Depending on your needs the cheapest way to borrow money will most likely be a personal loan or a credit card. These are not the only ways of getting hold of money, however. You can also use a bank current account overdraft or borrow against the value of your house.
The best way to decide how to borrow money cheaply is to think about how much you want to borrow, how long you will need it for, and how you are planning to pay it back.
If you are looking for a relatively small amount of money, then you could look for a loan with the lowest APR or an overdraft or credit card with a 0% interest period.
Compare 0% purchase cards
Avoid interest on your credit card spending for a set period of time
Where can I find the best deals on borrowing money cheaply?
What works best for you when looking for the cheapest way to borrow money is a deal where you get the lowest interest rate for the longest time, or where you get a long period of no interest at all.
There certainly isn't one loan that works for everyone, but there are some ways which are generally cheaper to borrow than others.
Here are some things to consider when you are thinking about the best way to borrow money:
- How much do you need to borrow?
- How long do you need it for?
- What will you use the money for?
- How will you be able to pay the money back?
Think about your income and credit history – if you have a poor credit rating you might not have access to all the loans in the market.
A credit card might be the best option if you don’t want to take out a loan. Find out more about how to use a credit card.
0% purchases credit card
One of the cheapest ways to borrow money is to use a 0% purchases credit card.
This type of credit card allows you to make purchases, without paying any interest on them for a fixed period of time. The term can be from three to 29 months, though most are for 12 or 24 months.
After the 0% interest period has finished, the interest rate switches to a higher rate, known as the standard purchase rate.
Many people use these types of credit card to buy larger items such as new furniture, electrical items, holidays or consumer goods.
Compare 0% purchase cards
Avoid interest on your credit card spending for a set period of time
Do the 0% interest credit cards have any fees?
Some of these 0% purchase credit cards charge an annual fee. You will need to work out whether the fee is worth paying in order to enjoy a lower interest rate. You will also need to think about how you will pay off the balance on your credit card when the 0% interest period ends. Otherwise you may find the standard interest rate reverts to anything from 20 to 30% when the introductory period ends.
Although 0% interest credit cards are cheaper and simpler than taking out a personal loan, you will only be able to spend relatively small amounts of money, usually up to £5,000.
How much money can I borrow cheaply on my credit card?
Credit card credit 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 instalments.
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 instalments over the entire course of the offer period.
Money transfer credit cards
There is also the option to transfer money from your credit card to your bank account, which you can then spend or use to pay off debts.
If you want to withdraw money from your credit card to put into your bank account, this is a relatively low cost and straightforward option compared to setting up a personal loan or borrowing against the value of your house. However, it does come with some costs, usually a percentage of the transfer amount.
You can withdraw money from your credit card and move it to your bank account using your credit allowance. It is best to use a money transfer credit card to do this rather than an ordinary credit card, because the charges will be lower.
Money transfer cards are similar to balance transfer credit cards, which allow you to pay off debts from other credit cards at 0% interest.
A money transfer credit card allows you to transfer money to a bank account, whereas a balance transfer card does not. You can find out more about how to transfer money from a credit card to a debit card.
Loans for longer or larger borrowing?
If you are looking to borrow more than £5,000 cheaply, there are other options available.
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 10 years.
You can find out more about loans and discover how to compare loans in our guide.
Personal loans typically have the lowest interest rates of any method of borrowing money, except for interest-free credit cards. You will need to apply for a loan and if you have a poor credit record you are unlikely to get the best deals.
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.
Personal unsecured loans work out cheaper than bank overdrafts but more expensive than a mortgage. However, mortgages aren't designed to provide small short-term loans.
Using your bank account's overdraft facility can work out to be a cheap option depending on your circumstances.
It can also be incredibly expensive and bad value if you borrow above the limit you have agreed with your bank. The borrowing limit you agree is known as your arranged overdraft. Anything above this sum is known as an unarranged overdraft and can be very costly in terms of fees and interest.
Banks have been told by the consumer watchdog to make their fees clearer and simpler to understand and compare. You will find details about the costs of an overdraft on your bank’s website, or on the back of your printed statement.
If you only need a small amount of money to borrow for a short period of time, then an overdraft can work out to be a cheap and easy way to get hold of some cash quickly.
Find a good overdraft rate
Compare current accounts from different providers and find a bank that offers an overdraft.
Will my bank give me a good deal on borrowing money cheaply?
If you are looking to borrow money cheaply from your bank, you could talk to them about special overdraft deals for existing customers.
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.
You can find out more about in our guide about using overdrafts.
Can I get a cheap loan from my bank?
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.
A secured loan is one that is linked to the value of your home. It’s different from a mortgage. If you have a very high mortgage and only a small amount of deposit in your house, then it may be difficult to add a secured loan to your outstanding debt.
While personal unsecured loans can offer low rates when borrowing sums of around £5,000 to £7,500, if you want to borrow more than this you might consider a secured loan.
The drawback 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.
On the other hand if you are looking to consolidate debts or if you don't have the security of extra income or credit to help pay back a secured loan, then it is likely to be a more risky option.
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.
Secured loans, second-charge mortgages or 'homeowner loans' could be a handy way to borrow large amounts at a potentially lower rate, as the loan is secured against your property.
Compare a range of loans from personal loans to debt consolidation loans.
The different ways to borrow money
When thinking about how to borrow money cheaply, think about what is best for you, considering your goals, your credit history and your financial situation, so always do your research.
A different approach to finding a cheap way to borrow money might be to ask your mortgage provider if you can extend your mortgage. You could also consider remortgaging to find a cheaper rate.