Martin Lewis: A cautionary tale over using a personal loan

Last summer, Catherine thought she was doing right by using a credit reference agency’s eligibility tool, to find a cheap loan for £1,000. “It came up saying, ‘you can get accepted’ – I thought, ‘brilliant, I can fix my car’. [Now, having such a costly loan on my credit file has] affected my remortgage. The 
loan was 54.9 per cent over 5 yrs... to pay it off now would be £2,800.”

These numbers don’t add up, so one way or another she’s having terrible loan issues at an extortionate cost. So here’s my six key need-to-knows.

1 Establish if you really need to borrow?

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, you can’t borrow your way out of it – instead get free debt counselling from charities citizensadvice.org.uk, nationaldebtline.org, or stepchange.org or if you need emotional support, try capuk.org.

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 carefully use a 0 per cent credit card). If you do need to borrow, do always minimise the amount, budget to ensure repayments are affordable, and repay as quickly as possible.

2 Before applying use an eligibility checker.

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 on the right loan before applying.

Yet the fact you can get a loan doesn’t mean you should. As Catherine found, some eligibility checkers include both personal loans and more unsavoury high interest loans (for the sake of transparency mine at www.moneysavingexpert.com/LoansCalc excludes high interest loans) otherwise you can end up in the sub-prime market without realising it.

Loan acceptance is about far more than just credit history – income plays a key role. 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. 

If you can’t get cheap lending, it often means most lenders don’t think you can afford it. So rather than jumping on to a higher interest loan – see it as a warning sign against borrowing.

3 Loan rates are at all-time lows

If you’ve a decent credit score, loan rates are at near all-time lows. Here are the quick best buys (though better to go through an eligibility calc to see what you’ll be accepted for).

£1,000 - £1,999: admiral.com is 13.2 per cent rep APR
£2,000 - £2,999: zopa.com is 12.9 per cent rep APR and admiral.com is 13.2 per cent rep APR
£3,000 - £4,999: admiral.com is 6.4 per cent rep APR
£5,000 - £7,499: zopa.com and ratesetter.com are 3.3 per cent rep APR and admiral.com is 3.4 per cent rep APR
£7,500 - £15,000 bank.marksandspencer.com is 2.9 per cent rep APR

4 Not everyone will get the advertised rate.

As you’ll see from the best-buys, all loans are ‘representative APRs’. The ‘representative’ bit sadly means only 51 per cent of people who apply will get the advertised rate. The rest can be charged more, and there’s no limit how much more.

So a loan advertised at 2.9 per cent could end up being 20 per cent. 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. Again, I suspect this happened to Catherine.

5 The longer you borrow, the more you repay

As with many things, with loans, length matters. The longer you take to repay, the more interest accrues. Eg, a 15 per cent one-year loan costs far less interest than a 4 per cent 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.

6 If borrowing under £3,000, you might be able to get a 0 per cent loan

If what you need to borrow for can be paid on a 0 per cent credit card, then get one of those, and as long as you clear it before the 0 per cent 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 0 per cent 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 per cent. These are likely to be the cheapest route for smaller loans.

For example, MBNA is currently giving up to 28 months 0 per cent for a 2.99 per cent fee – so if you want to borrow £2,000 that’s a £60 fee loan – just make sure you clear the card before the 0 per cent ends, or you pay 23.93 per cent after. If you are doing this it is worth doing a bit of reading as money transfers can be complex – see my guide at www.moneysavingexpert.com/moneytransfers.