Cheapest ways to borrow this January

We take a look at the cheapest ways to borrow small, medium and large amounts this January...

It was a distressing scene to behold on my first walk to work of 2012. Corpses, strewn across pavements, stuffed in bins and dumped on street corners. Yes, nothing says welcome to January – the month of debt, dieting and drabness – like brown, discarded Christmas trees.

But January also provides the impetus for many to take a long, hard look at their finances. And one question you should certainly be asking if you have any outstanding debts is whether you could borrow more cheaply.

However before I look at the cheapest ways to borrow in 2012 – a brief public service announcement...

What not to do

Overdrafts, credit cards and loans can be good ways to consolidate existing debt or spread out the cost of emergencies and big buys. But, whatever the size, no form of credit should ever been taken out lightly. You should only ever borrow if you are 100% positive you can pay the amount back. Even a small overdraft can push you into a spiral of debt if not repaid on time.

And whatever you do, never go for a payday loan.

So, warning over, onto the borrowing methods.

Small amounts: £200 – £500

If you’re after a smallish amount, say £200 to £300, using an overdraft is probably your best bet. Santander and HSBC currently have the market-leading overdraft accounts on the Preferred Account and sale period Bank Account respectively. Both deals have a 12 month 0% overdraft when you switch your main account to the provider. Have a read of this article for some more information on both accounts.

Remember though, both of these overdraft deals are only 12-month promotions. So after this period, you’ll have to pay for going into the red.

If you’re after a more permanent overdraft, First Direct’s 1st Account or the Co-operative’s Bank Account Plus are better options. First Direct’s offering comes with a £250 interest-free overdraft, and you’ll get £100 for switching. However you do have to pay in £1,500 every month to be eligible for this account.

The Co-operative Bank’s deal comes with a £200 interest-free overdraft and a lower monthly funding requirement of £800.

Medium amounts: £500 – £5,000

If you’re looking to borrow more than a few hundred pounds, an overdraft probably isn’t the best bet. Yes, Santander and HSBC may offer you large limits if you have a sparkling credit history. But as I mentioned earlier, you’ll only get 12 months at 0% and will have to jump through several hoops to be eligible for the accounts.

For £500 up to several thousand pounds a 0% purchase credit card is a far better choice. These deals will allow you to spend without accruing any interest for a set period.

Nationwide currently has the market-leading purchase card offering a huge 18 months at 0%. So if you spend £3,000, you’d need to make monthly payments of £166 to clear off the balance before the interest-free period expires. However you do have to hold a Nationwide current account to be eligible for this deal.

Halifax and Tesco offer the next best cards with 15 months at 0%, followed by Barclaycard at 14 months.

Using a credit card to borrow has several advantages over a loan. For a start: the 0% period! But you’ll also be able to overpay by any amount without incurring a fee. And what’s more, if you opt for the Tesco (15 months at 0%) or Sainsbury’s (12 months at 0%) cards you’ll earn Clubcard or Nectar points as you spend.

Large amounts: £5,000 – £15,000

Due to the limited 0% period and high revert-to interest rates, credit cards aren’t a great idea for spends upwards of £5,000. For larger amounts like this an unsecured loan is more appropriate.

A loan will grant you fixed repayments over a set term, so you’ll know exactly what is leaving your account each month as well as the date by which you’ll be debt-free.

Loans of £5,000 will attract interest rates of around 7.7% to 7.8% when paid back over three years. In fact the best rate available on the lovemoney.com loan calculator for this deal is with the peer-to-peer lender Zopa at 7.7%.

Rates start falling as the loan term and amount climb. If you’re after £10,000, you’ll be able to snap up a 6% typical APR deal from M&S Money. Over five years this brings the total amount repayable to £11,555.80 with monthly payments of £192.58. Tesco Bank and Sainsbury's Finance are the next best deals with 6.1% rates. That’s £193.03 repayable each month totalling £11,581.80 – £26 more than the M&S market leader.

But remember, the APRs trumpeted by loan companies are all just the 'typical' rate. This means that they only have to give that rate to 51% of loanees. So if you have a credit rating that's anything less than squeaky clean, you may well be lumbered with a higher interest rate.

Low-interest cards

A further way to borrow large amounts of money if you don’t fancy a loan is to get hold of a low-interest credit card. Unlike the deals I highlighted above, these cards do not carry 0% periods. But they do offer permanent interest rates that will be lower than the revert-to rates of interest-free cards. This allows you to pay off the balance over a longer period of time at an affordable rate.

Sainsbury’s currently has one of the best low-interest deals with an APR of 6.9% - far cheaper than the rates for a £5,000 loan. Barclaycard’s Simplicity account follows at 7.9%.

Huge amounts: £20,000+

Borrowing more than £20,000 will require a lot more research and work as most loan providers will not offer unsecured deals of such a size.

Remortgaging is an option if you are a homeowner and have managed to build up equity in your property. Have a read of this article for some tips on remortgaging and head over to our remortgage calculator where you can shop around for a new deal and speak to one of our fee-free brokers.

More: Compare credit cards and loans with lovemoney.com | There's never been a better time to get a credit card | You can beat Barclaycard's 24-month 0% card