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Small loans

Small loans explained: How to borrow a small amount

A small loan can be anything from £500 to a few thousand. They typically have higher interest rates, but they’re not hard to find if you need a small cash boost

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What is a small loan?

A small loan is a personal loan people normally take out because they need an injection of money, for example to finish a project or to make an emergency purchase.

There’s no legal definition of what makes a small loan, but most lenders consider sums of anything from £500 to around £2,000 as ‘small’. 

Small loans are almost always unsecured – meaning you don’t need to offer collateral such as your home or car to be accepted for the loan.

Unfortunately, smaller loans – or those taken out for a shorter term – tend to have much higher interest rates than larger sums borrowed over longer periods. 

Can I get a small loan with bad credit?

You might be able to get a small loan with a poor credit rating and there are lenders who specialise in loans for bad credit

But it is likely you will pay a higher rate of interest, or be able to borrow less, than someone with a good credit score.

If you compare through MoneySuperMarket we’ll perform a ‘soft search’ that won’t hurt your credit score. We’ll then only show you loans that you’re likely to be accepted for, including ‘pre-approved’ loans where you’re guaranteed to receive the stated rate.

Other ways to get a small loan with bad credit include secured loans, where you put up collateral such as a car or house, or guarantor loans, where a family member or friend agrees to pay back the remainder should you default.

How do small loans work?

Small loans work in the same way as larger loans. You find a lender and make a loan application. The loan provider will look at factors including your credit score and whether you meet their lending criteria. If you are eligible the lender will offer you a loan at a set rate of interest and send you the money. 

The one difference is that the Annual Percentage Rate (APR) – the interest you have to repay – tends to be higher for smaller loans. So, even though you’re borrowing less money overall, you’re paying back a higher proportion of what you are borrowing.

 

What are the different types of small loans?

There are lots of different ways to borrow small amounts of money, but always be wary because the interest rate may be high. The different types include…

Payday loans 

So-called because they are supposed to see you through until payday. They can be easy to get from high street shops and online, but as they are short-term loans they can have extremely high interest rates. Generally, you’ll be given up to a month to pay the money back plus interest. Fees and penalty charges can be high if you miss a repayment. 

Bank loans

Bank loans come in the form of personalsecured or guarantor loans.  Banks and building societies are strictly regulated by the Financial Conduct Authority and the interest rate you are offered will depend on your credit rating.

Credit Unions

Credit unions are non-profit organisations set up to serve their members not shareholders. You will have to meet a credit union’s eligibility requirements in order to become a member. This might involve making small savings with the credit union for a time first. But you may then be able to take out a small loan. 

Pawn brokers

This involves putting up something you own as security and then borrowing an amount up to the value of the item you’re pawning. It can be a quick source of cash, but you will have to repay with interest, and the item may be sold if you cannot meet repayments.

What is the interest rate on a small loan?   

The interest rate on a small loan will typically be presented as its Annual Percentage Rate (APR). This is the amount you will have to pay each year to borrow the money, including any fees, shown as a percentage. 

For example. If you wanted to take out a £1,000 loan and pay it off over the course of 12 months and the APR was 10%, you would eventually pay back £1,100. You can use our free loan calculator to put in your own values and see how much you might have to repay.

Providers will often show the lowest APR attainable to attract borrowers, but it doesn’t always mean you are guaranteed this rate. The APR offered will depend on your credit score – and those with a lower credit rating will often find borrowing is more expensive. This is because lenders view borrowers with a low or poor credit rating as posing more risk.

You can find out more about your credit score and how to improve it here.

What other costs do I need to consider?  

The most important thing when taking out a small loan is not to miss any repayments. 

If you do, it’s likely you’ll be hit with a late charge fee and it could also trigger a penalty interest rate meaning you’ll face much higher repayments in the future.

Missed payments also negatively affect your credit score making it harder to borrow at the best rates in the future.

You could also be charged a fee for taking out the loan, particularly if you use a broker.  

How quickly will I receive my loan?

Because we live in a digital world, once you have been approved for your small loan, you are likely to receive your money almost instantly.

Can I get a small loan if I am unemployed?

You might be able to get a small loan if you are unemployed. If you are on benefits, for example, you may still be able to borrow providing you can show you have the means to make the monthly repayments.  

Be confident you can pay the money back though. If you start missing repayments you will make your financial situation worse, drop further into debt and it can also harm your credit rating – making it more difficult to borrow in the future.

What can I use small loans for?

You can use a small loan for anything, but they should generally be seen as stopgap and repaid as soon as possible to clear the debt. 

For example, if you have had an unexpected expense such as a boiler breakdown in the middle of winter, you need to have it fixed, and it’s a week before payday.  

They tend to have high interest rates so are not ideal for long-term borrowing.

What are the alternatives to a small loan?

Because the APR on a small loan can be quite high, small loans can end up being disproportionately expensive. However, there are other options available:

  • 0% purchase credit cards: If you know you have more cash coming in soon, a credit card might tide you over. There are many on the market which charge little or no interest on purchases for the first few months, too. The APR tends to rise sharply after that, so credit cards are best considered as a short-term option. Your credit rating may affect the terms you are offered, and you can check it for free without harming your score using the MoneySuperMarket Eligibility Checker 
     

  • Arranged overdraft facility: Your bank may be prepared to offer you an arranged overdraft. Make sure you speak to your bank though – overdrafts can be pricy if you don’t pre-arrange them 
     
    Think twice: Ask yourself how important this purchase is to you, and whether it can wait until you have the funds. Debt can be a slippery slope, and it’s best to think carefully before you take out any loan – even if it seems small

How do I apply for a short term loan?

Most small loans can be applied for online in a matter of minutes, but there will be some minimum requirements.

You’ll need to be 18 or over and have proof of address in the UK. You may also need proof of income and lenders will also run a credit check before agreeing the loan.  

Compare small loans

With MoneySuperMarket you can compare loans from a wide range of providers, starting from £1,000.

Our Eligibility Checker shows you your chance of being accepted, so you can weigh up the facts and decide which deal to go for. It’s also a soft search so it won’t harm 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 broking service. Instead we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.