What is a small loan
A small loan is personal loan people normally take out because they need a small injection of money, for example to finish a project or to make a 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 like your home or car to be accepted for the loan.
Unfortunately the cheapest loan rates are generally reserved for people borrowing larger sums over a longer period. Smaller loans – or those taken out for a shorter term – tend to have much more expensive interest rates.
How do small loans work?
Small loans work in the same way as larger loans: you find a lender and make a loan application. They look at factors including your credit score, and if you meet their lending criteria, they 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 – tends to be higher for smaller loans.
So even though you’re borrowing less money over all, you’re paying back a higher proportion of what you are borrowing when you take out a small loan
The APR you will be offered is determined by your credit score. Everyone who has ever taken out credit has a credit score – it’s a numerical record of how reliable you are when you borrow money, which lenders use to assess how likely you are to be able to make your payments in full and on time. If you have a higher score, you’re more likely to be offered better terms.
How quickly you get the money depends on the provider: some can send you the money almost immediately once the terms are agreed, while others might take three to five working days or even weeks.
What can you use small loans for?
Most lenders don’t specify what their loans should be used for, so you can take the money out for more or less any purpose.
Most people take out small loans to pay for emergency costs in the short-term: an unexpected repair or vet bill, for instance. Others use small loans to top up a car or holiday purchase.
Do small loans affect your credit score?
Any kind of borrowing, whether on a mortgage, credit card or loan, is noted on your credit file. Banks and other lenders can see when you take out a small loan, and will be able to tell if you miss a repayment.
While increasing your borrowing may make it less likely that you will be accepted for further credit during the term of your small loan, the long-term on your credit score will depend on how you manage it.
If you make your payments on time and in full your credit score should increase, but if you miss one or more payment dates your score will certainly fall.
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 very pricy if you don’t prearrange 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
Compare small loans
MoneySuperMarket compares 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.