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Small loans - What's the best way to borrow a small amount?

Just because you need a bit of extra cash, that does not necessarily mean that you need to borrow thousands of pounds.

Often a few hundred pounds, borrowed over a short period, is all you need to get you out of a sticky situation.

Unfortunately, however, the cheapest loan rates are generally reserved for those borrowing between £7,500 and £15,000 over a period of between say three and five years.

While these amounts can currently be borrowed at an interest rate of as little as 5% if you have a good credit score, smaller loans tend to be much more expensive.

A quick search on MoneySupermarket shows that someone earning £25,000 a year would pay an interest rate of at least 18.6% on a one-year loan of £1,000 - meaning the total amount repaid would be about £1,095.

Here, we run through the options available if you need a small loan to tide you over.

How do small loans work?

While some lenders will process small loan requests very quickly, and get the money to your account within three days or less, others take longer - meaning that you may have to wait up to a few weeks for the cash to arrive.

If you need money fast, it therefore makes sense to check how long you will have to wait for a loan before applying for it.

Make all the payments on time, and the record could even stand you in better stead with lenders, but miss one or more payment dates and your score will certainly fall.

With personal loan amounts ranging from £1,000 to £25,000 it is also worth checking how much you can borrow.

This will depend on your income, your credit score and your existing credit commitments.

How do small loans affect your credit score?

Any borrowing, whether on a mortgage, credit card or loan, is noted on your credit file.

Banks and other lenders will therefore be able to see when you take out a small loan, as well as whether you miss a repayment, for example.

While increasing your borrowing will make it less likely that you will be accepted for further credit during the life of the loan, the long-term impact of a small loan on your credit score will therefore depend on how you manage it.

Make all the payments on time, and the record could even stand you in better stead with lenders, but miss one or more payment dates and your score will certainly fall.

What are the alternatives?

The higher cost of small loans means that it is often more sensible to find another way to raise some extra cash if possible.

Ways to do this include asking a relative or close friend to lend you some money in the short term and having a clearout and selling unwanted possessions online, for example on auction website.

Another option is to use the overdraft facility on your current account, if you have one.

Most authorised current account overdrafts charge interest at about 18%.

However, some charge less or even 0% up to a certain limit.

What's more, overdraft facilities can often be arranged immediately, making them a great way to get your hands on some extra cash quickly.

If you are disciplined, you may also be able to pay off an overdraft more quickly than a personal loan, reducing the amount you pay in interest.

The same is true of a 0% credit card, which could allow you to escape interest altogether if used wisely.

The best cards of this kind are currently offering up to 16 months interest-free spending, after which they charge interest at about 17%.

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