.9%.
• Borrowing just over £4,710 at 9.9% is more expensive than borrowing £5,000 at 7.3%.
• Borrowing just over £7,260 at 7.3% is more expensive than borrowing £7,500 at 5.9%.

These examples illustrate that, at these rates and terms, it can be financially advantageous to borrow slightly more to benefit from a lower interest rate.

To determine the best strategy for your situation, use a Loans Calculator. If you follow this approach, you might even use the additional funds for your initial loan repayments.

Even if you are borrowing less than these amounts, consider borrowing up to the next threshold if your loan allows immediate overpayments without penalties. This can be more cost-effective in the long run.

However, note that for loans above £15,000, the interest rate remains constant at 5.9% up to £25,000, so this strategy does not apply.

– The fly in the ointment with personal loans is the term “representative APR”. This single word significantly impacts the loan process. It implies that only 51% of approved applicants receive the advertised rate, while the remaining applicants often face higher rates. Unfortunately, applicants usually learn their actual rate only after applying, which leaves a mark on their credit file. In some cases, tools like our Loans Eligibility Calculator can reveal the actual rate before you apply.

There’s both art and science involved in navigating this process. Approval is key, and securing a slightly larger loan can be more challenging. Generally, similar thresholds apply across many lenders. Therefore, if you’re considering borrowing just under £3,000, £5,000, or £7,500, it might be worth checking if borrowing slightly more would be advantageous.

3 – Credit Card Loans Under £5,000: A Potentially Cheaper Option with Discipline

Before committing to a traditional loan, consider whether a credit card might suffice for a smaller amount. The crucial aspect here is your credit limit. Generally, unless you have a high income and an excellent credit score, credit card limits usually cap between £3,000 and £5,000. If your purchase exceeds this amount, a loan over £5,000 might be more suitable.However, if your needs are under £5,000, credit cards present a viable option. Assess whether any of these situations apply to you:

• I Can Use a Credit Card and Repay It Within 21 Months: Some credit cards offer up to 22 months at 0% interest on purchases. This is beneficial if you can budget effectively to clear the debt within that timeframe or if you’re adept at transferring the balance to another card before the 0% interest period concludes.Keep in mind, this strategy is only effective if the retailer accepts credit cards, which some, especially car dealerships, might not. But there’s a workaround…
• I Can’t Pay Directly with a Credit Card: Even if direct payment isn’t an option, you can still utilize a credit card through a more intricate process.Specialist money transfer cards allow you to transfer cash from the new card to your bank account, converting it into spendable funds, though typically with a fee. Currently, the longest 0% period on such cards is up to 12 months (with a 4% fee). If you can repay within that period or balance transfer after the 0% ends, this can be a viable loan alternative.
• I’m Looking to Reduce Existing Card Debt Costs: Often, a loan isn’t the cheapest option. Balance-transfer deals on credit cards let you move debt from other cards at a significantly lower rate, often cheaper than the best loan rates. Refer to our Best Balance Transfers guide for the top current options.

With these methods, it’s crucial to mimic the disciplined repayment structure of a loan. Calculate the monthly payments needed to clear the card within the 0% period and set up a direct debit for this amount. This prevents the temptation to miss payments and end up with debt after the 0% period, unless you plan to keep transferring balances to new cards as needed.

4 – Credit History’s Role vs. Income in Determining Borrowing Capacity

While having a solid credit history is crucial, your income primarily determines the amount you can borrow.Lenders prefer borrowers who have a strong credit history (indicating a reliable repayment track record) and a substantial disposable income.

However, credit history and income serve different purposes in a lender’s evaluation process. Here’s a closer look:

• Credit History. Your credit history influences whether a lender is willing to extend credit to you and what interest rate they will offer. A good credit history increases your chances of receiving the advertised rate. Conversely, a less favorable credit history means you might still qualify for a loan, but at a higher interest rate due to the increased risk you present to the lender.

• Affordability. Your disposable income determines the loan amount a lender is willing to provide. This calculation is based on your income minus essential expenses like rent or mortgage payments, and other typical outgoings estimated by the lender based on your living situation and number of dependents. Even with an excellent credit record, a loan will be out of reach if your disposable income is deemed insufficient.

Our Loans Eligibility Calculator and Credit Club replicate these criteria to assess your loan prospects. Credit Club also evaluates your loan affordability and assigns a score ranging from ‘poor’ to ‘very good.’

5 – Watch out for the deceptive allure of ‘representative’ APR – you might end up with a significantly higher rate than expected

There’s a sneaky caveat to be mindful of. Certain loan companies extend a higher APR to individuals with less-than-stellar credit histories, surpassing the initially advertised rate. Picture this: you apply for a loan promising a 5.6% APR, secure approval, only to be handed a 10.9% APR instead. This discrepancy arises because the APRs flaunted in advertisements are merely ‘representative’, meaning they need to be granted to only 51% of successful applicants. Consequently, a staggering 49% of those accepted could find themselves saddled with a pricier loan than initially anticipated.While some providers on our eligibility calculator may reveal the anticipated rate, this isn’t always the case across the board. We’re diligently striving to expand this coverage, but until then, regrettably, the sole reliable method to ascertain whether you’ll snag the advertised rate is to submit an application.

6 – You typically have the option to pay more than required or clear your debt ahead of schedule without incurring extra fees

Lenders are obligated to permit full repayment of your loan. However, there might be a penalty involved, usually ranging from one to two months’ worth of interest. It’s essential to review your specific agreement to understand the charges imposed by your lender.Loans obtained after February 1, 2011, offer the flexibility of making partial overpayments. If your additional payments amount to less than £8,000 within a year, financial institutions are prohibited from imposing charges for these overpayments. Nonetheless, if your overpayments surpass £8,000 annually, the bank reserves the right to levy fees, provided it has borne costs due to your early repayment.

7 – Avoiding Coverage of Subprime Loans: Here’s Why

We understand that many individuals seek out subprime loans due to their accessibility for those with less-than-perfect credit histories. However, these loans come with exorbitant costs and can ensnare borrowers in a cycle of high-cost debt.Before considering a subprime loan, it’s wise to explore other avenues, starting with our Loans Eligibility Calculator. This tool allows you to assess your eligibility for standard loans without impacting your credit score. Some similar checkers may include options with sky-high interest rates, inadvertently steering you towards subprime loans.

Nevertheless, if you find yourself only eligible for a subprime loan, it’s crucial to ask yourself: Can you truly afford it? Do you genuinely need it? When uncertain, err on the side of caution and refrain from pursuing one. If you’re grappling with debt-related issues, consult our Debt Help guide for assistance. Additionally, learn strategies to enhance your credit score to improve your financial prospects.

Best-buy personal loans

If you’re in the market for a loan, take a glance at the most competitive rates outlined below. We categorize loans based on different ‘bands’, as the interest rate offered may vary depending on the amount you’re looking to borrow.

If your lender has mistakenly billed you an incorrect sum, processed an inaccurate payment, or provided subpar service, there’s no need to endure it quietly. While reaching out to your lender initially is advisable to seek resolution, if they are unable or unwilling to assist, or fail to respond…

You have recourse through Resolver, a complimentary complaints tool. This platform aids in organizing your grievance, and if the company remains uncooperative, it facilitates escalation to the cost-free Financial Ombudsman Service.

Personal Loans Q&A

Q – Can I get a loan if I have bad credit?

A – Indeed, acquiring a loan with a poor credit score is feasible, albeit the process may pose more hurdles for approval. Even if approval is granted, expect to encounter exorbitant interest rates, often surpassing 30%, as a prerequisite for borrowing.

Additionally, it’s imperative to exercise caution when seeking a loan with unfavorable credit. Simply typing “loans for bad credit” into a search engine and selecting the initial advertisement is ill-advised. It’s crucial to ensure the credibility of the lender.

Prioritize utilizing eligibility calculators to gauge your likelihood of loan approval. Should this avenue prove unsuccessful, exploring comparison platforms like MoneySupermarket and Compare The Market could broaden your options across various lenders.

Once granted a loan, adhere diligently to the repayment schedule. Timely payments serve to ameliorate your credit history, potentially opening avenues for more affordable credit in the future. Moreover, meeting payment obligations promptly might render you eligible for a lower-interest loan, facilitating the settlement of high-interest debts. Delve into strategies like reducing existing loan expenses to comprehend this process better.

Q – Should I consider getting a loan from a credit union?

A – Credit unions stand out as unique, independently managed cooperative entities designed to provide financial assistance to individuals who might otherwise struggle to access traditional financial products and services. With approximately 500 such unions operating in the UK, they offer a range of services including loans, savings, and current accounts, each with its own set of offerings and membership criteria.

In a recent development, several credit unions have collaborated to establish an online platform called My Community Finance. This platform streamlines the process of applying for loans by collecting pertinent details about the applicant and the desired loan. It then matches the applicant with an eligible credit union, through which the loan is processed.

Loans from credit unions typically range from £1,500 to £25,000, with repayment terms spanning from one to five years. While the representative Annual Percentage Rate (APR) stands at 28.6%, it’s important to note that credit union loan rates are subject to a cap. The maximum APR that can be charged on a loan is 42.6%, equivalent to 3% per month.

For comprehensive insights into the workings of credit unions and guidance on locating one in your vicinity, delve into our comprehensive Credit Unions guide.

Q – Is it advisable to consider obtaining a loan from my employer?

A – Certain employers extend loan facilities to their employees, often designated for purchasing travel season tickets to facilitate commuting to and from work. Typically capped at £10,000, though the specific amount may vary depending on the employer’s discretion, these loans are repaid over the course of a year through deductions from your salary, usually in 10 or 12 installments.

While initially intended for covering travel expenses, it’s worth exploring whether your employer offers such loans and whether there’s flexibility regarding their purpose. Notably, at 0% interest, these loans represent one of the most economically advantageous borrowing options available.

Q – Is there any value in obtaining payment protection insurance for a loan?

A – Before committing to any insurance policy, ensure it aligns with your needs and provides the necessary protection. Income protection, also known as payment protection insurance (PPI), serves to safeguard you in case of inability to work, offering monthly cash benefits for up to two years. This financial aid can be utilized to manage loan repayments effectively. However, it’s essential to note that there is typically a waiting period of up to 180 days before you can make a claim, and policies often cap payments at around 70% of your regular income.

There are three primary types of coverage available:

• Unemployment-only coverage is designed to support you in the event of redundancy. However, to be eligible, you must be registered as unemployed with the government and actively seeking new employment. This coverage ceases once you secure new employment.
• Accident and sickness coverage provides protection against unforeseen accidents and prolonged illness, as certified by a medical professional.
• Accident, sickness, and unemployment coverage offer comprehensive protection encompassing all the aforementioned scenarios.

Ultimately, the decision to invest in a policy hinges on whether the associated costs are justified. If you have sufficient savings to cover repayments or a supportive network of friends and family, insurance may not be necessary. Furthermore, if you are currently unemployed, opting solely for accident and sickness coverage might suffice.

It’s imperative to understand that insurance cannot be obtained retroactively or if you are self-employed. Additionally, situations deemed foreseeable, such as impending redundancy or voluntary redundancy, may render you ineligible to make a claim. Disclose your complete medical history to the insurer to avoid any potential invalidation of your policy due to undisclosed pre-existing conditions.

Moreover, self-employed individuals may encounter limitations or exclusions in their coverage. While accident and sickness coverage may be available, unemployment coverage may not apply if work dries up.

Utilize comparison websites such as Compare The Market, Active Quote, and iProtect to gather quotes and identify suitable coverage options. Once you’ve shortlisted the most economical quotes, verify the details on the insurer’s website and carefully review the policy terms, ensuring you comprehend any exclusions or limitations.

Q – Should I get a consolidation loan?

A – This is a frequently asked question regarding borrowing. The advice remains consistent: never solely focus on consolidation, as it often leads to unfavorable outcomes. If you find yourself burdened with numerous small loans or credit card debts, the primary objective should be to settle them swiftly, ideally at the most favorable interest rate available.

Avoid falling for the allure of a consolidation loan promising reduced monthly payments, as this approach can backfire. While it does combine your debts into a single payment, it achieves this by extending the repayment period, sometimes spanning 15, 20, or even 25 years. Consequently, the total amount repaid escalates significantly due to the prolonged interest accrual.

For instance, consider a £10,000 loan with an 18% APR on a traditional credit card. If paid off within five years, it incurs £5,240 in interest. Transferring this to a consolidation loan at 9% APR may seem cost-effective initially. However, over a 25-year term, the actual interest balloons to £15,200, nearly tripling the original estimate.

Furthermore, many consolidation loans are secured against assets like homes, leading to higher costs and prolonged repayment periods, thereby increasing the risk of asset forfeiture. The primary objective should always be to minimize interest expenses, regardless of whether you’re consolidating one loan or multiple, and strive to clear the debt as swiftly as feasible.

Q – What’s the difference between secured and unsecured loans?

A – The majority of mainstream personal loans fall into the category of ‘unsecured’. Despite the initial impression that this may be disadvantageous, it’s quite the contrary. On the flip side, there are ‘secured loans’, often promoted on television as consolidation loans, which carry inherent risks:

• Potential loss of your home:

A secured loan entails the collateralization of your home (or another asset), implying that failure to meet repayment obligations could lead to repossession. Conversely, with unsecured loans, the likelihood of such a dire consequence is significantly lower.

• Fixed versus variable interest rates:

Nearly all unsecured personal loans come with fixed interest rates. This provides borrowers with clear visibility regarding their repayment obligations, shielding them from fluctuations in the UK’s interest rates or arbitrary adjustments by lenders. In contrast, secured loans often feature variable rates, exposing borrowers to potential increases in their repayment amounts at the discretion of the lender.

• Extended repayment terms:

Secured loan agreements often tout the appeal of “one easy low monthly repayment.” However, this seemingly attractive feature is designed to elongate the repayment period, resulting in the accrual of substantial interest over time, ultimately costing borrowers a significant sum.

To underscore the gravity of this matter…

Secured loans primarily offer security to the lender, leaving borrowers vulnerable. Opting for a conventional unsecured personal loan is undeniably preferable to securing one against your home.

Secured loans seldom represent a prudent financial decision and should only be contemplated as a last resort. Their relevance is restricted to highly specific scenarios. Individuals with favorable credit profiles would be wise to explore options such as personal loans, competitive credit card offerings, or even mortgage extensions instead.

Those grappling with poor credit histories, contemplating secured loans as a remedy, are encouraged to explore the Guide To Problem Debts as a more viable alternative.

Q – Are you eligible for Government help?

A – Prior to considering commercial debt options, it’s prudent to explore the availability of Government loans. There are two distinct categories for which you may qualify:

Local help: Since April 2013, individual local authorities have assumed responsibility for aiding residents facing emergencies. This assistance encompasses situations where your or your family’s health is jeopardized, financial constraints hinder purchasing of food, assistance is needed to maintain residency, or transitioning out of care, hospitalization, or incarceration.

Unfortunately, this assistance is subject to geographic variability. Each council retains the discretion to extend financial aid, and criteria for eligibility are determined by individual councils. Some may provide assistance in the form of furniture or food grants, while others may offer direct financial assistance.

National help: Another avenue comprises budgeting loans and advances, designated solely for individuals receiving benefits and possessing minimal or no savings. These provisions encompass a broad spectrum of borrowing purposes, including expenditures such as school uniforms or household furnishings.

For further details, consult our comprehensive Debt Help guide.

Q – What happens if I require a loan amount exceeding their lending limit?

A – Once your loan application has been submitted, it becomes a permanent entry in your credit report. Therefore, if you’ve already sought out the most economical loan option available to you, there’s little reason to decline the offered funds simply because they fall short of your ideal amount.

Should you find yourself needing additional funds, you might consider applying for another loan from a different source. However, it’s important to note that any potential lender will factor in your existing loan when evaluating your eligibility, potentially concluding that you’re unable to take on further debt.

Take a moment to explore the various credit card alternatives provided above to determine if any could suit your needs.

Q – What will happen if UK interest rates change?

A – Virtually all personal loans come with a fixed rate, ensuring that the interest rate and monthly repayments remain consistent throughout the loan term. This stability persists regardless of fluctuations in the base rate, the official borrowing rate set by the Bank of England, which influences returns for savers and costs for borrowers. Consequently, whether interest rates climb or descend, there is no effect on the terms of the loan.

Typically, alterations to the base rate do not influence the interest rates offered by lenders to potential borrowers. The primary factor influencing these rates is competition among lenders, rather than external economic factors (provided that all lenders can maintain profitability).

Q – How quickly will I get the money?

A – The timing of receiving the funds hinges on the lending institution. Should you opt for an online application that allows for digital signatures, you might find the cash deposited into your account within mere hours.

However, if you’re awaiting physical documents dispatched by traditional mail, the process could extend to approximately a week before the funds are made available to you.