The best ways to borrow £5,000

A personal loan, a credit card, a social lending site. Which is the best way to borrow £5,000?

There are many options open to borrowers in the market for a loan of a relatively low figure like £5,000. How do they compare? And how can borrowers choose between them?

0% credit cards

The obvious place to start when borrowing a sum like this is a credit card. Your first option is to go for a card offering a set period of 0% interest on your spending. This way you can pay off the debt in manageable chunks, with every penny of your repayments going towards your debt rather than on interest.

Here are the five cards offering the longest interest-free periods on purchases:

Just be aware that the 0% period begins when you take out the card, not when you make the purchase.

Alternatively, you can spend the money on your existing card and then transfer it over to a balance transfer card offering an extensive interest-free period. The plus point of going down this route is that you get even longer 0% deals than from purchase cards. However, you will have to pay a fee to transfer the balance over.

Here are the five cards offering the longest interest-free periods on balance transfers:

*Existing current account holders only

The trouble with going down the 0% credit card route is that at some point the 0% period comes to an end. And if you haven’t paid the debt off yet, you will then face a serious interest rate, of about 19%!

And that can make paying off that debt far more expensive. You can either accept the big jump in interest, or shop around for another new 0% card, which can be a pain. Who knows what deals will be available - and who they will be available to - in a couple of years' time?

A low interest rate for life

An alternative to frequently switching your cash from 0% card to 0% card is to go for a card which offers a low interest rate for life on both purchases and balance transfers. OK, so you will have to start paying interest from day one, but at least it’s a low, consistent rate for the entire lifetime of the card. What’s more, you generally don’t have to pay a transfer fee to move a debt onto the card.

As I explained in Why you don’t need a 0% credit card, these cards can work out cheaper than going down the 0% card route.

Below are the best low APR cards on the market today.

Personal loans

You may prefer not to go down the credit card route though, in which case turning to a personal loan is an option. The best rates on personal loans are saved for larger loans than £5,000, but there are still deals worth considering.

Here are the five cheapest deals for a £5,000 loan taken over a five-year period.

There is obviously a big difference between borrowing on a card and with a personal loan. With a loan you have to hand over a consistent monthly repayment, and you’ll also end up paying a charge if you pay the loan off early. With a credit card you can pay vastly different amounts each month, and if you clear the debt early there’s no punishment!

It's also worth noting that the banks only have to offer their typical APR to 51% of borrowers. So you could end up with a significantly different rate.

Social lender loan

Your final option is to go down the social route, and borrow via a social lending site. These sites basically cut out the banks, so you borrow directly from other people.

And at its best, that can give you a far better rate.

You can currently borrow £5,000 over a five-year term at a rate of just 7.60% APR at Zopa, significantly lower than the best deals from banks. Taking the £40 fee into account that works out at just £99.79 a month!

Another social lender also offers a rate that is fairly competitive compared to those on offer from the banks. At RateSetter borrowers can get a rate of 10.2% for a five-year loan of £5,000. There is a £130 fee to take into account.

For more on how social lending works, check out Earn 7.6% on your savings without going near a bank.

The best way for you

The cheapest way to borrow a sum like £5,000 for most is by going down the 0% credit card route. However, this is by no means the perfect answer. First, you’ll need to have a spotless credit record just to qualify for the interest-free offer.

And then, you’ll either need to clear the debt before the 0% period comes to an end, or shop around for a 0% balance transfer card to move the debt to. Who knows what those offers will look like at that point? Or whether you’ll be accepted for one? There’s a lot of hassle involved, but that grief may save you money.

In contrast, there’s the certainty of a loan, whether from a bank or via a social lender site. You’ll know exactly what you are paying each month, and there’s no shopping around or research involved once you’ve settled on a deal. You just make the stated repayment each month, and at the end of the term, the debt is gone.

On the downside, you will have to pay interest on the debt, and you may incur a charge if you try to pay the debt off early.

So which would be your preferred way of borrowing £5,000?

More: Five bank accounts that give you something for nothing | New low personal loan rates