Best ways to borrow £250 to £25,000!

Whether you need to pay for renovations to your home, a new car or simply make sure your finances will last you through the festive season, we reveal the most cost effective ways to borrow.

None of us like to borrow money but when there’s no other choice, make sure you do it the right way. Believe me, there are plenty of ways of doing it wrong.

A classic example is to allow your current account to go into the red without arranging an overdraft facility with the bank first. This means you’ll have wandered into unauthorised borrowing territory where the costs are truly extortionate.

Take the popular Santander Preferred In Credit Rate account. It’s a fantastic choice for those of you who usually have a healthy balance. It’s not so great for people who regularly go overdrawn. And if you do so without permission, you’ll be hit with an ‘unarranged overdraft’ rate of 28.7% EAR. Ouch!

No matter how much you need to borrow, there’s always a more cost effective way of doing it. Let’s find out how:

You need £250

If you need a relatively small loan - let’s say you’re short of no more than a few hundred pounds - don’t forget some banks offer free overdraft buffers which enable you to borrow a small amount interest-free. You should check whether this facility is available on your own current account.

The First Direct 1st Account, for example, provides all accountholders with a £250 buffer which is charged at 0%. And this feature comes as standard, so you won’t need to go through the hassle of applying for it.

If your current account doesn’t offer this option, think about switching to a bank which has better terms on its overdrafts. The Santander Preferred Overdraft Rate account is the only product left on the market which still offers a completely free overdraft for a period of 12 months. (You can even get your existing overdraft matched up to a maximum of £5,000 and charged at 0% depending on your circumstances.) Just be aware there are a few catches associated with this account.

You need £1,000

If you need to borrow a little more, it’s time to start thinking about interest-free credit cards. In fact, a 0% on purchases credit card is the ideal way to spread out of the cost of items you want to buy. Right now the top card on the market is the Tesco Clubcard Credit Card which offers a fantastic 13 months interest-free credit on all your spending - and the opportunity to earn extra Clubcard points too.

Sainsbury’s also has its own version in the shape of the Sainsbury’s Credit Card which allows Nectar card holders to enjoy interest-free purchases for 12 months. Meanwhile, Barclaycard Platinum with Purchase and the MBNA Platinum Dual Card also offer a similar deal. You can find out more about these best-buy cards in Top cards for your Christmas Shopping.

Just remember, if you’re going to borrow using a 0% card, it’s imperative you clear your balance in full before the interest-free period expires.

You need £3,000

A 0% on purchases credit card is still a good idea for larger loans as long as you can afford the monthly repayments required to clear it within the 0% introductory period. If you borrow £3,000, for example, you would need to pay off £250 a month to be debt-free in a year.

This route is infinitely preferable to more traditional ways of borrowing such as a personal loan. In the unsecured lending market, a loan of £3,000 is considered relatively small, and unfortunately, is usually subject to far higher interest rates. Even the most competitive lenders will charge around 13% to borrow this amount, making it far more expensive to take out a loan rather than a 0% credit card.

You need £5,000

It might start to become tricky to pay off an interest-free credit card within the interest-free period if you need to borrow even more. After all, clearing a loan of £5,000 in 12 month’s time requires substantial monthly repayments of around £417.

In this situation, it’s probably more sensible to consider a personal loan. After all, borrowing only works if you can comfortably afford to pay it back. And the beauty of a loan is, with fixed repayments over a set term, you’ll know exactly when you can wave goodbye to your debt forever.

Luckily, at £5,000 the interest rates start to come down significantly enabling you to borrow at less than 9%. The most competitive loans, which are available to all borrowers, are the Tesco Bank Personal Loan and the Santander Personal Loan both of which charge a rate of 8.7%. There are also plenty of loans which are exclusively available to existing customers including the Sainsbury’s Nectar Cardholder Personal Loan with a rate of 8.6%. (Although you can easily become eligible yourself by applying for a Nectar card if you don’t already have one.)

Don’t forget, at £15,000, many lenders will charge you the same rates as they do for loans of £5,000.

A second even cheaper option is to go for a credit card with a low standard APR instead. One of the best examples is the Barclaycard Platinum Simplicity card which charges a rate of just 6.8% on all your spending. Clearly, this is much cheaper than the best-buy personal loans, but the rate is variable and could feasibly become more costly over time.

Recent question on this topic

• jeza asks:

  I have an old £5000 loan from GE Money charging 22.67% can I do better to pay off quicker and cheaper?

  • 
    MikeGG1 answered "It is a high rate for a loan, but it depends on the terms of the loan. Have you asked them how..."
  • 
    SoftwareBear answered "The rate is massive ... is this because of previous credit problems ? This may affect what you can..."
  • Read more answers

You need £25,000+

By the time you need to borrow a substantial amount, personal loans will no longer be an option since lenders won’t generally be willing to hand out more than £25,000 on an unsecured basis. (Unsecured lending means the loan has no collateral such as your home.)

At this point, if you’re a homeowner you could think about remortgaging to free up extra funds if you have equity in your home, or by taking a further advance on your existing mortgage.  In either case, it’s a good idea to speak to your lender in the first instance.

If you can switch to a more competitive home loan, you make be able to make savings on the cost of your original mortgage loan as well as getting a better deal on new borrowing. However, with a further advance you may have to pay a higher rate than your existing home loan. Both options will likely charge arrangement and valuation fees.

Choosing one of these ways may lead to cheaper rates than personal loans since you’ll effectively be borrowing at mortgage rates, but bear in mind you are putting your home at risk in order to borrow that money, and a home loan is likely to take a lot more effort on your part to arrange. Plus, you’ll need to convince a lender to let you borrow more which, in the current climate, might be easier said than done....  

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