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Cheap loans

How to find a low-interest loan

The cheapest loan is not always the one with the lowest monthly repayments

By Jessica Bown

Published: 28 April 2021

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When you’re looking for a cheap loan, you might think the key figure to take into account is the amount you have to pay back each month. However, paying a lower amount each month does not always mean you are getting the best deal.

While taking a loan out over five years will result in lower repayments than borrowing the same amount over three years, the total amount you pay back will still usually be higher.

So once you’ve worked out how much you can afford to pay each month, you need to look for the loan that costs the least overall.

How can I borrow money cheaply?

You can borrow money cheaply using a low-cost loan. Just make sure you check the total cost over the term of the agreement, as well as the size of the monthly repayments.

It’s vital to make sure you can afford the monthly repayments when you take out a loan. Otherwise, you could end up falling behind with your repayments, facing penalty charges, and damaging your credit score.

But the loan with the lowest monthly repayments is not always the cheapest option; paying £200 a month for 10 years means shelling out £24,000, while paying £500 for three years adds up to £18,000 in total. That’s why it’s crucial to look at the cost over the entire term – including any extra fees and charges – when searching for a cheap loan.

Example: On a £15,000 loan at an interest rate of 9.9%, you would pay £480.34 a month over three years. The total amount repayable would therefore be £17,292.06 – meaning the loan cost you £2,292.06.

Over 10 years, the same loan would come with monthly repayments of just £193.91, but the overall cost would be £23,269.19 – meaning you paid £8,269.19 for the loan.

What are advertised loan rates?

When comparing personal loans, it’s important to remember that you may not be offered the advertised – or “representative” – interest rate, which providers only have to give to 51% of those to whom they offer loans. If, for example, you have a low credit score, you might be accepted as a customer, but on a much higher rate.

What type of loan is the cheapest?

The cheapest type of loan for you will depend on your individual circumstances, including your income, the amount you want to borrow, and your reason for borrowing it. There are three main types of loan that are likely to offer you the cheapest rates. These are:

  • Unsecured or personal loans: The most popular type of loan, these fixed-rate loans are offered by most high street lenders. They can be a cheap way to borrow money, but only if you have a high income and a good credit score. If you fall short of the lending criteria, you may be refused a loan or offered one at a much higher rate than advertised
  • Secured loans: These can be cheaper than personal loans if you have an asset such as a house that you are prepared to put up as security – especially if you have a low credit score that means personal loan providers will worry about your ability to meet repayments, and will price their loans accordingly. However, you risk losing that asset if you fall behind with your repayments, while some lenders also charge variable rates that could go up at any time
  • Peer-to-peer loans: Peer-to-peer loans can be a more flexible alternative to personal loans. They are just as secure, and work in the same way, except that you are borrowing from other individuals (via an internet lender). As some peer-to-peer lenders are prepared to take on more risk for higher returns, they can sometimes also work out cheaper than standard bank loans for people with less-than-perfect credit files

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How can I find a cheap loan?

Whether you want to buy a car, do up your kitchen, or spread the cost of getting married, the best way to find a cheap loan is to shop around. The overall cost is the most important factor, so use our handy loan calculator to work out exactly how much different options will cost you over the course of the loan. Remember to check when you apply for a loan if there’s a penalty for paying off it early.

Lenders often offer the best rates to those borrowing at least £5,000, and smaller loans of, say, £1,000 or £2,000 often come with higher interest rates because lenders stand to make less money on them overall.

So if, for example, you need to borrow £4,500, you may be able to get a better deal by upping the amount you borrow to £5,000. Again, our loan calculator can help you make the right choice – although it’s generally a bad idea to borrow much more than you actually need.

As those with the highest credit scores are offered the best loan rates because their histories suggest they will always make repayments on time, taking steps to improve your credit score, such as correcting any mistakes on your file and paying down outstanding debts, can also help you find a cheap loan.

Can I get a cheap loan with bad credit?

You’re more likely to be approved for a loan with bad credit if you have an asset such as a house or flat to put up as security. But if you default on the payments, you could lose your home.

You may also find it easier to be approved for a competitive peer-to-peer loan with a less-than-perfect credit score – although peer-to-peer lenders carry out similar checks to banks and building societies.

Either way, having a poor credit score and/or a low income will always increase the cost of taking out a loan. So rather than paying over the odds, why not try to improve your credit score or increase your disposable income before borrowing? Otherwise, you could find yourself in a debt spiral of high payments you struggle to afford.

Can I get a 0% loan?

Low-interest loans are available, but there are no loans that charge interest at 0%. You may be able to borrow money for an interest-free period using a credit card, though.

If, for example, you are looking to borrow under £5,000, you may be able to borrow it via a 0% credit card, which should therefore prove a cheaper alternative to a loan – as long as you pay back the full amount within the interest-free period (which is usually less than two years).

When comparing ways to borrow the money you need, it’s also worth considering low rate credit cards that charge a low interest rate longer term.

Either option can mean paying less interest than with a cheap loan, but credit cards usually have lower maximum credit limits – so they can only be used to borrow smaller amounts.

Compare loans

It’s quick and easy to compare personal loans with MoneySuperMarket. Just tell us a bit about your finances and the type of loan you’re looking for, and we will search the offers available from a wide range of providers to show you a list of loans that meet your requirements.

You can compare the loans you see by monthly repayments, overall cost and the likelihood you will be accepted at the advertised interest rate.

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