There is a way to get a cheap personal loan – it’s as easy as 1, 2, 3… Here’s our guide to choosing the right one for your situation.
Personal loans are an important tool for many people when they’re looking to improve their home, buy a new car, consolidate debt or achieve any number of other goals. When searching for the cheapest personal loan though, the most important factor is you. Your situation will determine what you need in a lender, and our guide will help you navigate the complexities to compare cheap personal loan options to match your needs.
Must read: What is the cheapest personal loan?The cheapest personal loan is the loan that has the lowest rate that you’re eligible for (assuming no fees are involved), at the loan term and loan size that you need. So, while this means that there is no single answer to that question, there is a way to find the cheapest personal loan for you. This guide will take you through what you need to know.
Compare personal loans
You should always refer to your loan agreement for exact repayment amounts as they may vary from our results.
Warning: late repayments can cause you serious money problems. See our debt help guides.
3 steps to help you find the cheapest personal loan
1. Find the right loan type for your purposes
The are a range of different products that sit under the umbrella of “loans”. If you need £100 to tide you over until your next payday, then you’re not looking for a second charge mortgage! Similarly, if you’re looking to kick start your new business, a standard unsecured personal loan from a bank might actually be off the table (there are however government-backed loans for start-ups that are well worth a look). Some of the main types of loan are listed below.
2. Compare loans to establish the features that are important to you
Some of the key features of personal loans are listed below. Which of these are important to you? Perhaps you want to be sure that the loan you take out will reward you for making overpayments and clearing the debt ahead of time. Or perhaps you’re looking for a loan that offers a repayment holiday option to give you a month or so to get back on your feet financially. Ask yourself which of these features are essential, and which ones simply “would be nice to have”.
3. Get the most affordable loan that meets your needs
OK, so you know what you’re after, now it’s time to find the most competitive product available to you. Rates are obviously important, but it’s not ALL about the APR. Focus on keeping the total amount repayable as low as possible, while ensuring the monthly instalments are affordable.
What type of personal loan will best suit my needs?
Here are some common situations where “there’s a loan for that”:
Buying a new/used car
As well as standard unsecured personal loans there are vehicle financing options you may wish to consider.
Borrowing with bad credit
A number of specialist lenders focus on this sector, including those providing guarantor loans.
Launching or growing a business
Many banks won’t give personal loans for business purposes, but a range of dedicated loans exist for SMEs.
Making large purchases
When making a major purchase like an appliance or holiday or paying for a wedding, a regular unsecured personal loan might suit your needs.
Leveraging home equity for larger loans
To borrow larger (£25k+) sums with security, you might be considering remortgaging or a second charge mortgage.
Borrowing small amounts for short periods
Payday/short-term lenders offer fast loans at high rates, to be repaid in full on your payday or in regular instalments.
What features should I compare to find the cheapest personal loan?
This is a non-exhaustive list of the features of personal loans that you can use to differentiate lenders, and to start to home in on the right products for your needs.
- Loan amounts. A good place to start is asking “Does this lender offer the amount that I need?”
- Eligibility. There’s no point applying for a loan if you’re not eligible, and remember that declined applications are likely to be visible on your credit record.
- Loan terms. More often than not, the loan term will simply be dictated by the affordability of monthly repayments. In other words, if you need to reduce your monthly repayment to make it affordable, then you may decide to spread repayment over a longer period. If you’ve already used a loan calculator and have a reasonable idea how long a loan term you’ll need, check that the lender you’re considering can accommodate this.
- Fees. There aren’t too many set-up fees in the world of personal loans, but they certainly aren’t unheard of. Where some lenders that you’re considering charge a fee, the total amount payable (the overall cost of the loan) might become your best benchmark for comparison.
- Total amount payable. This is the big one – if you only compare one factor, this should probably be it. You’ll want to keep the total cost as low as possible, while making sure your monthly repayments are affordable.
- Interest rate. A loan’s APR (Annual Percentage Rate – an annual summary of the cost of borrowing that all lenders must calculate in the same way) is normally the main “hook” that a lender will use to market the loan. Just remember that lenders are only obliged to award the advertised APR to 51% of these who take out the loan. Others may end up paying more, subject to the lender’s assessment of their circumstances. You can normally get a more accurate idea of the cheapest loan a lender can offer you when you tell them a bit more about yourself and the loan that you’re after.
- Turnaround time. If you’re in a hurry, you might want to look at the time each lender states it takes to actually draw down your funds (transfer the money to your nominated account). If you get a loan with a bank you’re already a customer at, chances are it’ll be pretty quick, however it almost always pays to shop around.
- Restrictions. Personal loans can be used for almost anything, but lenders are highly likely to ask you the purpose of the loan, and they may have prohibited loan purposes. Typically these can include gambling, business purposes and using the loan as a down payment to get an even bigger loan (like a deposit on a property with a mortgage, for example).
- Repayment holidays. Some lenders offer an optional month or two where you don’t make repayments. That can be handy if you need a break to get back on your feet financially. The downside of repayment holidays is that they increase the term of the loan, and the overall cost. It’s a holiday from repayments, not from accruing interest, after all.
- Early repayment. Most lenders will make a song and dance out of the fact that they don’t charge a penalty for making overpayments and/or repaying your loan early. That’s great, but it’s not the same as charging you less interest. A common policy is to charge a further two months’ interest on any amounts repaid early. So, if you’re hoping to try to make over-payments here and there, or if you have a lump sum coming in but you’re not sure exactly when, then factor the lenders’ early repayment terms into your comparison. Favourable terms could even be more important to you than a fractionally better rate.
What else should I keep in mind when seeking out and applying for a cheap personal loan?
Don’t apply for, let alone take on, a loan you can’t afford.
When borrowing money it is always important to find out what your monthly repayments will be. If you don’t know for certain that you can afford that amount out of your regular income, then there’s a good chance a lender will have doubts too. Rejected applications don’t show on your credit file, but applications for credit do – too many of these in a short space of time and prospective lenders could be put off. If you end up taking on a loan you can’t afford, you’re setting yourself up for problems down the line – late repayments come with fees plus additional interest, and are highly likely to damage your credit record too.
- Don’t apply for lots of loans in a short space of time. Take the time to make one sensible application, and if you’re rejected, try to find out why.
- Read the fine print. When a lender approves your application, they’ll send you a loan offer. This is an opportunity to check that you’re actually being offered what you applied for (rate, amount, term etc.), and to check you’re happy with the terms of the agreement. OK, it’s not the most exciting document in the world, but read the terms and conditions from start to finish and ensure you are aware of all fees and restrictions.