When it comes to finding the cheapest way to borrow, there is no one-size-fits-all solution.
Below, we’ve outlined ten popular ways to borrow that won’t break the bank and get the pros and cons of each.
Your credit history, borrowing needs and income will determine what borrowing options are available to you and which are suited to your circumstances.
1 – Interest-Free Overdraft
An overdraft facility allows you to spend more money than there is in your bank account, up to an agreed limit. The bank charges interest on the outstanding balance at the end of the month, but there is no deadline by which you need to pay it back- making overdrafts a highly flexible borrowing option.
Starting from July 2020, the average interest rate on high street overdrafts will be 35% APR, meaning overdrafts are an expensive way to borrow.
However, a handful of banks offer interest-free overdraft facilities on their current accounts. The interest-free limit is normally fairly low (the largest we could find was for £500), but this is enough to help with small unexpected expenses and purchases.
Pros: Completely interest-free; flexible repayment terms
Cons: Relatively small amounts on offer; switching banks is time-consuming
2 – 0% Purchase Credit Card
This allows you to spread the cost of purchases for up to two years or more, without having to pay any interest. Any purchases made in a shop or online store are added to the card’s balance, which you pay off in regular monthly instalments. Provided that you repay the balance in full before the end of the interest-free period, it will cost you nothing to borrow.
The length of the interest-free period and the amount you can borrow will depend on factors such as your credit score and income. Some banks offer up to 30 months interest-free and credit limits of over £5000.
However, if you have a poor credit score, you might not qualify at all. Once you start spending, the bank will specify a minimum amount to be paid towards the balance each month. If this isn’t met, it will harm your credit rating and could also cause you to lose the 0% interest offer.
0% purchase credit cards don’t cover cash withdrawals or overseas spending. Although you can still use the card for these expenses, interest would be charged on them at the bank’s specified rate.
Pros: Interest-free if paid off before the end of the introductory offer; regular instalments help you clear your debt
Cons: Not accessible to those with poor credit; failure to keep up with payments could harm your credit score
3 – Peer-to-Peer Lending
Peer-to-peer lending allows you to borrow money directly from crowd funders and individual investors instead of banks. Loans from peer-to-peer lenders are not interest-free, but many offer lower interest rates than equivalent loans at banks.
Most peer-to-peer lenders are based online, meaning that their running costs are minimal compared to a high street lender- resulting in lower fees for customers.
As with banks, the interest rate you are offered will reflect your credit history. Investors who are happy to take a risk may lend to customers with poor credit ratings for higher interest, while risk-averse investors lend to people with better credit ratings at lower costs.
These platforms also have a reputation for being more flexible in their approach to bad-credit customers, meaning you may be able to get a loan with a peer-to-peer lender even if you have been rejected by a bank.
The risks of peer-to-peer lending lie mostly with the investors, who don’t have the same protections as banks if borrowers fail to repay their loans.
However, this type of borrowing still appears on your credit file, and if you don’t stick to the terms of your deal, it will reflect on your credit rating.
Pros: Potentially lower interest rates than with traditional lenders; you might be able to get an affordable loan even with a bad credit history
Cons: Borrowing is not free; failure to keep up with payments could hurt your credit
4 – 0% Balance Transfer Credit Card
Borrowing money to pay off debt sound crazy? It’s more common than you might think. If you’ve taken out an expensive loan in the past, a 0% balance transfer card is a tool that could help to minimize the costs of paying it back.
To entice customers, some lenders offer an introductory interest-free period of up to 18 months when you transfer your existing debts to a new credit card. The bank may charge transfer fees to set up the account, and as with most credit cards, you are still required to make a monthly minimum payment to the account.
Failing to keep up with this will harm your credit rating and could cause the bank to cancel the interest-free offer.
However, if you can clear your existing debts before the end of the introductory period, you will avoid paying any interest on the balance.
Pros: Chance to switch to cheaper borrowing option if you’ve already committed to an expensive deal
Cons: Most banks charge transfer fees to set up the account; depending on the size of your debts, you may not be able to clear your whole balance in the interest-free period
5 – Borrowing From the Government
People who receive certain benefits can apply for an interest-free Budgeting Loan from the government of up £821. If you have received Income Support, Jobseekers Allowance, Employment and Support Allowance or Pension Credits for the last six months, you may be eligible to apply.
The loan money can be used to pay for a variety of expenses, ranging from travel around the UK to clothing and maternity expenses.
Repayments are deducted directly from your benefits each month until you have repaid the loan in full.
Pros: You won’t be charged any interest; one of the few affordable options available to people on benefits
Cons: It can take a long time for a decision (up to 3 weeks); the appeals process can be cumbersome and slow if your loan application is rejected
6 – 0% Money Transfer Credit Card
0% money transfer credit cards provide interest-free cash loans for a set period of time. Depending on your credit score, you could borrow money on the account for up to 24 months without paying a penny in interest. This kind of card is useful for clearing debts as well as funding cash loans.
As with all credit cards, you will need to meet monthly minimum payments on the account. If you don’t keep up with these, you will damage your credit score, and the bank could cancel the interest-free offer.
Usually, the card can also be used for payments and cash withdrawals- although these aren’t included in the interest-free deal and could even cause the deal to be voided it, depending on the contract.
This option is also better suited to people with a good credit history; the higher your credit score, the longer the interest-free period you will be able to access. If you have bad credit, you might not be accepted at all for an interest-free credit card.
Pros: Interest-free borrowing for up to two years; regular instalments help you stay on top of your debt; cash loan allows you to spend the money as you wish
Cons: The best deals are reserved for people with good credit; people with bad credit unlikely to be accepted.
7 – Family & Friends
It can be uncomfortable to talk about money, but if your family or friends are in a position to lend to you, this can be one of the cheapest options available.
Borrowing from loved ones is an increasingly popular option- since the credit crunch, insurers Scottish Widows report that borrowing from family and friends has increased by 31%, while the Family Building Society claims the ‘bank of mum and dad’ is the UK’s sixth-largest lender!
Unfortunately, finances have the potential to put a strain on any relationship. To limit the opportunity for disagreement, it is important to set boundaries and clear expectations with informal loans. Putting an agreement in writing is not a bad idea.
Pros: No formal checks; you could potentially borrow money at no cost
Cons: Failure to pay back could put a huge strain on your relationships; you won’t be building a credit history for borrowing in the future
8 – Buy Now, Pay Later Deals.
If you are looking to fund a purchase for a specific item or with a specific retailer, you may be able to spread the cost of the purchase using a buy, now pay later interest-free loan offered by the outlet.
These are common with online retail websites, digital payment services and traditional catalogue retailers. They allow shoppers who pass a soft credit check to spread the cost of their purchases over a specific period of time, sometimes without paying any interest for a set period of time.
However, if the purchase is not paid for on time or within the terms of the deal, extra charges may be applied.
Some retailers may charge interest retrospectively, meaning the whole balance of the loan (from the beginning of the interest-free period) is taken into account.
Pros: Often more accessible than bank loans; helps spread the cost of purchases without incurring interest
Cons: Only available some of the time; limited to certain retailers and products; can be expensive if you don’t keep up with repayments
9 – Personal Loan
A personal loan is an unsecured loan borrowed from a bank. It is for a fixed amount of money and is paid back at regular intervals over a fixed amount of time, at a fixed rate of interest.
It is possible to borrow anywhere from £1000-£50 000 with a personal loan; how much you can borrow and how much interest you are charged will depend on your income and credit history.
Your credit history will affect the interest rates available to you; if you have a bad credit score, you won’t be able to access the cheapest rates- sometimes as low as 2.5%. Likewise, if you have a very low income, you are unlikely to be granted a loan for £50,000.
However, regardless of your credit score, personal loans are almost always cheaper in the long run that other bank-based faculties such as overdrafts and regular credit cards.
Pros: Some of the cheapest deals available from banks for long-term borrowing; larger amounts available than with other low-cost loan options
Cons: The best rates are only available to those with good credit; repayment terms are not very flexible so it could cost extra to top up your loan or pay it off early
10 – Credit Union
Credit unions are community-led savings cooperatives run in the interests of their members. Members pay their savings into an account with the credit union and in exchange get access to affordable loans and other products.
Because they run on a not-for-profit basis, they can afford to grant low-interest rates on credit. The average interest on a personal loan from a credit union is 12% APR. In England, Scotland and Wales, the maximum interest a Credit Union can charge on any loan are capped at 42.6% APR, and 12% in Northern Ireland.
To borrow from a credit union, you need to hold savings with them. Membership to a union is normally based around a common trait shared by all members, such as their profession or where they live.
If a member wants to take out a personal loan, the organization examines their savings and income before deciding how much to lend them.
Credit Union loans don’t include charges or early repayment fees and normally come with free life insurance so the loan would be paid off if you died.
Pros: Competitive interest rates; no charges or early repayment fees; because they are run in the best interest of their members, you’ll never be sold a high-risk loan.
Cons: You need to join a credit union and save with them before you can start borrowing
How Can Flexy Loans Help?
Here at Flexy Loans, we have partnered with some of the UK’s leading Lenders.
They have already helped thousands of people get loans already, and they can do the same for you.
Choosing a loan broker like us (we don’t charge any fees) means our application process matches you with the best loan available to you. All lenders we recommend are regulated by the FCA, which gives you an additional layer of protection.
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