How to borrow a small amount of money
There’s always something unforeseen that crops up, isn’t there? Whether it’s a replacement washing machine or new tyres, it usually demands a bit of extra cash to sort. So, what are the options if you need to borrow a small amount of money?
There’s always something unforeseen that crops up, isn’t there? Whether it’s a replacement washing machine or new tyres, it usually demands a bit of extra cash to sort. So, what are the options if you need to borrow a small amount of money?
I need to borrow a small amount. What are my options?
If you’re looking to borrow a small amount of money, say for an unexpected expense or to tide you over until pay day, there’s a few options available – each with their own pros and cons.
A small loan
A ‘small’ loan is usually considered to be anything between £500 and £2,000. These unsecured personal loans allow you to borrow a small amount without having to put up an asset like your house or car as collateral. They could also be one of the quickest ways to borrow – you could have money in your bank account within a day or two of applying.
Smaller loans can come with higher annual percentage rates (APR) compared to larger loans. APR is the total amount of interest (plus fees) you’ll pay on top of the loan amount. Some small cash loans have very high rates of interest.
Pros:
- Quick application process
- Fixed payments, so you’ll know exactly how much you’ll be repaying each month
- Managed well, a small loan could improve your credit rating
Cons:
- Interest rates for smaller loans can be high
- You sometimes can't borrow less than £1,000
You can compare loans from £1,000 to £50,000 with Compare the Market.
Credit card
A credit card with a 0% interest period on purchases could be useful if you need to pay for something specific. Provided you pay off the debt within the 0% timeframe, you’ll only pay back what you borrowed.
Pros:
- Spread the cost over a set period without paying interest
- Useful for spreading the cost of one-off items like a holiday
- Used responsibly, a credit card could improve your credit rating.
Cons:
- Once the 0% period ends, you’ll pay a higher interest rate
- If you go over the credit limit, you’ll be charged a penalty fee
- You must make the minimum monthly repayment or risk losing the 0% deal and damaging your credit score.
Overdraft
Borrowing a small amount through your current account could be a straightforward option. But overdrafts come with a few pros and cons:
Pros:
- An option for short-term borrowing and cash emergencies
- Quick and easy to set up if you have a current account
- Some banks offer 0% overdrafts for small amounts.
Cons:
- The interest on overdrafts is high – some banks could charge as much as 39.9% APR.
Family or friends
This could be the best way to borrow a small amount of money, but isn’t always a viable option.
Pros:
- The bank of mum and dad is unlikely to charge you interest
- It won’t affect your credit rating
- Probably the quickest and cheapest option
Cons:
- You might not want your family or friends knowing about your finances
- An informal agreement means you won’t have terms or conditions to fall back on
- It might sour relationships, especially if you can’t pay back what you owe.
What other alternatives are there?
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Peer-to-peer (P2P) lending – P2P websites link people who want to borrow money with those willing to lend it. It’s an alternative to banks.
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Credit unions – not-for-profit, community-based organisations that are run by their members. They pool their savings to provide each other with credit at a lower interest rate.
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Pawnbroker – you need to offer something valuable, such as jewellery, as security against a loan. Interest can be higher than bank loans or credit cards, and the item could be sold if you can’t keep up with the repayments.
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Sell some stuff – it might be worth selling your unwanted items. You’ll be surprised at how much you could make at a decent car boot sale or online auction site.
Borrowing money – what to consider
Whether you want to borrow £500 or £30,000, make sure you can meet your repayments. Just one missed payment could negatively impact your credit rating and may mean lenders refuse you credit in the future.
Compare the Market Limited acts as a credit broker, not a lender. To apply you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility.
Can I pay back a small loan early?
Yes, you can pay back your loan early. But, depending on your loan terms, you may have to pay an early repayment fee or penalty.
If you want to pay back the outstanding amount, you’ll need to ask your lender to calculate this for you. This is known as an early settlement amount and is made up of:
- Your total debt still owing
- Interest charges
- Any early repayment charges.
Frequently asked questions
Can I get a small loan with bad credit?
It’s not impossible to get a bad credit loan, but:
- The interest will probably be higher
- You might not be able to borrow as much
- Your application may be rejected – this could lower your credit score even more
It might be wiser to build up your credit score before applying for a loan. Paying your bills on time, registering on the electoral roll and getting a credit building credit card could help to improve your credit rating.
Can I get small loan if I’m unemployed?
If you’re unemployed or on a low income, it could be much harder to get a loan.
If you’re on certain benefits, you might be eligible for a government Budgeting Loan. This is interest free and payments are taken directly from your benefits.
Find out more about Budgeting Loans at GOV UK.
What about a pay day loan for a small amount?
Pay day loans should be carefully considered as they can be very expensive with eye-watering APRs. You’ll usually only have a month to repay the full amount, plus interest.
You could end up in serious debt – even if you only borrow a small amount of money. So, you should only take one out if you’re certain you can pay it off on time and in full.
If you’re struggling with your finances, MoneyHelper offers free and impartial help and advice on debt management.
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Alex Hasty - Insurance comparison and finance expert
At Compare the Market, Alex has had roles as Commercial Associate Director, Director of Trading and Director of Growth. He’s currently responsible for the development and execution of Comparethemarket’s longer-term strategic options, ensuring the right breadth of products and services that meet customer needs.