Need a Small Loan? What to Know Before You Apply

Need a Small Loan? What to Know Before You Apply

Why Might Someone Need a Small Loan?

Sometimes life throws unexpected costs your way: a car breaking down during the school run, a washing machine packing in on a Sunday evening or even a lost mobile phone. These aren't always expenses you can easily put off until payday.

The FCA's Financial Lives Survey 2024 found that, among people who took out personal loans in the previous 12 months, 46% cited a one-off large expense as their main reason, 26% cited debt consolidation and 10% cited everyday essential expenses such as food, transport, rent and utility costs.

While these figures relate to personal loans generally rather than smaller-value loans, they help us understand why someone might consider taking out a personal loan to cover a particular expense.

What Counts as a Small Loan?

The amount of money involved in a "small" loan depends entirely on a person's individual circumstances. For one person, it might mean a few hundred pounds to cover a plumbing repair, while someone else might need an extra £1,000 towards the cost of a car.

The term "small loan" describes the amount being borrowed, not necessarily how long it will take to repay or how much it will cost overall. Different lenders offer different borrowing ranges and repayment structures. A small personal loan from a Credit Union could have completely different terms from borrowing the same amount through a payday lender or another form of short-term, high-cost credit.

The amount borrowed is only one part of the agreement. The repayment period, frequency and interest rate all matter when deciding whether a loan is right for you. A small loan can still be expensive relative to the amount borrowed, so it's important to understand the full repayment terms before agreeing.

How Much Do You Need to Borrow?

Before applying for a personal loan, it's worth working out exactly how much you need. For example, if you're borrowing to cover car repairs, it's not just the cost of the parts you need to consider. There's also the diagnostic fee, labour and any other potential charges.

If you're taking out credit to cover a particular expense, work out the full cost and try to borrow no more than you actually need. Borrowing more than the expense requires increases the amount you'll need to repay and could increase the overall cost of borrowing through additional interest.

How Much Does a Small Loan Cost?

The FCA's 2024 survey examined people who held high-cost credit at the time or had used it during the previous year. It found that 16% considered the speed and ease of application when choosing a credit product, while 18% considered the total amount payable and 12% considered the interest rate or APR.

When working out how much a loan will cost, there are three important things to understand: APR, the repayment schedule and the total amount repayable.

APR (Annual Percentage Rate) is a standardised measure that helps people compare the cost of different borrowing products. It's useful when comparing loans, but it doesn't tell you exactly how much you'll repay in pounds and pence on its own.

The repayment schedule explains how much each repayment will be, how often payments need to be made, how many there will be and when they're due. You should also check whether any fees apply if you miss a payment or decide to repay the loan early.

The total amount repayable is exactly what it sounds like: the total amount you'll pay back over the agreement, including interest and any applicable fees.

Can You Comfortably Manage the Repayments?

When taking out any form of credit, it's important to consider the agreed repayment amount and date alongside your existing commitments.

For example, if you get paid monthly on the 15th, having repayments scheduled after your income arrives may be easier to manage than having them come out the day before payday. You should also consider how repayments will fit alongside essential spending and any existing loan, credit card or overdraft commitments.

It's worth thinking about whether you could still comfortably afford the repayments if another unexpected expense came up while you were paying off the loan.

What Do Lenders Look at When You Apply?

Even if you feel comfortable with the proposed repayments, the lender has a responsibility to assess whether the loan is affordable for you.

This typically involves looking at your income and expenditure, any existing borrowing or financial commitments, your credit file and history, and the amount you're requesting in relation to your disposable income.

The FCA's 2024 Financial Lives Survey reported that 31% of people who had applied for a personal loan in the previous two years said their application had been declined.

If you think you might need to borrow, it's worth looking at your options in advance rather than leaving everything until the last minute. This gives you time to compare products, understand the costs and consider what you might do if an application is unsuccessful, rather than rushing into multiple applications in the hope of getting the money quickly.

Is a Personal Loan the Right Type of Borrowing for Your Needs?

There are several types of borrowing you could consider when covering an expense. A personal loan provides an agreed amount with a set repayment schedule, whereas other forms of credit, such as credit cards, overdrafts and Buy Now Pay Later (BNPL) agreements, have their own terms, costs and repayment arrangements depending on the provider.

It's important to compare these options and understand how each one works before deciding which is right for your circumstances.

What Should You Know About Borrowing from Cambrian Credit Union?

Here at Cambrian Credit Union, we offer personal loans from £200 up to a maximum of £7,500. Our website has a loan calculator that allows you to explore how much you would repay across the available loan amounts and terms.

We also have no hidden fees or early repayment fees. If you have a few extra pounds the day before payday, you can make an additional payment of any amount without it costing you anything extra.

Applications that reach full review are assessed by a person at Cambrian, alongside our standard affordability and credit checks. This doesn't guarantee that any particular application will be accepted, but it means your circumstances are considered as part of the decision rather than relying on your credit score alone.

If you're considering a loan with us, we recommend using our loan calculator (https://www.cambriancu.com/loans) to explore the available terms and repayment amounts and see what could best suit your circumstances.