The Best Way To Raise £10K

Need to borrow some extra cash? Here are the pros and cons of different types of credit.

Imagine you need to make vital repairs to your home or your car has broken down for good. If you need extra cash, where would you get it from? Perhaps you have enough savings carefully stashed away for emergencies. But for many more of us, some form of credit to finance the extra expenditure is often called for. If you need say, £10,000, is there a way of raising funds that's more, well Foolish than the rest?

All forms of credit have their own relative merits and drawbacks. Here I'll look at your five key options in turn. First up - loans.

1. Secured Loans

A secured loan allows you to borrow by putting up an asset as security which is usually the equity in your property. Crucially this means the roof over your head could be at risk if you fall behind on your repayments. Essentially a secured loan is a second mortgage so you need to be absolutely sure the additional borrowing is affordable considering what's at stake. A second mortgage carries a higher risk for the lender and therefore usually charges a higher rate of interest.

Because the loan is secured you can often borrow more than you could via the unsecured route. And it can be made more affordable by borrowing over a longer timeframe perhaps running alongside your mortgage. But long term loans mean your overall interest will be significantly higher.

Pay special attention to the interest rate charged on a secured loan. It can vary dramatically from lender to lender and you really lose out by choosing a poor deal. What's more, most rates are variable so you won't have the security of knowing your repayments will remain the same over the term.

Don't forget, you may need to factor in the cost of arrangement, valuation and legal fees if they apply. And there could be penalties for early repayment, so watch out for that.

2. Unsecured Personal Loans

No security is required for this type of loan. In the wake of the credit crunch they aren't quite the inexpensive line of credit they once were. A growing number of lenders are beginning to increase APRs but generally you should be able to pick up a loan which is more cost-effective than the secured alternative. And because personal loans are usually arranged over shorter periods, the total interest bill should be kept to a minimum.

Try to find a flexible loan which allows you to overpay or redeem your debt early without getting stung by a penalty. It's important to shop around to find a competitive deal not only for a lower APR but also to find a fixed rate.

3. Remortgage

Regular readers of The Fool will know how much we encourage remortgaging if you're coming to the end of your current mortgage deal or are paying your lender's standard variable rate (SVR). If you're a homeowner and you need to raise extra funds you may be able to kill two birds with one stone.

Moving to a more competitive mortgage can provide big cost savings and further borrowings may be provided more cheaply into the bargain. Switching to a market-leading deal could cut your mortgage outgoings by around 15%.

But to raise cash this way you'll need to have some equity in your property. Plus you'll have to put up with the hassle and costs involved, and you may have to stump up for valuation, legal and arrangement fees.

That said it's likely the savings made by remortgaging will easily offset the costs incurred. But this involves running debts over the longer term possibly incurring greater interest charges overall.

4. Further Advance On Your Mortgage

This is a way of raising capital using your existing mortgage lender as long as they're willing to provide the additional lending facility and you're comfortable with the higher repayments. But beware the interest you pay may not be the same as your original mortgage and there could also be an arrangement fee.

You may be paying your debt off over a much longer period which could rack up the interest costs. But on the plus side if you're happy with your current lender and want to stay put, taking out a further advance could be quicker and easier than remortgaging.  

5. Borrow On A 0% On Purchases Credit Card

You could simply raise cash by spending on a 0% on purchases credit card. Recently we've seen generous extensions to interest-free periods. At the moment the longest 0% period is fifteen months but is this really a sufficient timeframe in which to repay a debt of £10,000?

You'll need a pretty healthy disposable income to be able to achieve that and you'll need to be disciplined to ensure the debt is repaid before the interest-free period expires. If you don't, repayments under the typical APR could come as a particularly nasty shock.

You could repay as much as you can during the fifteen months and then transfer the remaining balance to a new credit card. But there's no guarantee that 0% balance transfer credit cards will still be available so this could be a risk.

Whichever method you choose you should ask yourself three important questions first:

1. How much risk are you prepared to take?

Consider, for example, the unknown quantities of variable interest rates or the risk of having more debt secured on your property.

2. How much can you comfortably afford and

3. How long will it take you to repay your debt?

If you can repay your debt pretty quickly a 0% on purchases credit card may be appropriate. But if you need your repayments to be as low as possible you may be better going for a further advance or remortgage.

Don't be fooled into thinking a low APR equals a good deal. The longer you take to clear your debts the higher your overall interest bill will be regardless of the interest rates charged.

More: Loan Rates Jump | How Remortgaging Saved Me Money |Simple Steps To Clear Your Debts