In a perfect financial world, it’s best if you never borrow. Or at least, only borrow to buy a home.
Sadly, however, most of us do end up borrowing more than just a mortgage. Sometimes it’s for an emergency like a new boiler. Or sometimes it’s because we just can’t wait any longer for that top-of-the-range computer or holiday in the sun.
So if you’re going to borrow, what’s the best way to do it?
0% credit cards
My favourite way to borrow is a 0% new purchases credit card.
The current market leader is the Tesco Clubcard credit card. If you took out this card tomorrow, you could make a purchase and then not pay any interest on that purchase for 15 months!
However, there are some catches. The most important is that the 15-month interest free period begins when you take out the card, not when you make the purchase. You’ll also have a spending limit on the card and that may not be enough for the purchase you want to make. (If you go over the spending limit, your 0% period will end immediately.)
Alternatively, you could make the purchase with your current credit card, and then transfer your debt to a 0% balance transfer credit card. You’ll then get a longer interest-free period. If you transfer your debt to the Barclaycard 22 month Platinum Visa card, you won’t have to pay any interest for 22 months!
Be careful though. The credit card companies won’t give you either kind of 0% card unless you have an excellent credit rating. In other words, you should have a long track record of successfully paying off your debts on time.
Personal loans
Taking out a personal loan is your next best bet. And the good news is that interest rates on these loans have been falling.
If you were looking to borrow £10,000 back in June, the best loan rate on offer was 6.7%. Now there are three loans which will only charge you 6.3%.
These are the Alliance & Leicester Aggregator Personal Loan, the Sainsbury’s Finance Shopper Personal Loan, and the Nationwide Existing Customer Personal Loan.
Unfortunately, the Nationwide loan is only available at 6.3% if you’re an existing customer of the building society. As for Sainsbury’s, you can only get this rate if you have a Nectar card. So, for many people, the Alliance & Leicester loan is the one to go for.
That said, don’t assume that you’ll definitely get the 6.3% rate. This rate is ‘representative’ which means that at least 51% of approved loan customers must be offered the 6.3% rate. If your credit rating is weak, you may be asked to pay a higher rate or not be offered a loan at all.
What’s more, these rates are only available to people who want to borrow between £7,500 and £15,000. If you want to borrow less than £7,500, the cheapest rates are a fair bit higher at 8.2%.
Social lending
Another option is social or peer-to-peer lending. This is where you borrow from other individuals via social websites. The best known website in this field is Zopa. If you went to Zopa and borrowed £10,000 over three years, you could benefit from a loan rate as low as 7.2%.
However, once again, the best rates are only on offer for borrowers with a good credit history.
None of the above
It’s possible that you won’t be able to get a loan from any of the options we’ve highlighted so far.
If that’s the case you might have better luck if you transfer your credit card debt to a low APR credit card. The best card in this market is the Barclaycard Platinum Simplicity card which charges a 7.9% interest rate.
However, even with this card, there are no guarantees that you’ll be offered one. Once again, it all depends on your credit rating.
If you find that you can’t borrow via any method we’ve mentioned, then it’s probably best not to borrow at all. If you don’t need money immediately, just try and save up instead.
If you need to borrow because your finances are in a mess, the answer is to get some free debt advice.
Staff at Citizens Advice or the Consumer Credit Counselling Service can help you get back on the straight and narrow. Find out more in Get debt advice for free.
Whatever you do, don’t take out a payday loan or borrow via an unauthorised overdraft. Going down either route is very dangerous because horrendously high interest rates and charges will make it much harder for you to pay off your debts in the end.
But if you go for the safer options such as a personal loan or a 0% credit card, and make your payments on time, everything should turn out fine.
More: 10 tips for personal loans | Three ways to get an interest-free loan