What's the best way to borrow?

If you need to borrow a set amount to make a purchase, pay off existing...

16:51 21 November 2012

If you need to borrow a set amount to make a purchase, pay off existing debt at a cheaper rate or just to tide you over the festive period, there are several different avenues to consider.

 

The one you choose may well depend on the kind of borrowing you need, so here we take a closer look at the options available.

 

Personal loans

 

In recent weeks, loan rates have tumbled to record low levels, with providers tripping over themselves to undercut the next and pull the cheapest rates out of the hat.

 

This has resulted in the lowest personal loan costs in the history of MoneySupermarket data. For example, the market-leading personal loan, currently offered by Derbyshire Building Society, has been slashed right down to a representative APR (Annual Percentage Rate) of 5.4%. The rate applies to borrowing of between £7,500 and£14,999 which is taken over between one and five years.

 

As an example, if you were to borrow £10,000 over a four-year period with the building society, you would repay a total £11,113.

 

The Derbyshire cut its rate in response to Sainsbury's Bank, which set the precedent a couple of days prior by pegging the cost of its Shopper Personal Loan down from 5.6% to 5.4%, also on loans of between £7,500 and£15,000.

 

However, to benefit from the joint market-leading rate, the loan must also be taken over a period of between one and three years. If you want to borrow for longer (over four or a maximum of five years) the rate at Sainsbury's will increase to a representative 5.5% APR. And in either case you must be a Nectar card before you apply.

 

M&S Bank is also a worthy contender in the personal loans market. The bank also recently reduced its representative rate APR to 5.5% for borrowing of between £7,500 and £15,000 over one and five years. However, you will need to be either aged 30 or over or a homeowner to qualify. For context, to borrow £10,000 over the same four-year period here would cost you a total of £11,134.

 

THIS TYPE OF BORROWING WILL SUIT YOU IF...

 

•    You are looking for a medium-sized loan of between £7,500 and £15,000. If you want to borrow less than this, rates can soar. M&S for example, charges a whopping 19.9% APR (representative) on loans of between £1,000 and £2,999 and 16.9% (representative) on loans between £3,000 and £4,999.

 

•    You are looking to repay the debt over between 12 months and five years.

 

•    You would benefit from the discipline of monthly repayments

 

•    You want the reassurance that your debt would be cleared over the chosen timeframe.

 

Credit cards - for purchases

 

If you are looking to borrow under £7,500 it is worth considering a credit card as your first port of call because, as long as you choose wisely, you can pay no interest at all. This is because some credit cards offer 0% on purchases for a given time period. The credit limit you are given will vary according to your credit score and your earnings.

 

Top of the tables currently in the purchase credit card market is the Tesco Clubcard Credit Card, which offers interest-free spending for 16 months. The card also doubles as a Clubcard, allowing you to earn points at a faster rate than usual within Tesco - and even gain points on spend elsewhere. The Tesco Clubcard Credit Card will also throw in 0% on balance transfers for nine months in return for a 2.9% balance transfer fee.

 

The M&S credit card offers a slightly less generous 15 months on new purchases but allows you to collect M&S loyalty points even when you are not using the card within a Marks & Spencer store.

 

It's also worth knowing that, between November 8 and January 3, every time you spend on your M&S card you'll receive one entry into a Christmas prize draw. This puts you in with a chance of winning one of 100 M&S gift cards which are each worth £1,000. If you make a new successful application for an M&S Credit Card between these same dates, you'll receive 10 entries into the Christmas prize draw.
 

THIS TYPE OF BORROWING WILL SUIT YOU IF...

 

•    You are looking to borrow a relatively small amount

 

•    You know you will be able to repay the debt by the end of the relevant 0% period

 

•    You do not have existing credit card debt.

 

Credit cards - for balance transfers

 

If you already have credit card debt, however, and it's incurring interest to the tune of 17.3% APR (the current average according to the Bank of England), then taking out another credit card which offers 0% on purchases might not be a wise idea. You should first clear your existing credit card debt - or if you can't, at least move it to a 0% shelter.

 

The good news here is that some credit cards allow you to switch across an existing card debt (as long as it's not from the same provider) and will not charge interest for a given time. Barclaycard's Platinum card with Extended Balance Transfer, for example, has recently upped its offering to a hefty 24 months at 0% on balances transferred. The balance transfer fee is also a relatively low 2.8%.

 

What's more, if you transfer a balance of £2,000 or more before December 6, you will receive a rebate of £30 on the fee paid.

 

If you want to borrow on top of this, the card also offers three months 0% on purchases - but you will need to clear both your balance transfer and purchases by their respective expiry dates as the representative APR both will kick in at 17.9% (variable).

 

THIS TYPE OF BORROWING WILL SUIT YOU IF...

 

•    You have existing expensive credit card debt

 

•    You want to a further small loan which you can pay off in the accompanying 0% purchase period.

 

Overdrafts

 

If your borrowing requirements are very small, it may not be necessary to take out any formal credit agreement at all. Some banks offer reasonable rates on overdrafts, up to a given level.

 

First Direct, for example, charges no interest on the first £250 that you venture into the red, and levies a relatively reasonable AER (annual equivalent rate) of 15.9% thereafter. What's more, if you switch your current account to the bank's 1st account, you can currently pocket £125 cashback just for making the move.

 

The Co-operative Bank also offers the first £200 of borrowing without charging interest. The standard AER charged beyond this is 18.9% AER so it's best not to venture any further into the red here.

 

THIS TYPE OF BORROWING WILL SUIT YOU IF...

 

•    Your borrowing requirements are very small

 

•    You may not qualify for a standalone agreement due to a low credit score.

 

•    You can be sure you won't venture into unauthorised borrowing, which becomes a lot more expensive

 

Secured loans

 

If you need to borrow a larger sum, a personal loan (which is always unsecured) may not suffice as the maximum you can borrow is usually capped at £25,000. And even if you want to borrow less than this, rates on personal loans soar for any borrowing north of £15,000.

 

In this case, it could be worth considering a secured loan. This is a loan that is secured against your property, so the lender can legally sell it from under you if you default on payments.  It's for this reason that interest rates are usually lower. However, they are a lot less flexible and usually charge if you want to pay it off early.

 

But most importantly they put your home at risk so should never be taken lightly. You can compare what's available at our homeowner loans channel but always take independent advice before signing up to this kind of borrowing.

 

It might also make more sense to remortgage or take a further advance with your existing mortgage lender, so long as you meet the required criteria. Call our mortgage partner, London & Country, for free independent advice on 0844 209 8725.

 

THIS TYPE OF BORROWING WILL SUIT YOU IF...

 

•    You are a homeowner

 

•    You want to borrow more than £25,000.

 

•    You need longer than five years over which to repay the debt

 

•    You do not have a good credit score

 

•    You do not qualify for a remortgage or further advance on your mortgage.

 

•    You are absolutely sure you can make the repayments.