While borrowing isn't wrong, it does need care, and what really counts is that you find the right deal...
Is borrowing worth it?
Unless you're seriously financially savvy, only borrow if you really need to. Otherwise, it's far better to wait and save up for something instead. If you are planning borrowing, it will usually fall into one of two categories…
● Just funding your ongoing lifestyle. This is the worst type as it means you're consistently living beyond your means and risk a debt spiral. Avoid it. Instead, stick to a budget.
● For a needed, planned purchase - eg, a car - or to pay annual insurance as it's cheaper than monthly. Here you need to minimise the amount borrowed, repay quickly to keep interest costs down and ensure your repayments are comfortably affordable. If not, don't do it.
The cheapest way to borrow – 20 months 0%
With no interest and no fee, 0% credit cards are the cheapest way to borrow provided you can pay for the purchase(s) on plastic, can clear the debt within the 20 months and pay at least the monthly minimum.
● Currently we have three cards offering new cardholders the longest ever fees-free 0% deals on new spending - all at 20 months. They are Clydesdale bank (www.cbonline.co.uk), its sister Yorkshire Bank (www.ybonline.co.uk) and www.halifax.co.uk. Fail to clear the debt in that time and they jump to 18.9% representative APR.
The cheapest ever loans
If you can't pay on a card, need to borrow more or for longer, or want the discipline of fixed monthly repayments, personal loans win. The loans go as cheap as 3.6% which is lower than anything before the credit crunch.
● £2,500-£2,999: www.hitachi.co.uk is 8% rep APR. Yes I know you usually think of Hitachi as electronics, but it is trying to break into the loans market, and for small amounts is far cheaper than anyone else.
● £3,000-£4,999: Hitachi again at 7.8% rep APR.
● £5,000-£7,499: www.cahoot.com is 4.6% rep APR
● £7,500-£15,000: www.bank.marksandspencer.com is 3.6% rep APR as is www.sainsburysbank.co.uk if you're borrowing for 1-3 years and have a Nectar card.
It's also worth checking out www.zopa.com and www.ratesetter.com – who can be cheaper than those above, but their rates are more personalised.
There are two key need-to-knows though:
1) A 3.6% loan can charge you 20%. All loans are "representative" rate, meaning only 51% of those accepted need get that rate. There is no way to know in advance, which is outrageous because the mere act of applying marks your credit file. My www.mse.me/eligibilitycalc can give your likely acceptance odds (without impacting your future credit) for each loan and in general the higher your acceptance odds are, the more likely you are to be given the advertised rate.
2) Borrow more, pay less? As rates decrease, the more you borrow at the borders, you can play the system. For example, borrow £2,499 and the cheapest is 14.9%, borrow £1 more and it's 8%. On a five-year loan you'd then repay £540 less.
Can I use a 0% card for a loan?
Yes. For smaller amounts, if you need cash or are buying something you can't pay for on a card then the winner - for a fee - is a specialist 0% money transfer credit card. These pay money directly into your bank account, so you owe the card firm instead - effectively a loan, and they are usually far cheaper, especially for smaller amounts.
● www.mbna.co.uk offers 24 months 0% for a 1.94% fee and www.uk.virginmoney.com gives an extra year at 0% (36 months) but for a much larger 4% fee. Always ensure you clear the card by the time the 0% ends, or you'll pay 22.9% and 20.9% rep APR respectively. And never miss the minimum monthly repayments, or you can lose the 0%. If this is new to you read my full www.mse.me/moneytransfers guide first
Struggling? You may be eligible for a government 0% loan
There's no credit check, but they will check you can repay. You can try local council support schemes (typically for those in emergencies with no savings), or budgeting loans which are useful for those on income-based benefits (www.gov.uk/budgeting-loans), or try your local credit union which are small savings and loan mutuals, helping local communities (www.abcul.org).
