Martin Lewis: How to get the cheapest loan
Last week during Martin’s phone-in, he received a call from a concerned viewer whose initially ‘cheap’ loan has left her in a world of debt. Using her story as a cautionary tale, Martin tells us what to look out for when it comes to cheap loans and how to really acquire one.
If you need to borrow, loan rates are near the all-time cheapest, some as low as 2.9% – but how do you do it without getting burnt? Sadly, before the bank holiday, Catherine who called our Money Saving Expert Martin Lewis’ phone-in had found out just how costly getting it wrong could be. She told us within 8 months her £1,000 loan would cost £2,800 and was stopping her getting a remortgage. So Martin’s here with his masterclass of how to do it the right way.
What went wrong for Catherine? I’ve always warned that debt is like fire. Used well, it’s a useful tool. Used badly, it burns. And while thankfully loan PPI mis-selling is now long gone, it's far from the personal loan market's only blight. There’s a whole host of hurdles to get through to make sure you get a loan right.
The most important start point though for anyone isn’t how to borrow it’s whether you should. If you’re already in debt and struggling, don’t think you can borrow your way out of it. If that’s the case you’re best to go and seek debt counselling help from Citizens Advice, National Debtline or StepChange and if you need emotional support too, try CAP.
Yet sometimes borrowing is a valid decision – it may be you need car insurance and to pay it upfront is better than monthly (for that I’d use a 0% credit card). Or there’s a big one off purchase for your home such as a new sofa, or even kitchen – and waiting for it may be a life detriment.
So if you do pass the ‘do I need it?’ test the next key questions are…
- Have you minimised the amount you’re borrowing?- Have you budgeted to ensure you can afford the repayments?- Will you repay as quickly as possible?
To get a loan you suggest using an eligibility calculator, Catherine did that but still got stuck, why? Using a loans eligibility calculator is the right starting point. You tell it your information and it shows you which loan you are most likely to be accepted for. It does that without impacting your credit worthiness – letting you home in before you apply. Some lenders have their own ones, and there are comparison sites which do this for a whole range of loans in one go.
Yet the fact you can get a loan doesn’t mean you should. Some eligibility checkers include both personal loans and more unsavoury high interest loans (for transparency sake Martin’s Loans Eligibility Calculator, excludes high interest loans) otherwise you can end up in the sub-prime market without realising it.
What’s really important to understand with loan acceptance is this is about far more than just credit history. A key part of loan acceptance is your income, can you afford to repay it? So if you’ve a good credit score, while a lender may accept you if you want to borrow £2,000, if your income isn’t enough it may reject you for £5,000.
Therefore, if you can’t get cheap lending, it’s worth noting that often it means most lenders don’t think you can afford it. So rather than jumping on to a higher interest loan – that’s a good warning sign.
If people do have good credit scores, how cheap are loans right now? They’re near all-time lows. Here are the quick best buys (though you’re better to go through an eligibility calculator to see what you’ll be accepted for).
£1,000 - £1,999: Admiral is 13.2% rep APR£2,000 - £2,999: Zopa is 12.9% rep APR and Admiral is 13.2% rep APR£3,000 - £4,999: Admiral is 6.4% rep APR£5,000 - £7,499: Zopa and Ratesetter is 3.3% rep APR and Admiral is 3.4% rep APR£7,500 - £15,000 M&S Bank is 2.9% rep APR
Will people actually get those rates? No. As you’ll see all loans are ‘representative APRs’, and that little word is important – it sadly means only 51% of people who apply will get the advertised rate. The rest can be charged more, and there's no limit to how much more.
So a '2.9% loan' could cost you 20%. You're almost always only told this after application, so after you’ve been accepted ALWAYS CHECK THE RATE YOU’RE GIVEN. Even if you’re using an eligibility checker, as the rate you’re given is just the rep APR. I suspect this may have been what happened to Catherine – why she got such a high rate.
Are loans the cheapest way to borrow? Not always. For smaller amounts a 0% credit card will be cheaper. If what you’re borrowing for can be paid on a 0% credit card, then get one, and as long as you clear it before the 0% ends and don’t miss repayments there’s no cost. Yet the key is will your credit limit be big enough – getting over £3,000 is tough for many.
Even if you can’t pay on the card, there’s a way to get a special 0% credit card loan. You do this via a few specialist cards that offer ‘money transfers’. These cards let you transfer cash from the credit card to your bank account for a small nominal fee, so then you owe the card at 0%. These are likely to be the cheapest route for smaller loans.
For example MBNA is giving up to 28 months 0% for a 2.99% fee – so if you want to borrow £2,000 that’s a £60 fee loans - just make sure you clear the card before the 0% ends, or you pay 23.93% after. If you are doing this it is worth doing a little bit of reading though as money transfers can be complex.
How long is it best to repay the loan over? As in many things, with loans, length matters. The longer you take to repay, the more interest accrues. Eg, a 15% one-year loan costs far less interest than a 4% loan over 5 years. So only borrow for the length that you absolutely need to repay in. If you can reduce the term even by a year that’ll make a big difference to the interest you pay.