Thinking of taking out a small personal loan? Here are five reasons why you shouldn't.
Personal loans are no longer offering borrowers a good deal. In fact, the banks are looking more cautious than ever before when it comes to unsecured lending. Earlier this year, lovemoney.com partner Moneyfacts, revealed that despite the bank base rate standing at a record low, rates on loans had climbed to a nine-year high. And this trend appears to be ongoing, particularly for smaller loans.
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Let’s say you wanted to borrow £2,500. The most competitive personal loans for this amount today are from First Direct and the Post Office. But both charge a staggeringly high rate of 13.9%. That’s almost as much as the standard rates charged by most credit cards.
Fortunately, there are better ways to borrow than rip-off personal loans. Here are five alternatives:
1) 0% purchases credit cards
If you need to buy something, but don’t have the cash available, a personal loan might seem like the obvious choice. But a 0% on purchases credit card could be a far cheaper option. The best cards will give you a whole year of interest-free credit. You could try the Sainsbury’s Finance Nectar Card Credit Card as long as you have a Nectar card, or you’re happy to sign up to the Nectar scheme. You can do that easily online using this link.
Alternatively, the Tesco Clubcard Credit Card is another good choice which also gives you a break from interest on your purchases for a year. Again you’ll need to a Tesco Clubcard to qualify.
Just remember, if you’re borrowing on a 0% on purchases credit card you must clear your debt within the introductory interest-free period or the far higher standard APR will kick in.
2) Low rate credit cards
If you don’t think you can manage to pay off your debt within a year, you could go for a low APR credit card instead. This type of card will charge less interest than a personal loan, and should stay that way until you have paid everything off. A great choice here is the Halifax Easy Rate Mastercard which charges just 6.9% (variable) on all your purchases, beating all current personal loan rates by miles no matter how much you want to borrow.
3) Zopa
Alternatively, you could ignore traditional ways of borrowing altogether and try Zopa. If you’ve never heard of it before, Zopa is an online peer-to-peer lending business which brings borrowers and lenders together. It's a simple idea: the lender earns a return on the money they loan out from the interest paid back by the borrower.
Ed Bowsher takes a look at Zopa, an interesting alternative to the high street banks
I really like Zopa because it completely cuts the bank out of the loop. What’s more, you can lend at potentially much cheaper rates. For example, you could borrow £2,500 over three years at a rate as low as 10.9%. This is significantly less than the rate charged by the cheapest loan for this amount. To find out more, check out the Zopa website.
4) 0% overdrafts
Another way of getting around pricy loan rates is to switch to a current account with an interest-free overdraft facility. There are some great choices here including the Alliance & Leicester Premier Current Account and the Alliance & Leicester Premier Direct Current Account. Both accounts offer a 0% EAR overdraft of up to £2,000 with a whole year to pay back what you owe. (Note that these accounts must be funded with at least £500 a month.)
Remember once the year is up, any remaining overdraft debt will be subject to a daily usage fee of 50p, up to a maximum of £5 a month. So do try your best to get your account back in the black as soon as you can.
Recent question on this topic
- kerri gt asks:
MikeGG1 answered "If you can get a 0% card that will allow cheque or credit transfers to bank accounts then that..."
kerri gt answered "Thanks Mike, i've cleared other debt using 0% cards but always have found it difficult in the past..."
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Meanwhile, Santander offers the Preferred Overdraft Rate Account which also comes with an interest-free overdraft for a year (depending on your circumstances). After the introductory offer has finished, you’ll be charged a rate of 12.9% EAR. So, once again, it’s in your best interest to clear your debt at the earliest opportunity.
5) Cut your costs by borrowing more
Finally, if you’re still convinced a personal loan is the way to go, there’s a sneaky way you may be able to cut the costs by borrowing more. That might sound like ridiculous advice, but personal loans usually work on a tiered pricing system where the more you borrow the lower the rates generally are.
Let’s say you need to borrow £4,950. The most competitive option here would be the Sainsbury’s Finance Nectar Card Holder Personal Loan which charges a rate of 11.9%. But, if you borrowed slightly more so your loan increased to £5,000, the rate would drop to just 8.8%. And repaying that higher loan over three years would actually save you £180. Can't be bad!
Just remember you need to have - or apply for - a Nectar Card to qualify for this particular deal.
Compare personal loans and credit cards at lovemoney.com