The cheapest way to borrow a grand
A loan for £10,000 is normally cheaper than one for £1000. So where is the best place to go if you only need a grand?
In an ideal world, it’s best not to borrow for anything except your mortgage. But sometimes we have to accept that some people are going to borrow even if it isn’t the most prudent thing to do.
Of course, a small loan is better than a large loan, which is why it’s so frustrating that rates are cheaper on larger loans.
So, as I write now, I could borrow £10,000 for five years from one bank and pay interest of 5.8% a year. But if I wanted to borrow just £1000 from the same bank, I'd have to pay 18.9%.
So where's the best place to look if you're only looking for a small cash injection?
Hole in the wall
Firstly, whatever you do, don't be tempted to borrow the money using a cash advance on your credit card. In other words, don't use your credit card in a hole-in-the-wall.
Cash advances are one of the worst ways you can borrow money, even for a short period of time. Not only do they charge you an initial fee for drawing out the money, but the APR interest rate on cash advances can go up to a staggering 28%.
And don't go for a payday loan either. Loans from the likes of Wonga are ridiculously expensive and should be avoided at all costs. Read more in Payday loans still suck.
Perhaps surprisingly, credit cards aren’t always a bad idea if you’re looking to borrow a small amount. That’s because some cards offer a ‘money transfer’ function.
Some providers allow you to transfer money from your credit card as cash into your bank account, which you can then use to pay off other debts, or fund that essential item of expenditure.
The great thing about these money transfers is that they’re 0% deals – you won’t have to pay any interest on the debt. The only cost is a fee that's charged when you apply for the cash. This is normally higher than the equivalent fee for a balance transfer and will typically be around 4%.
You could currently get a 20-month money transfer with the MBNA Platinum Credit card (4% fee.) You'll get a 16-month 0% period from the AA Balance Transfer Credit card, and you'll also have to pay a 4% fee.
If you need to borrow to pay for a big purchase, there’s another way a credit card could help you. Get a 0% on purchases credit card, use it for a purchase, and you won’t have to pay any interest on the resulting debt for that card’s 0% period. That period could last for a year or longer.
The current top 0% purchases card is the Tesco Clubcard Credit Card for Purchases. You won’t have to pay any interest for 16 months on your purchase, and you’ll also earn Clubcard points as you spend.
Just note that the 0% period begins when you take out the card, not when you make the purchase.
If credit cards aren't your thing, another alternative is to borrow via one of the social lending sites such as Zopa.
These sites enable consumer to borrow from other ordinary individuals, as opposed to applying for a loan at a bank. Sadly, interest rates for a £1000 loan are higher than a £10,000 loan, but social lending sites still make a lot more sense than many other options.
You could ask your bank for an authorised overdraft. Interest rates for approved overdrafts vary but 19.9% is about average. You may also have to pay some fees on top of that.
Obviously this isn’t a cheap way to borrow, but, in their favour, overdrafts are very flexible. So if you only need to borrow for a couple of weeks, you can dip into your overdraft and then pay it off when you get your next pay cheque.
This article has been updated.