Loans come in many different forms so it’s important to pick the right one to truly make it a cheap loan.
Making a bad choice can leave you paying hundreds, or even thousands, of pounds too much.
If borrowing cash from a mainstream bank or building society you typically pay a fixed amount of interest and you normally have between three and ten years to pay it back.
Such loans are usually referred to as personal loans and you can usually only borrow up to £25,000.
Cheap loans can also be sold for specific groups, such as car buyers, homeowners and graduates.
If borrowing more, the debt is usually secured against your home, which means you risk losing your property if you fall behind on payments. You can often choose to repay this debt over up to 25 years.
Secured loans, as they are commonly known, are therefore only available to homeowners, though they are not exclusively available to those borrowing more than £25,000.
Personal loans usually come with a fixed interest rate but the rate on a secured loan can vary at the lender’s discretion.
Regardless of the type of loan, typically, the longer you choose to repay it, the lower the interest rate. However, that doesn’t make it a cheap loan.
Say you’re borrowing £5,000 at 10% over three years, you’ll pay approximately £800 in interest. Borrow the same amount at 5% over ten years and you’ll pay around £1,360 in interest.
Also, the more you borrow, the lower the rate typically is. Again, don’t think it is therefore a cheap loan as it’s crucial to know the total interest cost over the loan period to weigh up whether it’s worth it.
To get a truly cheap loan you usually need a good credit score. This means keeping up-to-date with all debt repayments, having as little outstanding borrowing as possible and ensuring you are on the electoral register.
Some lenders offer loans to those with patchy or poor credit histories but you usually pay higher interest rates for the privilege.
However, during tougher economic times, banks and building societies tend to limit the number of loans available to those with anything but an exemplary credit history.
If you cannot even get a bad credit loan, another option is a payday loan. These loans are not cheap loans, by any means, but can be a last resort for those truly struggling.
However, if you’re in the financial mire it might be worth speaking to a debt charity for help.
The idea of a payday loan is you’re given a short-term advance which must be repaid by your next payday or the one after.
You’ll often see rates quoted at well over 1,000% APR, though you often pay the debt plus a fee back in one lump sum, rather than in stages, so comparing the APR with that of a personal loan or secured loan is not necessarily fair.
Yet the amount you pay back in fees can often be a large percentage of the initial loan, which is why payday loans can be expensive.
When looking at a cheap loan rate, remember that lenders only have to offer the typical rate quoted to two thirds of those accepted. You may find that after applying you are offered the cash, but at a higher rate.
Another aspect to watch out for is lenders trying to sell loan insurance, often called payment protection insurance. While this may offer peace of mind, as your repayments are sometimes taken care of for up to 12 months if you’re out of work, this product has been missold over recent years.
Sometimes, borrowers have cover in place already via their work or another insurance policy so always check first before committing, and don’t be harassed into saying “yes” by a pushy salesman.