The best way to borrow a small amount of money
There’s always something that crops up, isn’t there? Something unforeseen that usually demands a bit of extra cash to sort it out – whether it’s a part for your car or replacing that ancient boiler. If you’re looking to borrow a small amount of money, what are your options?
There’s always something that crops up, isn’t there? Something unforeseen that usually demands a bit of extra cash to sort it out – whether it’s a part for your car or replacing that ancient boiler. If you’re looking to borrow a small amount of money, what are your options?
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 tie 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 between £500 and £2,000. Most unsecured personal loans start at £1,000. They allow you to borrow a small amount without having to put up an asset like your house or car as collateral. They can also be one of the quickest ways to borrow money – the cash could be in your bank account within a day or two of applying. But typically, smaller loans come with higher annual percentage rates (APR), which is the total amount of interest (plus fees) you’ll pay on top of your loan amount.
Pros:
- Quick application process
- Fixed payments, so you’ll know exactly how much you’ll be paying each month
- Managed well, a small loan could improve your credit rating
Cons:
- Interest rates for smaller loans can be high
- You can’t usually borrow less than £1,000
- You typically need a good credit score to apply
Credit card
A credit card with a 0% interest period on purchases could be useful if you need to pay for something specific. Paying it off within the 0% timeframe means you’ll only pay back what you borrowed and you’ll avoid hefty interest charges (as long as you keep up the minimum monthly payments as well).
Pros:
- Spread the cost over a set period of time without paying interest
- Useful for buying expensive one-off items without having to pay for them upfront
- Used responsibly, a credit card could help improve your credit rating
Cons:
- Once the 0% period ends, you’ll be charged a high interest rate
- If you go over the credit limit, you’ll be charged a penalty fee
- You must pay at least the minimum monthly repayment or risk losing the 0% deal and damaging your credit score
Overdraft
Interest rates charged on overdrafts can be high – from around 19% to 40%. Some current accounts offer a zero interest overdraft buffer.
Pros
- An option for very short-term borrowing and cash emergencies
- Quick and easy to set up if you have an existing current account
- Some banks offer 0% overdrafts for small amounts
Cons:
- Only suitable for short-term borrowing
- Some banks could charge as much as 40% APR
Family or friends
This could be the quickest and cheapest way to borrow a small amount, but it’s not always the best option.
Pros:
- It’s unlikely the ‘bank of mum and dad’ will 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 no loan terms or conditions will be in place
- Money and family or friendships rarely mix well – it could sour relationships, especially if you struggle to pay back what you owe
What other alternatives are there?
- Peer-to-peer (P2P) lending – P2P sites link up people who want to borrow money with those who are willing to lend it. It’s an alternative to banks so the rate of interest is usually slightly better.
- credit unions – community-based organisations that offer fair and reasonable borrowing rates. You typically have to be a member and may have to save with them for a while before you can apply for a small loan.
- Pawnbroker – you need to offer an item of value as security against a loan: for example, jewellery. Interest can be high and the item could be sold if you can’t keep up with the repayments.
- Sell some stuff – if you have the time, sell some unwanted items. You’ll be surprised at how much you could make at a decent car boot sale or online auction site.
Borrowing money – things to consider
Bigger loans tend to attract better APRs. On the downside, you’ll either need to pay back much more each month or your loan period will be a lot longer.
Credit cards and overdrafts offer manageable and quick access routes to extra cash – especially if you only need a few hundred pounds or even less. If you already have a credit card, then you might want to consider an alternative – for example, an all-rounder credit card that charges you 0% interest for balance transfers and on new purchases.
Whatever the amount of your loan, whether it’s £1,000 or £30,000, you need to make sure you can meet your repayments. Just one missed payment can negatively impact your credit report and lenders may be reluctant to offer 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 the terms of your loan, you may have to pay an early repayment fee or penalty.
If you can afford to pay back the whole of your outstanding loan, you’ll need to ask your lender to calculate this for you. It’s known as an ‘early settlement amount’ and comprises:
- how much you still owe of the total debt
- what interest charges apply
- any early repayment charges due.
Your lender must give you this figure if you ask and allow you 28 days to decide whether you want to proceed. You’ll have to work out if it’s worth any additional charges to clear your debt early, and you don’t have to go ahead if you choose not to.
If you want to continue and clear the loan, then you’ll need to pay the amount by the settlement date given. If you pay later, the settlement amount won’t be correct and will need to be worked out again.
Don’t rely on your own calculations to work out what you owe as you could end up paying the wrong amount.
If you want to make a partial overpayment, then a 28-day notice period applies. You’ll be charged interest on the full amount you owe for 28 days after you’ve told your lender that you intend to make an additional payment.
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 a lot higher
- you might not be able to borrow as much
- your application might be rejected – this could lower your credit score even further.
It might be wiser to try 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 a small loan if I’m unemployed?
If you’re unemployed or on a low income it can be much harder to get a loan.
If you’re on certain benefits, you might be eligible for a Government Budgeting Loan. It’s interest free and the 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 are to be avoided. They can be very expensive with eye-wateringly high APRs, and you usually only have a month to pay back the full amount plus interest. You could end up in serious debt – even if you only want to borrow a small amount of money.
If you’re struggling with your finances, MoneyHelper offers free and impartial help and advice on debt management.
