Our guide to finding a low interest loan
The cheapest loan isn’t always the one with the lowest monthly repayments. Our guide can help you find the right deal
When you take out a loan you make an agreement with the lender to pay it back with interest (usually at an interest rate fixed at the start) and over a fixed period, such as two or three years, for example.
The lower your interest rate – usually the better the deal. But not all loans are the same in the UK and just because you’re repaying less per month, doesn’t necessarily mean you’re on the cheapest deal. Our guide explains more...
What is a low interest loan?
A low interest loan is one that charges a low percentage rate for the lump sum borrowed. It helps keep your monthly repayments affordable and ideally means you will pay less overall – although this also depends on the length of the deal. The longer the term of your loan the more interest you’ll pay overall.
What is considered a low APR on a loan?
Cheap loans are usually those with the lowest interest rates. But the headline rate on a loan is only one factor to consider.
The APR on a loan stands for Annual Percentage Rate and takes into account the interest rate on a loan plus any other charges such as an initial fee – or set up fee. As such the APR is a better reflection of the total cost of your loan, not the rate.
You may find short term loans and loans for lower values have higher APRs. But when you borrow large sums over a long time frame (the term) you also end up paying more in interest over the length of the deal.
Can I get a loan with 0% interest?
While it’s unlikely you’ll be offered a 0% interest (or interest free) loan, you may be able to borrow money for an interest-free period using a 0% credit card.
It should prove a cheaper alternative to a loan for smaller amount of borrowing, as long as you pay it off in full 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 you pay 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. The credit limit you’re offered will depend on your income or salary and your credit score.
How do low-cost loans work?
After searching the market and finding the right loan deal for you, you can apply directly to the provider. Once you’re accepted, the cash should be in your account within a matter of days.
It’s important to be confident you can afford the monthly repayments when you take out a loan. Otherwise, you could fall behind with your repayments, facing penalty charges, and damaging your credit score.
But as well as affording the monthly repayments you should also look at the total cost of your loan over the term, taking into account extra fees and charges.
For example, with 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 be £17,292 – meaning the loan will cost you £2,292 in interest.
Over 10 years, the same loan would come with much lower monthly repayments of just £193.91. But the overall cost would be £23,269 – meaning you paid a much bigger sum - £8,269 for the loan.
Where can I find a low interest personal loan?
The overall cost is the most important factor. Our free loan calculator can give an idea of how much different loan options might cost you. Remember to check when you apply for a loan if there are any early redemption penalties.
Smaller-sized loans of, say, £1,000 or £2,000 often come with higher interest rates because lenders stand to make less money on them overall.
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.
Borrowers with good and excellent credit scores will typically be offered the lowest loan rates so take steps to improve your credit score, such as correcting any mistakes on your file and paying down outstanding debts. Boosting your score should start to open the door to better credit and loan deals in time.
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.
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
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. However, you risk losing that asset if you fall behind with your repayments so tread with caution
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 lower credit scores
Can I get a low APR loan with bad credit?
You may be able to get a loan with bad credit but it’s likely the interest rate will be higher, and you’ll be able to borrow less than if you had a good credit score.
This is because providers don’t have as much confidence that you’ll keep up with repayments, so they factor that added risk into the loan cost.
If you have an asset such as a house or flat to put up as security, you might be able to get a lower APR loan on a secured basis. But the risk is that if you default on the payments, you could lose your home.
Either way, having a poor credit score will always increase the cost of taking out a loan, so it’s a smart move to try to improve your credit score before borrowing.
Other useful guides
Compare low interest loans with MoneySuperMarket
It’s quick and easy to compare low interest loans with MoneySuperMarket. Just tell us a bit about your finances and the type of loan you’re looking for, and we’ll search loan deals from our leading panel of UK 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. Searching in this way will have no impact on your credit score.
MoneySuperMarket is a credit broker – this means we’ll show you products offered by lenders. We never take a fee from customers for this service. Instead we are usually paid a fee by the lenders, but the size of that payment doesn’t affect how we show products to customers.