What is a cheap loan?
A loan is money you borrow, usually from a bank or direct lender, that you pay back over an agreed timeframe with added interest.
A cheap loan is considered to have have low-interest rates with no additional fees.
How do cheap interest loans work?
In addition to the amount you plan to borrow, four main factors determine the cost of a loan.
- The rate of interest
- The length of the loan term
- Any fees or additional charges, such as arrangement fees or early repayment charges
- Your credit score
Here's how cheap loans work in more detail:
A loan’s interest rate usually has the biggest impact on the overall cost of a loan, because this dictates how much extra you will have to pay back. Interest rates can vary significantly between lenders and loan types.
The Annual Percentage Rate (APR) indicates the cost of the loan inclusive of interest and fees. So the lower the APR, typically, the cheaper your loan.
The interest rate you’re offered by a lender can depend on your credit score. A higher credit score indicates you’re a reliable borrower and could result in you being able to access a lower interest rate, and thus a cheaper loan.
Your credit score is based on how you’ve managed any loans, credit cards, overdrafts, mortgages or any other credit products, such as a mobile phone contract in the past.
Lenders will use your credit score to work out how much of a risk you are to them - and how likely you are to pay back what you borrow. This is known as ‘creditworthiness’ and it will often be used by loan companies to help determine how much they will lend to you and the rate of interest they’ll charge you.
If you have a bad credit score, the loan will cost you more. The best cheap loans typically go to customers with the best credit scores, therefore borrowing wisely and repaying your debts on time ultimately helps you in the long run.
Some loans come with additional fees and charges either for simply arranging the loan or as penalties.
It's common to pay a penalty if you miss or make late payments, but you could also get charged if you want to pay off your loan early, so check the terms and conditions.
A final factor is the loan term. The longer the duration of your cheap interest rate loan, the lower each monthly repayment will be, but bear in mind you’ll end up paying more in interest over the total period of the loan.
Where can I get a cheap loan?
The best cheap loan deals are usually found online through:
- Traditional and digital banks
- Direct lenders
- Loan brokers
- Comparison websites
If you're looking for a cheap loan online, you'll find a wide range of lenders and loan brokers with a simple internet search. Alternatively, use a comparison website like ours, to compare options.
A comparison website is an ideal place to start because you can use eligibility tools to narrow down your search. We only show hand picked, vetted lenders, so be confident in knowing you will be matched with a trustworthy loan company if you compare options with Choose Wisely.
How do I get a cheap loan?
Once you've found a cheap APR loan, you can apply for your loan in several ways. For example:
- Online with a direct lender or broker
- Via a banking app
- Over the phone
- In person
You'll often find cheaper loan rates if you apply for your loan online, but read the terms and conditions carefully and make sure you understand the total cost of the loan before you go ahead with the application.
What you'll need to do
If you apply with your current bank, they'll already have all your financial details on file. If you apply with a direct lender or loan broker you will be required to prove your identity and affordability.
Documents you may need to provide include:
- Proof of identity, such as your passport or UK driving licence
- Proof of residence, such as a utility bill less than 3 months old
- Proof of your right to live and work in the UK
- Proof of income, such as payslips, bank statements or benefits evidence
- Employer details, evidence of self-employment or directorship
You will also need a bank account with the facility to set up a direct debit or standing order and fit any other eligibility criteria set by the lender.
What type of loan is the cheapest?
There are many different types of loans to fit all financial circumstances but bear in mind the best loan for your needs, may not be the cheapest.
Some loans, like secured loans, may have lower interest rates but they can have additional fees attached, are repaid over a longer time frame and you may need to use your home as collateral in case you can't repay, whereas a personal loan may have a higher interest rate but is repaid quickly, so it's cheaper in total.
If you have a good credit score, you'll benefit from the cheapest loan rates on the market, however, if you have a bad credit score, you'll find it harder to get a cheap interest loan and may find the loan rate you're given is much higher than the advertised APR.
What are the pros and cons of cheap loans?
A cheap loan is a useful way to finance a large purchase, solve a short term cash flow problem or pay for an unforeseen expense like car repair or dental work.
However, there are also downsides to getting a cheap loan, so take time to understand the total cost of borrowing and weigh up the benefits of borrowing before you apply.
- Easy, straightforward online application
- Funds are available quickly if you're approved
- Manageable, fixed, regular repayments
- Can be cheaper than a credit card or overdraft
- There could be expensive penalties for late or missed payments
- Multiple cheap loan applications in a short space of time may damage your credit score
- You'll damage your credit record if you're unable to repay the loan
- The cheapest loans are only available to people with a good credit score
Are there any alternatives to cheap loans?
There are several other options to consider if you need a cheap interest loan.
Buy Now Pay Later
This interest-free, point of purchase credit option is available from most online retailers, holiday companies and auto centres. It's ideal for spreading the cost of online purchases but less flexible than a cheap personal loan. However, the Interest rates are high if you can't repay within the agreed 0% time period. It’s also very easy for debts to spiral if you opt to use this payment format regularly.
0% Credit Cards
This is a purchase card allowing you to borrow money to pay for goods and services interest-free for a specified time. If you repay what you owe within the 0% introductory period you are essentially borrowing for free. However once the interest free period ends, this type of borrowing can be very expensive.
This type of loan is also known as a homeowner loan and is secured against your home or a property you own. The equity you have in your home is used as collateral, which means that if you default on the loan, your home could be sold to cover the debt.
Secured loans are typically used for borrowing more than £10,000, so it's the cheapest type of loan if you need to borrow a large sum.
How can I improve my credit score?
If you haven't done it already, sign up for an online credit reference agency like Experian, Equifax or Transunion to access your credit report.
The first thing to do is check your report to find out your credit score and make sure the report is accurate. Secondly, there's some simple steps you can take to improve your score.
Here's how to boost your credit score and get the best cheap loans:
- If you have no credit history, start building one
- Make sure you're on the electoral roll
- Pay your bills on time
- Don't max out on your credit limit - keep the amount you owe under 25% of the balance
- Avoid opening a new credit account within a six month period
- Keep old accounts open, even if you're not using them
Cheap loan FAQs
It's possible to apply for a cheap loan for bad credit, but your credit history will be checked, and your credit score will be taken into account.
If you have bad credit you may not automatically be rejected for a cheap loan, but your monthly payments and the overall cost of the loan will likely be higher than the representative example and unfortunately, the loan is likely to be more expensive.
Some online loan companies specialise in loans for people with bad credit or low credit scores but beware of short-term, high-cost lenders because their loans are often expensive.
Ideally, if you need to borrow money but have bad credit, check your credit score and work on improving it, so you can get better APR rates in the future.
It depends on the terms and conditions of the loan. Some cheap APR loans may advertise a low interest rate, but charge sky-high penalties for things like early repayment and late or missed payments.
If you plan to pay off your loan early or there's a possibility you'll be in a position to settle your debt before the term ends, look for a cheap interest loan with flexible repayment terms.
The quicker you can repay the loan, the less interest you'll pay on it, so if you can't get a cheap loan with flexible repayment terms take time to check the terms and conditions carefully to make sure you won't face expensive fees if you do settle your loan early.
If you manage your loan well and repay in full and on time, taking out a cheap loan will have a positive impact on your credit score, because it will demonstrate you can be relied upon to pay back what you owe.
If you’re late paying or miss repayments on a cheap loan, your credit score will be negatively impacted, and this will be visible to lenders when you apply for credit in the future.