The best - and worst - ways to borrow money

Are you thinking of borrowing money to pay for Christmas? Read this first!

Before you take out a loan to pay for Christmas, please think very carefully about what you're doing. The chances are your loved ones will happier enjoying frugal festivities than having a huge blow-out and then worrying about your financial predicament for the rest of 2010!

If you really feel you have to borrow money to cover a crucial expense - whatever the time of year - you need to find a way of doing it as cheaply as possible.

I'm going to run through some of your best and cheapest loan options. And I'm also going to touch on a couple that should be avoided!

0% credit card

If you have a squeaky clean credit record and need to borrow a relatively small amount of money, a 0% purchase credit card may be your cheapest and best borrowing option.

This sort of card offers you 0% interest on all new spending for a set period of time. At the moment, the market leader is the Tesco Clubcard credit card, which offers 0% on purchases for a full 12 months. After that, the typical APR reverts to 16.9%.

A 0% purchases card is, in effect, a short term interest-free loan. However, you need to make absolutely sure you can clear the balance completely before that interest-free period comes to an end; the interest rate you're charged after this point is almost certainly going to be far higher than that charged by a personal loan.

The other main catch is that 0% credit cards are usually only available to people with excellent credit ratings. An unsuccessful application could make a bad credit rating even worse, so before you apply for one of these cards, it's important you find out exactly where you stand.

You can get a free credit report from Experian if you sign up for a 30-day trial of the service. If you don't want to be charged in the future, just make sure you unsubscribe before the 30 days come to an end.

To find out more about 0% borrowing on credit cards, read The cheapest way to borrow a grand.

0% overdraft

Another way to get an interest-free loan for a relatively small amount is to find a current account with a decent 0% overdraft facility.

One of the best on the market at present is the Alliance & Leicester Premier Direct current account, which offers customers an interest-free overdraft facility of up to £2,000 for 12 months after the account is opened.

Just be aware that, when your interest-free period ends with the Premier Direct account, you'll be charged an overdraft 'usage fee' of 50p a day (up to £5 a month). Other current accounts charge even higher fees, in the form of hefty interest rates.

To help choose the right account for you, read The top eight current accounts.

Personal loan

Next up, one of the best-known consumer borrowing options: The personal loan (also known as the unsecured loan).

This is the most expensive form of borrowing I've covered so far: the cheapest personal loans currently on the market are the Nationwide Existing Customer Loan (starting at 7.9% APR for Nationwide FlexAccount customers only) and the Alliance & Leicester Exclusive Personal Loan (starting at 8% APR).

However, there are certain circumstances in which a personal loan may be the best and cheapest solution for you. For example:

• Your credit record doesn't allow you to apply for a 0% balance transfer card or low rate credit card;

• You need to borrow more than a credit card or overdraft will allow (the lowest personal loan rates are typically offered to people borrowing between £5,000 and £25,000).

If you do opt for a personal loan, there are several factors to consider other than the 'headline' rate on offer. To find out more about handling a personal loan, read Six top tips for an affordable loan.

Zopa

If you can't or don't want to get a personal loan, you might want to consider borrowing from Zopa, an innovative social lending venture. In a nutshell, Zopa allows you to borrow from other people, rather than from a bank.

When you apply for a loan, Zopa will credit score you and offer you a loan according to how good (or bad!) it deems your credit rating to be.

At the time of writing, Zopa maintains that those people in the A* credit rating bracket can typically get a £5,000 loan, spread over three years, at an APR of 9.6%.

To find out more about Zopa, watch this lovemoney.com video.

Warning: Loans to be avoided!

So, my round-up of 'good' potential borrowing options is complete. As you can see, the type of loan that's right for you will depend entirely on your credit status, how much money you need, and how long you think it will take you to pay it back.

I'll finish by highlighting two sorts of loan that you should avoid if at all possible:

Secured loans

A secured loan is 'secured' against your home, or sometimes your car. That means that if you fail to keep up with your monthly repayments, you could literally lose the roof over your head, or your means of transport.

Read Steer clear of secured loans to find out more.

Payday loans

Payday loans are essentially cash advances on your salary. It takes next to no time to apply for one, no credit checks are normally carried out, and the cash (usually up to £1,000) can be transferred into your bank account the very same day.

HOWEVER - payday loans normally come with huge APRs attached - often way over 1000%!

To find out more, read Why payday loans suck.

Compare loans and credit cards at lovemoney.com

Get help from lovemoney.com

If you need a bit of help making ends meet, you've come to the right place.

First, adopt this goal: Manage on a small budget

Next, watch this video: How to save when you've got no money

And finally, why not have a wander over to Q&A and ask other lovemoney.com members for hints and tips about what worked best for them?