The cheapest way to borrow thousands of pounds

What are the best deals out there for borrowers? Donna Ferguson investigates.

Where should you go if you are looking for a loan? How can you ensure you pay as little interest as possible - and, at the same time, get a loan that suits your needs and circumstances? 

I only need to borrow a few thousand pounds

If you only need to borrow a few thousand pounds, and the thing you need to buy can be purchased with a credit card, you may actually be better off applying for a credit card rather than a loan.

This is because the interest rates on credit cards can be as low as 0% for a set period - which means you’ll pay no interest at all. If you’re employed and have got a good credit rating, you should be able to one of the two market-leading 0% credit cards out there: the Tesco Clubcard Credit Card Mastercard or the M&S Money Credit Card. Both offer 0% on purchases for 15 months - after which, the rate will jump up dramatically.

If you don’t think you can afford to pay off what you spend on the card within 15 months, then you could potentially transfer your balance at the end of  this period to another 0% card. However, it is likely you will have to pay a fee of around 3% at this point, and you will need to keep your credit record squeaky clean to be confident your application for a new 0% card will be successful. So be careful, and make a note in your diary to switch before the interest-free period ends!

Top tip: You collect Clubcard points when you spend on the Tesco Clubcard credit card. 

I need to borrow £5,000

If you need to borrow £5,000 over, say, three years the rates on loans are unfortunately not very competitive. You will typically have to pay more than 8% APR, as this table of the market-leading deals shows:

So what are your other options?

Well, if you earn a high income - say £70,000 or more - and have an excellent credit history, you may qualify for a £5,000 credit limit on a 0% on purchases card. If so, again I think this is a far better strategy than a loan, as you won’t pay any interest at all.

But if an income of £70,000 is something you can only dream about, don’t despair as, even on an average income, you should still be able to get and use a 0% on purchases card for some of your spending. Your credit limit probably won’t stretch to all of it - but you can put the rest of your spending on a low APR credit card. The market-leading card, the Barclaycard Simplicity Visa, charges just 7.9% APR. Not only is this a lower interest rate than you’d pay with a loan but, with a credit card, you have more flexibility, as you can vary your payments each month (as long as you make the minimum payment).

If you go for this strategy, it’s best to focus on paying off the debt on the interest-bearing card first, as this card will cost you more in interest. But at the same time, you’ll need to keep an eye on when the 0% period ends on the interest-free card - and, if you can’t pay it off completely, transfer your balance to a new 0% card before the deal runs out! 

I need to borrow £10,000 or more

If you’re borrowing such a large amount, then a loan is likely to be your best option - although again, you could potentially put some of your spending on a 0% on purchases card.

Here are the best rates around if you are borrowing £10,000 over five years:

As you can see, existing customers of Nationwide will get the best deal, as they are offered an exclusive rate of 6.5% APR. But even if you aren’t an existing Nationwide customer, you’ll only pay £1 more a month at 6.7% APR. These are some of the most competitive rates we’ve seen in years! 

Compare loans to find the best deal

*This loan costs slightly more than the Nationwide loan at 6.7% due to the fact that you must defer your first payment for three months.