Need to spread an expense over time? If you’re looking to borrow a few thousand pounds or less, a small loan may be right for you. This guide explains how small loans work and what to consider before applying.
Need to spread an expense over time? If you’re looking to borrow a few thousand pounds or less, a small loan may be right for you. This guide explains how small loans work and what to consider before applying.
A small loan lets you borrow a small amount of money – typically between £500 and £3,000. Small loans are usually personal loans (also called unsecured loans). Personal loans aren’t tied to an asset such as your home or car, so there’s no risk of losing your home or car if you can’t keep up with the repayments. This makes them a safer option for you, although they’re not without risk.
A small personal loan isn’t the same as a payday loan. Payday loans can be very expensive and risky and should generally be avoided.
To get a small loan you need to:
Just remember, we're a credit broker, not a lender†. That means we don't provide credit, but we can help you find offers from a range of companies.
When you take out a small loan, you’ll sign a credit agreement with your lender. This sets out the loan amount, your repayments and other terms. You’ll usually make set payments each month to repay the loan plus interest. Interest is the cost of borrowing – it’s calculated as a percentage of the amount you borrow.
You can usually apply for a loan online or on the high street. The lender will usually ask for your full name, address, date of birth, national insurance number, employment status, proof of income and ID. They may ask for additional information as well.
Before you apply for a small loan, remember to compare offers and check your chances of approval with Experian. Searching is free and never affects your credit score.
You can use a small loan for pretty much anything. Check the terms of your credit agreement – it’ll usually have a few exceptions such as illegal purchases and gambling.
Small loans are often used for unexpected expenses such as car repairs or fixing your boiler. It’s better to have an emergency fund for these costs, but sometimes that isn’t possible.
Small loans typically are for £500 to £3,000. Each lender will have their own criteria when deciding if and how much they will lend you. The amount of interest you’ll be charged for a small loan is likely to vary from lender to lender so it’s worth shopping around to see who’ll offer you the best deal.
It depends. Many things affect the cost of small loans, from the economy to your credit score. For example, inflation usually pushes interest rates up, while a higher credit score may help you get a cheaper deal. It’s always worth comparing loans to find the best offer.
To compare the costs of small loans, look at the Annual Percentage Rate (APR). This gives you an idea of the cost of the loan each year, including interest and other fees. The APR is expressed as a percentage of the amount you borrow.
For example, say you want to take out a small loan of £500. You have two offers – one at 15% APR and the other at 30% APR. The first would cost you £75 a year in interest and fees while the second would cost you £150 a year.
Small loans often have higher APRs than large loans.
It’s often easier to get a small loan than a big loan. This is because the lender stands to lose less money. But it’s work for them to set it up, so they often charge a higher APR to ensure a small loan is worth their time.
It’s possible to get turned down for a small loan, especially if you have a poor credit score.
Here are some tips to improve your chances of getting a small loan.
Only apply for what you can afford
When you apply for a small loan, the lender will check your monthly income and expenses to see if you can afford the repayments. Do your own calculations and make sure your budget can cover the repayments.
Improve your credit score
Lenders are more likely to offer you a low-interest loan if you have a higher credit score. There are several ways you may be able to improve your score, including registering to vote and building your credit history.
Consider a guarantor loan
A guarantor loan can be easier to get. You’ll need to find someone who agrees to repay your loan if you can’t, such as a parent or partner. Make sure they understand the risks of being a guarantor.
Look into bad credit loans
Bad credit loans are designed for people with a low credit score. They typically have higher interest rates and greater restrictions. This reduces risk for the lender, meaning they may be more likely to approve you.
Check your eligibility rating
Your eligibility rating indicates your chances of approval for a specific offer. When you search small loans with Experian, we’ll calculate your eligibility based on your unique data.
Just remember, we're a credit broker, not a lender†. That means we don't provide credit, but we can help you find offers from a range of companies.
Here are a few important things to be aware of before deciding to apply for a small loan.
Impact on your score
Your score dips every time you apply for credit. It should recover over time if you take care of it. Being refused credit also has a negative impact on your score.
Missed payments
It’s important to make your loan payments on time and in full. Missed payments will lower your score and can result in fines and even legal action.
Early repayment fees
Small loan lenders may charge you up to 2 months additional interest if you decide to pay off your loan earlier than planned.
If a small loan isn’t right for you, take a look at other types of loans and credit cards.
Cards often have higher APRs but are more flexible than loans. You can change your payment amount each month as long as you meet the minimum. And you can reuse your credit limit, whereas you can’t re-borrow money on a loan.
It’s also worth considering alternatives to credit. Need to cover an unexpected cost? Consider asking your employer for an advance, borrowing from a relative, or seeing if you can get financial help from the government. If your need isn’t urgent, it may be best to wait and save up.
We're a credit broker not a lender†