Depending on your needs the cheapest way to borrow money will be the loan with the lowest APR or an overdraft or credit card with a 0% interest period
When searching for the best loans and best places to borrow money from, it isn’t always clear what the ‘best’ actually is. There certainly isn’t one loan that works for everyone, but there are some ways which are generally cheaper to borrow than others.
Each individual has their own financial circumstances and goals they want to achieve, so before you start comparing loans and other borrowing methods, start by defining what it is you want to do with that money and how you will be able to pay it back.
Even more crucially perhaps, take a look at your income and credit history to help you figure out which loans are available to you and which ones might just be out of reach.
0% purchases credit card
One of the cheapest ways to borrow money is to do it on a 0% purchases credit card. Credit card limits are often lower than you could get when taking out a loan, but if you are making one or two one-off expensive purchases and can manage your money carefully, they can work out a lot cheaper.
For example, you could get a 0% purchases credit card to pay for a train season ticket, which would save you money instead of paying for a monthly ticket, or use it to buy something you could afford to pay off in smaller installments.
You might think there is nothing cheaper than borrowing at 0%, but 0% purchase credit cards are time-limited, so watch out for when the high rate of APR kicks at the end of the interest free period.
The best way to get the most out of a 0% purchases credit card is to use it to purchase something at the start of the offer period, and put a plan in place to pay it back in installments over the entire course of the offer period.
Personal or unsecured loan
Personal, or unsecured, loans are offered against your credit score. You can borrow anywhere between £1,000 and £35,000 for terms anywhere between one and ten years.
They typically have the lowest interest rates of any method of borrowing money (other than mortgages, which aren’t suitable as a cheap borrowing method – though remortgaging might be appropriate).
However, you will need excellent credit to get the best loan rates, and loans are relatively inflexible with fixed monthly repayments and set loan terms.
Sometimes the cheapest ways of borrowing can be in the most obvious places.
Using your bank account’s overdraft facility can work out to be a cheap option depending on your circumstances, but it can also be incredibly expensive and bad value, especially as the terms and conditions can be quite baffling.
However, if you only need a small amount of money to borrow for a short period of time, then it can work out to be a cheap and easy way to get hold of some cash quickly.
A lot of this depends on your bank, so it’s best to give them a call or visit a branch to see how much they can let you go into your overdraft without incurring a penalty, and for how long they’re happy for you to stay in debt.
If you’ve been a customer at the bank for a while and have generally been reliable then you might be able to use that in your favour to negotiate better terms. If the alternative is getting a payday loan, then a bank overdraft is likely to work out as a safer and much more affordable option.
Loan from your bank or credit card provider
Customer loyalty can play a big part in getting a cheaper deal on your loan. Some loan providers will offer loans specifically to existing customers of their other services and give them preferential rates.
Similarly, you can give your bank a call and ask about their loan options. Check if they will offer you a preferential rate, as you have been a loyal customer. If not, then consider moving bank – some may give you a better loan deal to encourage you to switch your current account over.
It can pay to be loyal, but it can also work in your favour to regularly shop around for cheaper deals.
Personal loans can offer low rates when borrowing sums of around £5,000 to £7,500, but if you want to borrow more than this, secured loans can still offer good value.
The danger of secured loans is that you will be securing the loan against your home, so if you can’t afford to pay it back you could lose your home. If you can reasonably take on the risk and feel more than confident of paying it all back, then it can be a sensible way of borrowing higher values.
For example, you might want an extra £20,000 to invest in renovating your home – which could help increase the value of your home in the future – but it may not be worth taking out a secured loan if you’re looking to consolidate debts or if you don’t have the security of extra income or credit to help pay it back.
The lower the value of your home and credit rating, the more likely it is that you’ll only be allowed to borrow a far lower amount.
Many people use secured loans when they don’t have a good credit rating, as they can still get a relatively good rate – but be sure to assess your own suitability before filling out an application, as the risks are quite high with secured loans.
The different ways to borrow money
While we’ve listed a few ways to borrow money, there are many different ways to borrow money.
Most of it comes down to you – what’s best for you, considering your goals, your credit history and your financial situation, so always do your research.
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