We might need to borrow some cash to tide us over until the end of January. Or maybe we’ll want to splurge in the sales, or even book a summer holiday. Whatever the reason, thanks to low interest rates it’s now relatively cheap to borrow, so here’s how to cut the cost of doing so – along with a look at which kind could be best for you.
1. Balance transfer credit card
If you run up debts over the festive period, you should make a New Year’s resolution to switch any outstanding balances to a 0% balance transfer credit card. You could then pay no interest on your debts for up to 29 months.
It really is a no brainer, especially if you have debts on store cards that charge even higher rates of interest.
MoneySuperMarket lists the leading balance transfer deals and top of the table at the moment is the Barclaycard Platinum Credit Card with Extended Balance Transfer, which charges 0% on balance transfers for 29 months.
Watch out for fees. They vary between these cards but can be around 3% of the amount transferred.
The golden rule of 0% balance transfer cards is to clear the outstanding balance before the 0% deal expires. If you don't, you will start to accrue interest at the standard rate and the costs will mount up. And note that you cannot normally switch a balance from one card to another within the same banking group.
2. 0% purchase credit cards
With a 0% purchase credit card you pay zero interest on your spending. The Halifax Purchase credit card is currently the best buy in this class, with 0% on purchases for 17 months.
As with a 0% balance transfer card, you should aim to pay off any balance on a 0% purchase card by the time the promotional offer expires, or you could end up in serious debt. The typical standard interest rate is between 17% and 19%, though the American Express card charges 25%.
3. Personal loan
What if you don’t qualify for a 0% credit card? Or maybe you want to borrow a large amount and would struggle to pay off the debt within the promotional period. Perhaps you want the discipline of a fixed repayment schedule, or to consolidate your existing debts? If so, a personal loan could be the best solution.
Personal loans charge a fixed rate of interest for a fixed period of time, usually one, three or five years. So you know at the outset how much the loan will cost and can budget accordingly. You can borrow as little as £1,000 but the best deals are often available on bigger amounts – between £7,500 and £15,000.
For example, the best value personal loan from a bank or building society that is open to all applicants for this level of borrowing is the Sainsbury’s Bank Shopper Standard loan which charges 4.9% on loans of this size with repayment terms ranging from one to three years. But even cheaper deals are sometimes available as limited offers – or HSBC offers 4.8% on the same borrowing if you are already a customer with the bank.
Overdrafts can be useful, but they can also be an expensive way to borrow money. You should therefore only use an overdraft for small amounts over the short term, preferably no more than a few days. And always let your bank know if you are going to slip into the red as unauthorised borrowing is often more costly.
Clydesdale Bank charges one of the lowest authorised overdraft rates at 9.9%. First Direct’s 1st account is also competitive at 15.9%. Plus, here you get an interest-free buffer of £250, which is handy if you need only a small overdraft. Or, you could switch to Nationwide’s FlexDirect and get a 12-month interest-free overdraft. After the 12 months, you pay 50p per day.
5. Mortgage or secured loan
If you need to borrow a lot, say £25,000 or more, credit cards and personal loans can be expensive. Instead, it’s probably better to think about a secured loan, or mortgage.
Let’s say you have a home worth £350,000 and a mortgage of £250,000. You could take out a new loan of £275,000, pay off the old debt and release £25,000 to spend. It might not even cost you any more money.
For example, if you currently pay 4% on your £250,000 mortgage over 20 years, your monthly payments would be £1,515. Increase your loan to £275,000 but switch to a rate of 2.5% and you would pay £1,457 a month.
You can compare a range of remortgage deals at MoneySupermarket. Some of the top deals at the moment include a two-year fix from West Bromwich building society at 1.48% and a loan fixed until March 2016 with HSBC at 1.49%. Or there’s a two-year tracker from Tesco Bank at 1.75%.
Check that you will not have to pay any penalty charges if you switch to another lender. And make sure that you include any mortgage fees in your calculations.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct