The cheapest way to borrow money will depend on how much you want to borrow, and for how long. The interest rate you will pay is affected by the size of the loan and your own personal credit rating. You can shop around for the best loan rates using Uswitch as there are lots of different deals available.
Depending on your needs the cheapest way to borrow money short-term will most likely be a personal loan or a credit card. These aren't 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, known as a mortgage.
If you have a flexible mortgage, or smart mortgage, then you might find accessing the funds from that could be cost-effective. But always make sure you can pay it back.
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. Also keep in mind what you want the money for - is it to purchase something new, or to repay other money you owe elsewhere?
If you're looking for a relatively small amount of money, then you could look for a cheap loan with the lowest APR, an overdraft or credit card with a 0% interest period.
If you are planning to borrow a larger sum of money, or you need to pay it back over the long term, then finding a mortgage or remortgaging your existing home loan could be an option.
Again, it pays to shop around with Uswitch to find the best deal as the options are constantly changing and new deals are coming onto the market all the time.
The best way to borrow money is to think about what your needs are, and your financial means to pay the money back. A number of factors go into finding the cheapest way to borrow money: the lowest interest rate, how long the term of the loan will be, and whether you can find a long period of no interest at all, for example on a 0% interest credit card. You might also want to consider whether there would be any charges if you came into some money and could pay back the borrowing sooner than planned.
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're 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?
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. The best deals at the lowest interest rates tend to be offered to those people with a good credit history and credit rating.
A credit card might be the best option if you don’t want to take out a personal loan. You can find out more about how to use credit cards in our guide.
For the short term, your options are a credit card, a personal loan or your bank overdraft. All have different terms and conditions and interest rates, so you need to think about which best suits your needs.
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.
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.
Credit card credit limits are often lower than you could get when taking out a loan. But if you're 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's 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. Then put a plan in place to pay it back in instalments over the entire course of the offer period.
There's 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.
With a special money transfer credit card 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's 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.
It is critical you are completely certain what fees (if any) come from using cash from a credit card. While some may allow you to transfer the money from a credit card to a bank account online for no cost, withdrawing money from your credit card at a cash machine could be a completely different matter. You might be hit with a cash advance fee, and interest may accrue on that withdrawal immediately, meaning you could end up paying a lot more for that cash than you took from the cash machine.
You can find out more with our guide on how to transfer money from credit card to a debit card.
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.
You can find out more about loans and discover how to compare them with 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're 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. This is a good reminder that having good credit history can benefit you for years to come so if your credit is not in good shape, now could be the time to fix it.
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. Don't just overdraw your account and assume everything will work out, without fully knowing the fees, and terms and conditions involved with an overdraft. You could be in for a shock.
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. It's usually about 40%, which is steep.
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.
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 cheap loan rates.
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.
If you're looking to borrow more than £5,000 cheaply, there are other options available. You could opt for an unsecured personal loan or you could considered a secured loan, which might have a lower interest rate.
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, where 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're 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's 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 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.
When thinking about how to borrow money cheaply, think about what's 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. Find out more about remortgaging here.
Property prices in the UK have risen strongly, which means that your home could be worth more than you paid for it, and more than the mortgage you are currently paying. Your lender might let you increase the amount you borrow - enabling you to borrow money at a lower rate than a personal loan. However, the mortgage repayments will be spread over a longer term, meaning that you will pay interest for longer.
If you want to find out whether you can increase your mortgage advance you should talk to your current lender. Find out if there are any fees or penalties for changing your current mortgage deal. Ask what set-up or arrangement fees you might have to pay for the new mortgage. Make sure you can afford the repayments, and think about whether you want to have a bigger mortgage for longer. You can check the best deals on mortgages with Uswitch.
Remortgaging is when you take your existing mortgage deal and look for a new one. You can do this is you are nearing the end of a fixed rate mortgage deal, or you are on a variable rate mortgage with no tie-ins for leaving early. You will also need to remortgage if you are moving home, although some lenders allow you to port your mortgage to your new home.
Remortgaging your house could mean that you find a new mortgage with a lower interest rate. This could either save you money, freeing up money to pay off debts or for other projects. Or you could apply to increase your mortgage in order to borrow some extra money for a home improvement project, for example. You can shop around for the best remortgage deals with Uswitch.
Make sure you can afford the monthly repayments and think about whether you really want to take on a bigger or longer mortgage.