The best loans for 'small' amounts

Here's a general look at the cost of borrowing less on a personal loan - as well as other options you may not have considered.

08:08 21 May 2013

The fact that we are currently seeing the lowest ever rates on loans of between £7,500 and £15,000 has to be good news - but where does that leave people who don't want to borrow that much money?

 

Rates on medium-sized loans are currently as low as 4.9%, which is great if you've got a reasonably large purchase or project in mind, but what if you have something smaller planned, like buying a used car?

You can borrow as little as £1,000 with an unsecured loan, but your 'smaller' borrowing will come with higher rates. Here's a general look at the cost of borrowing less on a personal loan - as well as other options you may not have considered.

 

Smaller personal loans

 

Smaller loans tend to come with higher Annual Percentage Rates (APRs), which can make them less attractive than medium-sized loans. And the less you borrow, the higher the rate will be.

For example, on a loan of between £1,000 and £2,000 taken over three years with Sainsbury's Bank you'd be charged a whopping APR of 18.6%. Borrow between 3,000 and £4,000 and the rate drops to 12.6%. But as soon as you want to borrow as much as £5,000, the rate becomes a lot cheaper still at 6.9%.

So you were to borrow £1,000 over three years with Sainsbury's Bank at 18.6%, you'd pay back £287 in interest. If you borrowed £5,000 over the same period, you'd pay back £532 which, in percentage terms, is much cheaper.

You can take back some control however, by choosing to take the loan over a shorter period. For example, if you borrowed £4,000 from Sainsbury's Bank over three years at the advertised rate of 12.6%, it would cost you £778 in interest. If you opted to pay it off over one year instead it would cost £263 in interest. That's a very worthwhile saving of £515.

The following tables illustrate how much you'll pay back based on different amounts and over different time periods, with some of the most competitive lenders. As you can see, loans get cheaper if you borrow more or pay them back over shorter terms.

Loans of £3,000

 

	1 year	2 years	3 years	4 years	5 years
Sainsbury's Bank, 12.6%	£3,197	£3,387	£3,583	£3,793	£4,006
M&S Bank, 16.9%	£3,261	£3,516	£3,782	£4,060	£4,350
Clydesdale Bank, 17.9%	£3,276	£3,545	£3,828	£4,124	£4,433

 

Loans of £4,000

 

	1 year	2 years	3 years	4 years	5 years
Sainsbury's Bank, 12.6%	£4,263	£4,516	£4,778	£5,058	£5,341
M&S Bank, 16.9%	£4,349	£4,687	£5,043	£5,413	£5,800
Clydesdale Bank, 17.9%	£4,368	£4,727	£5,104	£5,498	£5,911

 

Loans of £5,000

 

	1 year	2 years	3 years	4 years	5 years
Sainsbury's Bank, 6.9%	£5,183	£5,356	£5,532	£5,723(7.0%)	£5,910 (7.0%)
Tesco Bank, 7.0%	£5,186	£5,361	£5,540	£5,723	£5,910
M&S Bank, 7.1%	£5,188	£5,366	£5,548	£5,734	£5,923

 

Loans of £6,000

 

	1 year	2 years	3 years	4 years	5 years
Sainsbury's Bank, 6.9%	£6,220	£6,427	£6,639	£6,686 (7.0%)	£7,092 (7.0%)
Tesco Bank, 7.0%	£6,223	£6,433	£6,648	£6,686	£7,092
M&S Bank, 7.1%%	£6,226	£6,439	£6,657	£6,880	£7,108

 

Borrowing more to pay less

If you were in the market for a loan of £7,000, it can actually work out cheaper to borrow £7,500 instead, as this is when the really cheap rates kick in. Peer-to-peer lender Zopa is offering a rate of just 4.9% on borrowing between £7,500 and £10,000 which you must repay over a maximum of three years. You'll have to hurry though as the deal - which is the cheapest personal loan rate ever - is only available until Wednesday 22 May. You can read more about the deal here.

 

For longer term value, Derbyshire Building Society is offering a rate of 5% on loans of this size, which you can choose to repay over one to five years.

Bear in mind however that all of these headline rates are representative. This means they only have to be offered to 51% of successful applicants. The rate you actually get will depend on your credit rating and individual circumstances.

It's also worth trying our loans Smart Search, which will give you an idea of how likely it is you'll be accepted for a loan, before you actually apply. This reduces the chances you'll be rejected when you do apply, thus preserving your credit score.
0% purchase credit cards
There are other options too though for smaller borrowing such as a 0% purchase credit card.

The Halifax Purchase Credit Card tops the tables by offering 0% on purchases for 17 months. The catch is, if you don't manage to pay it off within 17 months, the rate of interest will rocket to a representative 16.9% APR (variable), which you'll be charged on your balance.

Tesco Bank is close behind, offering 0% on purchases for 16 months and the same representative Annual Representative Rate (APR) of 16.9% (variable) thereafter. The difference is Tesco's card will reward you with Clubcard points on your spending.

Again, in both these cases, the APR after the 0% period expires is representative - so you may be offered a different rate to the one advertised. And, while cards like these can be great for smaller loans, bear in mind your credit limit will depend on your own circumstances and credit score. It might not be as high as you want it to be.

Money transfers

There is a third option too: credit cards that offer money transfer facilities. With a money transfer you can move available credit from a credit card into your current account - and use it to do what you like with.

The Fluid Balance Transfer Card, issued by MBNA, currently offers the longest interest-free money transfer deal. So long as you make the transfer within 60 days of opening the account, this card will give you 24 months interest-free on money transfers, giving you two years to pay down the balance before you're charged interest.

There are some catches to look out for though - for example, the card charges a 4% fee on the amount of the money transferred - so transfer £2,000 into your current account and you'll pay £120. Miss the initial 60-day window and the transfer rate will cost 5% and, more importantly, you'll lose its interest-free status and pay a far higher representative APR of 20.9% (variable).

If you'd be concerned about clearing the balance within 24 months and being charged the card's expensive standard rate, you might prefer the AA Transfer Plus Credit Card, which will charge an APR of 6.9% on your balance until you clear it, provided you make the transfer within 60 days of opening the account. That 6.9% is clearly cheaper than some of the most competitive loan deals on smaller amounts, as our tables above demonstrate.

The overdraft option

If you're looking to borrow a relatively small amount and you're not particularly keen on loans or credit cards, there's always the option of using a current account's overdraft facility.

For example, the Nationwide FlexDirect current account offers 0% and no arranged overdraft charges for the first 12 months, so rather than borrowing the cash you can spend into your overdraft and pay it off before the year is out. If you don't pay off your overdraft by the end of the year, you'll be charged 50p a day - which will soon mount up.

How to choose

Choosing between a loan, 0% purchase credit card, money transfer and 0% overdraft comes down to how you want to repay what you borrow.

If you're confident you can pay back the borrowing within an interest-free period, then a credit card, money transfer or 0% overdraft mean you can essentially pay no interest on your small loan.

However, while you will be charged interest, you may feel more secure with a personal loan as you'll know how much your monthly payments will be - and you'll have no choice but to make them!

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.