10 top tips for personal loans

In addition to the most accurate top loan comparison in the UK, we offer ten tips on choosing and using loans.

I last did a thorough test of the personal loans market three years ago this week. There are far fewer cheap loans around today than there were at that time. No wonder, since most banks are trying to make up for their disastrous strategies by raising prices at a time when the Bank of England's base rate is at a record low.

If you have an excellent credit record, you can currently expect to pay less than £200 per month for a five-year, £10,000 loan. We're talking between 6.6% and 7.4% APR (APR stands for annual percentage rate, which means the interest rate you pay).

Yet the interest rate isn't everything you need to consider when looking at loans. I'll show you the cheapest loans currently on the market at the bottom of this article but, firstly, here are ten tips for choosing and using loans.

1. You'll pay for it for the rest of your life

The more you borrow, and the more interest you pay, the less wealthy you'll be for the rest of your life. Bear that in mind when you're deciding how much to borrow. You can read more in How to spend less and have more.

2. The longer your loan is, the more interest you'll pay

If you read and understood point one, you'll know that this means you should pay off loans faster, if you can.

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3. Make overpayments free of charge

It is now the law that you can make loan overpayments without charge or penalty. This applies to loans not secured on land, and should apply to the vast majority of personal loans taken out on or after 1 February 2011.

I have not seen if this works in practice yet; the industry is good at finding loopholes and is not afraid to use them. However, in theory you should be able to do so, so long as you follow the correct procedure. You can read a summary of these rules here and more details in chapter 14 of the government guidance.

4. Fix your loan

There's little point getting a variable-rate personal loan. Not only does that mean more risk, but the rates have been more expensive for at least the past ten years.

5. Avoid dodgy referrals

Some lenders bury ticked tick boxes in the application saying that if they reject you then you agree to be referred to another lender. These new lenders are likely to be expensive and offering variable-rate loans.

Read every line of the small print, including the privacy policy, because I've known lenders to hide such boxes there, too.

6. Don't assume your house is safe

The name “unsecured loan” seems to be on the way out, with many publications now calling them “personal loans” – including lovemoney.com. Previously, “personal loan” was a collective name for both secured and unsecured loans.

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7. Avoid payment holidays

Some loans have a compulsory waiting period of two or three months before your repayments start. If this is the case, expect to pay more than the estimates you see in comparison tables and even sometimes on the providers' own websites!

During the waiting period, you'll still accrue interest. If you have to wait three months to pay your first repayment on a five-year, £10,000 loan, you could end up paying an extra £120 or so.

Sometimes lenders have the temerity to sell these periods to you as a benefit. They call it a payment “holiday” without making it clear that it comes at that great cost. If the holiday is an option and not compulsory, decline it.

In my loans table at the bottom of this article, I have calculated the figures myself to include the costs of compulsory waiting periods, where applicable. This makes my table, I believe, the most accurate table of the top personal loans in the UK right now.

8. Use your bank; don't let them use you

Don't just walk into your bank for a loan, because loyalty is normally rewarded with sky-high interest rates and expensive add-on insurances.

That said, many banks are currently offering great rates to existing customers if you apply online. You can see such banks and their loans in lovemoney.com's comparison tables. Furthermore, if you're struggling to get a loan but you've got a good record with your own bank, you're more likely to get one from them.

9. Consolidate, don't exacerbate

From all the surveys I've read over the years, it seems most people who take out consolidation loans go on to rack up even more debt. If you consolidate your debt, it still exists. It doesn't mean you should use your newly cleared credit cards to spend even more.

Make sure you have a plan to live within your means and clear your debt. Otherwise you have just taken out an exacerbation loan, not a consolidation loan.

10. Ignore the gimmicks

Gimmicks such as cashback, rewards and buy now, pay later deals are usually just a distraction from the real cost of the loan. You're usually better off ignoring them.

Top five personal loans

I believe these are the cheapest loans currently available on the whole market that don't tie you in to other bank products:

As explained above, I have improved the accuracy of this table based on compulsory waiting periods. Hence, Sainsbury's at 6.9% costs as much as Santander or the Post Office at 7.4%, because you start repaying a couple of months later.

The APRs in the table above are “representative”, which means those are the best rates you can get from each lender. The lender must offer those rates to 51% of successful applicants. However, close to half of successful applicants will usually be offered a worse interest rate than those shown above.

More: Compare personal loans through lovemoney.com | How to get poor quick | 3p per £1 goes to fraudsters