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How to choose the best loan

Chris Torney / 05 December 2016 ( 04 March 2020 )

Read these useful tips for choosing the best loan and bear them in mind when you apply for a loan, plus a simple guide to help you secure the lowest possible rate.

A folder marked loans, containing loan applications

At first sight, getting the best deal on a personal loan seems fairly simple: just have a look at the best buy tables, find the lender that’s offering the cheapest rate and make your application.

As ever when it comes to financial products – and borrowing in particular – in reality things are not quite so straightforward.

How best-buy tables work

Best-buy tables online and in the press are certainly a good place to start but they don’t always tell the whole story.

Firstly, the tables tend to rank deals according to the rates on specific loans: so some tables will compare the rates for advances of, say £5,000 over three years. 

Others might compare the cost of borrowing £10,000 over five years.

This is great if the sum and period matches your own requirements, but if you instead wish to borrow, for example, £3,000 over two years, these best-buy tables may not give you the full picture: a different provider may offer a better deal on the loan you are actually after.

Some price-comparison websites, however, let you vary the size and length of the loan, and then rank providers on this basis.

Eligibility for the best rates

Another issue is that there is no guarantee you will be offered the rate a particular lender is advertising: the best rates tend to be reserved for people with clean credit histories.

If you have missed repayments in the past, you could have a black mark on your credit file which means lenders will charge you more – or reject your application altogether.

Before you apply, it is worth checking your credit file and dealing with any problems on it if necessary.

You’ll be offered a lower interest rate if you have a clean credit record: this means you have a history of making repayments on loans, mortgages and credit cards on time.

Lenders will see you as a safe bet – and because lending to you is likely to be less risky, they can afford to set a lower rate.

Before you start applying, check your credit report through the three credit-reference agencies,  ExperianCallcredit and Equifax: each of them offers a basic copy of your report.

How to check your credit report

Changing the size and length of your loan

Another way to get a cheaper rate is by changing the amount you wish to borrow and/or the term of your loan.

As a rule, larger loans tend to have cheaper rates of interest and APRs (annual percentage rates). This is because the administration costs are the same regardless of the amount borrowed, so smaller loans have to be more expensive in order for providers to cover their costs.

The length of the loan can also affect the rate: some providers offer cheaper rates on medium-term loans, such as those for two or three years, while one or five-year deals are more expensive. This can vary from one company to the next, so shop around to see what is more cost effective.

Bear in mind, however, that the longer you borrow for, the more interest charges you’re likely to pay in total. All things being equal, the quicker you can pay off your loan, the cheaper it will be.

Five things to do before a loan application

How to get a cheaper rate on your loan

If you want to borrow money through a personal loan, the rate of interest you are charged is likely to be the key consideration.

Generally speaking, loans don’t come with initial set-up fees like the administration or legal charges added to mortgages – so the interest rate is pretty much the only factor in determining the best deal.

Shop around for the best rate

Don’t just accept the loan offered by your current bank or the first deal you come across online. Depending on your personal circumstances and the type of loan you’re after, you may find a big disparity in the rates on offer.

Many lenders now allow you to make an informal check of what rate you are likely to get: the advantage here is that it is quicker than making a full application, and it won’t be recorded on your credit file.

If you make a number of formal loan applications instead, they will be noted on your credit record which may create a negative impression for future lenders – it could look as if you are being repeatedly rejected.

Five things to do before a loan application

Loan applications and your credit record


The opinions expressed are those of the author and are not held by Saga unless specifically stated. The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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