How to get a personal loan

Personal loan rates have begun to ease slightly, offering some relief to borrowers, though they remain significantly higher than a few years ago—often nearly double. For those who must borrow, understanding how to secure the cheapest loans, navigate the application process, and avoid pitfalls is critical. This comprehensive guide covers the essentials of personal loans, including current best-buy rates, eligibility considerations, and alternative borrowing options. It also introduces tools like the Loans Eligibility Calculator to help you identify lenders most likely to approve your application, minimizing the risk of rejection.

Understanding Personal Loans

A personal loan, often referred to as an unsecured loan, allows you to borrow a fixed amount from a lender and repay it over a set period through fixed monthly installments. The lender charges interest as the cost of borrowing, meaning you repay the principal plus interest. This structure provides upfront cash, enabling you to spread the cost of significant expenses—like home renovations or a new car—over months or years.

Read More:Affordable Personal Auto Loans

Common Uses for Personal Loans

Personal loans are versatile and can technically be used for any purpose, though lenders typically inquire about the intended use. Common reasons include:

Home Improvements: Funding renovations or repairs, such as a new kitchen or bathroom. See our dedicated Home Improvement Loans guide for more details.
Car Purchases: Financing a new or used vehicle. Our Cheap Personal Car Loans guide offers tailored advice.
Weddings: Covering costs like venues, catering, or attire.
Emergencies: Addressing urgent needs, such as car or home repairs.
Debt Consolidation: Combining multiple debts into a single loan for easier management, though caution is advised—see our Debt Consolidation Loans guide for more information.

Key Considerations Before Borrowing

Borrowing requires careful planning to avoid financial strain. Here are essential principles to follow:

Borrow Only What You Need: Limit borrowing to the minimum required and repay as quickly as possible to reduce interest costs. Use a budget to determine what you can afford, as overborrowing can lead to unmanageable debt.
Shorter Terms Save Money: Longer loan terms reduce monthly payments but significantly increase total interest. For example, borrowing £10,000 at 7% over three years incurs £1,100 in interest, while over 10 years, the interest balloons to £3,900. Use our Personal Loan Calculator to estimate affordable borrowing amounts and repayment terms.
Credit History and Income Matter: Lenders assess your credit history to determine eligibility and interest rates. A strong credit record increases the likelihood of securing the advertised rate, while a weaker history may result in a higher rate. Additionally, your disposable income—calculated by subtracting essential expenses like rent or mortgage payments—dictates how much you can borrow.
The Borrowing Quirk: Sometimes More Costs Less

A counterintuitive aspect of personal loans is that borrowing slightly more can sometimes reduce the overall cost due to lower interest rates at higher loan thresholds. Here’s how it works:
Rate Tiers: Interest rates often decrease at specific borrowing thresholds, such as £3,000, £5,000, and £7,500. For instance, in April 2024:
Borrowing £2,770 at 13.5% costs more than borrowing £3,000 at 9.9%.
Borrowing £4,710 at 9.9% is more expensive than £5,000 at 7.3%.
Borrowing £7,260 at 7.3% costs more than £7,500 at 5.9%.

Strategic Borrowing: If you’re just below a threshold, borrowing up to the next level could save money, especially if the loan allows penalty-free overpayments. You can use the extra funds to make early repayments, reducing the interest further. Use our Loans Calculator to compare scenarios.
Caution with Representative APRs: Advertised APRs are “representative,” meaning only 51% of accepted applicants receive the quoted rate. Others may face higher rates, often discovered only after applying, which impacts your credit file. Our Loans Eligibility Calculator can sometimes provide your actual rate before applying, reducing uncertainty.

Current Best-Buy Personal Loan Rates (as of April 2024)

Loan rates vary by borrowing amount. Below are the best-buy rates across different bands, noting that these are representative APRs, and up to 49% of accepted applicants may receive higher rates. Always check eligibility before applying to avoid credit score damage.

£1,000 – £1,999:

Zopa via John Lewis Finance: 9.9% rep APR (1-7 years)
Santander: 13.5% rep APR
M&S Bank: 14.9% rep APR (1-7 years)

£2,000 – £2,999:

Zopa via John Lewis Finance: 9.9% rep APR (1-7 years)
Santander: 13.5% rep APR
M&S Bank: 14.9% rep APR (1-7 years)

£3,000 – £4,999:

Novuna Personal Finance: 9.9% (£3,000-£3,999) or 9.7% (£4,000-£4,999) rep APR (2-5 years)
Tesco Bank (run by Barclays): 9.8% rep APR (requires Clubcard)
M&S Bank: 9.9% rep APR (1-7 years)

£5,000 – £7,499:

People’s Choice (owned by Hastings): 7% (£5,000-£6,999) or 6.5% (£7,000-£7,499) rep APR
Novuna Personal Finance: 7% rep APR (2-5 years)
Tesco Bank: 7% rep APR (requires Clubcard)

£7,500 – £15,000:

M&S Bank: 5.9% rep APR (1-7 years)
TSB: 5.9% rep APR
Novuna Personal Finance: 5.9% rep APR (2-7 years)

£15,001 – £20,000:

People’s Choice: 5.8% rep APR
M&S Bank: 5.9% rep APR (1-7 years)
TSB: 5.9% rep APR

£20,001 – £25,000:

TSB: 5.9% rep APR
Novuna Personal Finance: 5.9% rep APR (2-7 years)
Santander: 6% rep APR

Over £25,000 (up to £50,000, existing customers only):

First Direct: 5.8% (£25,000-£30,000) or 6.9% (£30,000-£50,000) rep APR (1-8 years)
Nationwide: 6.9% (£25,000-£35,000) or 7.9% (£35,000-£50,000) rep APR
NatWest/RBS/Ulster Bank: 7.7% (£25,000-£35,000) or 8.7% (£35,000-£50,000) rep APR
Bank of Scotland/Halifax/Lloyds: 7.8% (£25,000-£35,000) or 8.8% (£35,000-£50,000) rep APR
Barclays: 7.8% (£25,000-£35,000) or 7.6% (£35,000-£50,000) rep APR
Open Market: Tesco Bank: 7.4% (£25,000-£35,000) rep APR (1-7 years, requires Clubcard)
Note: For loans over £25,000, check with your bank first, as preferential rates are often reserved for existing customers. Borrowing such large amounts is a significant commitment, so ensure affordability.

Alternatives to Personal Loans

Before opting for a personal loan, consider other borrowing options, especially for smaller amounts, as they may be cheaper or more flexible:

0% Spending Cards: These offer interest-free borrowing for up to 25 months, ideal for purchases under £5,000 if you can repay within the 0% period. Ensure the retailer accepts credit cards, as some (e.g., car dealerships) may not. See our 0% Spending Credit Cards guide for details.
Money Transfer Cards: If you can’t pay directly with a credit card, these cards transfer cash to your bank account for a fee (e.g., 3.99% for a 14-month 0% period). This can be cheaper than a loan for amounts under £3,000 if repaid quickly. Learn more in our Money Transfer Credit Cards guide.
Balance Transfer Cards: For existing credit card debt, balance transfer cards allow you to shift debt to a new card with a 0% interest period, often cheaper than loan rates. Set up a direct debit to mimic loan repayments and clear the debt within the 0% period. See our Best Balance Transfers guide.
Overdrafts: Suitable for small, short-term borrowing, some banks offer fee-free overdrafts up to a limit, depending on your credit score. However, overdraft interest rates can reach 40%, making them risky if not managed carefully. See our Cut Overdraft Charges guide.

Borrowing from Friends or Family: This can be a low- or no-cost option, but ensure clear terms to avoid straining relationships.

Debt Consolidation: Loan vs. Balance Transfer

For those with existing credit card debt, choosing between a balance transfer card and a debt consolidation loan depends on your financial situation:

Balance Transfer Cards: These are typically cheaper, offering 0% interest for a set period, allowing more of your payments to reduce the principal. However, you need sufficient creditworthiness and a high enough credit limit. Repayments are flexible but require discipline to clear the debt before the 0% period ends.
Debt Consolidation Loans: These provide fixed monthly repayments, offering simplicity and enforced discipline. For example, £10,000 on a credit card may require £270/month minimum repayments, while a 6.2% loan over five years requires £195/month. However, card repayments decrease as the debt shrinks, unlike fixed loan payments. Loans are harder to secure for larger amounts due to stricter affordability checks.

Use our Credit Club to assess your eligibility and affordability for both options, providing a score from “poor” to “very good” based on your credit and income.

Advantages and Disadvantages of Personal Loans

Advantages

Flexibility: Once approved, you can use the funds for any purpose.
Spreading Costs: Loans allow you to finance large expenses over time, making them manageable.
Fixed Rates: Most loans have fixed interest rates and predictable payments, aiding budgeting.
Unsecured: No collateral (e.g., your home) is required, reducing risk to your assets.
Credit Score Boost: Timely repayments can improve your credit score, enhancing future borrowing prospects.

Disadvantages

Interest Costs: Smaller loans often carry higher interest rates, increasing the cost of borrowing.
Increased Debt: Borrowing adds to your financial obligations, requiring careful budgeting.
Potential Fees: Early repayment or missed payment fees may apply, though loans since February 2011 allow up to £8,000 in annual overpayments without penalty.
Credit Score Risk: Missed payments can harm your credit score, affecting future borrowing.
Affordability Impact: A loan may reduce your disposable income, potentially limiting access to other credit, like a mortgage.

Avoiding Sub-Prime Loans

Sub-prime loans, targeting those with poor credit (e.g., County Court Judgments), often come with exorbitant interest rates, leading to costly debt spirals. Instead, use our Loans Eligibility Calculator to check for standard loans, which may be accessible even with imperfect credit. If only sub-prime options are available, reconsider borrowing and explore our Debt Help guide or Boost Your Credit Score guide for alternatives.

Applying for a Loan

Check Eligibility First: Use our Loans Eligibility Calculator to identify lenders likely to approve you without affecting your credit score. Some providers offer pre-application rate quotes, reducing uncertainty.
Understand Representative APRs: Only 51% of accepted applicants receive the advertised rate, so you may face a higher APR, especially with weaker credit.
Early Repayment: Most loans allow penalty-free early settlement (with one to two months’ interest) or partial overpayments up to £8,000 annually. Confirm terms with your lender.
Complaints: If issues arise (e.g., incorrect charges or poor service), contact your lender first. If unresolved, use the free Resolver tool to escalate to the Financial Ombudsman Service.

FAQs

Can I get a loan with bad credit?

It’s possible, but you’re likely to face higher interest rates. Use our Loans Eligibility Calculator to find standard loans you may qualify for, avoiding sub-prime options.

Should I consider a credit union?

Credit unions often offer competitive rates and are community-focused, but loan amounts may be smaller, and membership is required. Research local credit unions for eligibility.

Is an employer loan a good idea?

Employer loans can have low or no interest but may involve payroll deductions or job-related risks. Review terms carefully and compare with other options.

Is payment protection insurance worth it?

Often, it’s expensive and unnecessary if you have other coverage (e.g., sick pay or savings). Assess your needs and avoid automatically adding it.

Should I get a consolidation loan?

It can simplify debt management but may not be the cheapest option compared to balance transfers. Use our Credit Club to compare costs and eligibility.

Secured vs. Unsecured Loans: Secured loans require collateral (e.g., your home), risking asset loss if you default. Unsecured loans, like personal loans, don’t require collateral but may have higher rates.
Government Help: Some government schemes offer low-cost loans for specific groups (e.g., low-income households). Check eligibility via official government websites.
Borrowing More Than Offered: If you need more, consider combining smaller loans or remortgaging, but this extends terms and increases interest or risk.
Impact of UK Interest Rate Changes: Rising rates can increase loan costs, especially for new loans. Fixed-rate loans lock in your rate, offering protection.
Loan Disbursement Speed: Funds are typically available within days of approval, depending on the lender’s process.

Additional Resources

MSE Credit Club: Sign up for free tools to assess your credit score, affordability, and loan eligibility.
Personal Loan Calculator: Calculate affordable borrowing amounts and repayment terms.
Weekly MoneySaving Email: Subscribe for the latest deals and financial tips at no cost.

By carefully assessing your needs, comparing options, and using eligibility tools, you can secure the cheapest loan possible while minimizing financial risks.

Conclusion

Navigating the world of personal loans requires careful consideration to ensure you secure the most cost-effective option for your financial needs. By understanding the current landscape of loan rates, which have begun to ease but remain significantly higher than in recent years, you can make informed decisions to minimize costs. This guide has outlined the best-buy personal loan rates, from 5.8% APR for larger loans to 9.9% for smaller amounts, and highlighted the importance of borrowing only what you need and repaying it as quickly as possible to avoid escalating interest costs. Tools like the Loans Eligibility Calculator and MSE Credit Club empower you to assess your approval odds and credit profile without harming your score, while strategies like borrowing slightly more to access lower rates can save money if managed wisely.

Exploring alternatives, such as 0% spending or balance transfer cards, money transfer cards, overdrafts, or borrowing from friends and family, can often provide cheaper solutions, especially for smaller amounts or short-term needs. For those consolidating debt, balance transfers typically outshine loans due to their interest-free periods, provided you maintain disciplined repayments. Always be mindful of representative APRs, as up to 49% of applicants may face higher rates, and check loan terms for overpayment flexibility to reduce costs further.