When you borrow a loan, you agree to pay back the full amount, plus interest, in monthly instalments. Depending on your financial circumstances and credit profile, it may be possible to find a loan with a low Annual Percentage Rate (APR).
What are ‘cheap’ loans?
‘Cheap, ‘low cost’ or ‘low interest’ loans usually refer to loans with a lower APR than a standard loan product.
While some loans do come with less interest and a lower APR than others, it’s worth remembering that no loan should ever be considered ‘cheap.’ All loans come at a cost, and careful consideration is required before you commit to applying for one.
What is the APR?
The APR is the overall annual cost of the loan, including interest rates and any fees (where applicable), expressed as a percentage.
The APR you will be eligible for is determined by various factors, including your credit history, the amount borrowed, and the term of the loan.
Who can apply for a low-cost loan?
You can apply for a loan if you:
- Are over the age of 18;
- Are a UK resident;
- Are in regular employment with your wages paid into a UK bank account; and
- Have a UK registered address and bank account with a debit card.
A good credit history is also desirable to lenders.
Can I apply for a low-cost loan if I have poor credit history?
A low credit rating and poor credit history may make it difficult to be approved for a loan.
Some lenders specialise in loans for bad credit, although interest and APR rates will be higher.
Can I apply for a low-cost loan if I have little-to-no credit history?
Sometimes, your credit score may be low simply because you have little or no credit history to report; this is known as a ‘thin’ credit file. This may be due to the fact that you have never applied for or used credit before.
Having a thin credit file is common in younger people who may not have paid bills before, or have not registered to vote.
Having a thin credit file could make being approved for a loan more difficult. Unfortunately, like those with poor credit history, you will be subject to higher interest rates.
If you can wait, it might be an idea to consider boosting your credit score before applying for a loan.
How to improve your credit rating
Improving your credit rating may not only increase your chance of being approved for financial products, but it could also have an effect on the interest rate and APR you are offered by the lender. In addition to this, it may give you more options in terms of choice of lenders.
The good news is that there are a number of ways to boost your credit rating, regardless of your credit history.
- Check your credit report for mistakes. While it might seem trivial, even something as minor as a mistyped postcode could negatively impact your rating.
- Sign up to the electoral register. This allows potential lenders to quickly confirm your identity.
- Pay your bills on time every month.
- When you apply for credit directly with a lender, they will run a full credit check on your financial history; this is sometimes called a ‘hard search’. This leaves a footprint on your credit file. Too many hard searches over a short space of time could affect your credit rating.
- Avoid joint accounts where possible. Believe it or not, somebody else’s poor credit history may well lower your own.
- Try to keep paid-off accounts open as long as you can, even if you no longer use them. This may help to extend the length of your credit history.
You can check your credit rating and view your report on Experian, TransUnion or Equifax.
Just so you know: Experian remains a free service, while Equifax and TransUnion both charge monthly fees after an initial 30-day free trial (£10.95 for Equifax, and £14.99 for TransUnion).
How can I reduce the cost of a loan?
A good credit rating and history suggests to the lender that you are more likely to be able to manage your monthly repayments. You may be offered a lower APR as a result.
Below is an example of how a lower APR could help to reduce the expense of the loan.
| Loan Amount | Loan Term | Representative APR | Total Repayable | Monthly Repayments | Total Cost of Credit |
|---|---|---|---|---|---|
| £1,500 | 18 months | 70.5% | £2,228.67 | £123.81 | £728.67 |
| £1,500 | 18 months | 49.9% | £2,035.34 | £113.07 | £535.34 |
| £1,500 | 18 months | 10.2% | £1,618.46 | £89.91 | £118.46 |
Table is for illustrative purposes only.
Making little alterations to your application, such as taking your loan out over a shorter period of time or borrowing less money, could help to lower the overall cost of the loan. However, you must be sure that both the loan term and the loan amount are right for you and your circumstances and, most importantly, you can afford the monthly repayments before deciding to make an application.
You can find a useful loan calculator here.
We have included a table below to show much money you could save by adjusting the term of your loan.
Changing the loan term -
| Loan Amount | Loan Term | Representative APR | Total Repayable | Monthly Repayments | Total Cost of Credit |
|---|---|---|---|---|---|
| £1,500 | 24 months | 49.9% | £2,225.57 | £92.73 | £725.57 |
| £1,500 | 18 months | 49.9% | £2,035.34 | £113.07 | £535.34 |
| £1,500 | 12 months | 49.9% | £1,855.14 | £154.59 | £355.14 |
Table is for illustrative purposes only.
How do I pay off my loan?
You will pay back your loan, including interest, every month.
It is important that you make your repayments on time; falling behind on or missing repayments may result in additional charges, further interest fees, and a decline in your credit rating.
I’m struggling to make my repayments – what can I do?
If you find yourself in a position where you are no longer able to afford your repayments, you must contact your lender as soon as possible. There may be ways they can help you. Don’t suffer in silence and fall even further behind.
We understand that this is a very stressful situation. Please don’t ever feel as though you’re alone. Unfortunately, financial hardship can happen to anyone, but help is always available.
For free, impartial financial advice, head to Citizens Advice Bureau, MoneyHelper, National Debt Line or StepChange.
Alternatives to loans
Before you take out a loan, it’s really, really important to think very carefully about the required monthly repayments. Do not apply for a loan – or any other financial product – if you are in any doubt about being able to manage the repayments. This may well lead to increased financial stress and damage your credit rating.
Ask yourself if you really need the money right now?
Is what you intend to spend the money on absolutely urgent, or can it wait a few months until you have saved up?
Saving up undoubtedly takes longer, but the money will be your own, you won’t be required to make any repayments or pay interest fees.
You can learn more about different types of borrowing at Citizens Advice.