Warning: Late repayment can cause you serious money problems. For help, go to moneyhelper.org.uk.
Please note: High-cost short-term credit is unsuitable for sustained borrowing over long periods and would be expensive as a means of longer-term borrowing.
Most of us will need to borrow money at some point in our lives. But the borrowing method you choose can have a big impact on the amount you pay overall and how long it takes you to repay it. That’s why it’s important to research your options carefully.
What to consider before borrowing money
Borrowing money is not a decision to be taken lightly. With interest rates on the rise, borrowing is rapidly becoming more expensive at a time when the cost of living is also soaring. So it’s important to keep the following points in mind:
Do you really need to borrow or could you use savings instead?
Do you know exactly how much you’ll be paying in interest and fees?
Can you afford the monthly repayments? Keep in mind that missed payments can have a negative impact on your credit report and lead to debt problems, so only ever borrow an amount you can afford to pay back.
Have you checked your credit rating? You can check yours for free with Finder. The better it is, the easier it will be to access the best interest rates.
Cheapest ways to borrow money short term
If you do need to borrow money, we’ve outlined some of the cheapest ways to do so over the short term. Borrowing over a shorter term means you’ll pay less in interest overall.
Credit cards
Credit cards can be a really easy and flexible way of borrowing money, as long as they are used sensibly. For example, you can use a 0% purchase credit card to spread the cost of an expensive purchase, such as a holiday or new car, interest-free over several months. Or you can use a 0% balance transfer credit card to help you pay off existing credit card debt more cheaply. Simply transfer over an existing card balance and you’ll avoid paying interest for a number of months. Keep in mind there will usually be a transfer fee of around 1% to 3% to pay.
Another option is a 0% money transfer credit card. This enables you to move funds from your credit card into your bank account and then use them however you like – whether that’s to pay for an expensive item or clear existing debt such as an overdraft. You then make payments to your credit card provider. Note that you’ll usually have to pay a transfer fee of around 4%.
Keep in mind that when using any type of 0% credit card, if you don’t pay off your balance in full before the 0% deal ends, interest will kick in – usually at a rate of between 20% and 25%.
The amount you can borrow with a credit card varies, with the average UK credit limit between £3,000 and £4,000. In some cases, if you have a good credit rating and a high income, you might be able to borrow as much as £10,000, but it’s vital that you would be able to keep up with your repayments if you have a credit limit this high.
Pros
Can borrow interest-free
Flexible monthly repayments
Convenient
Purchases of more than £100 and up to £30,000 are protected under Section 75 of the Consumer Credit Act
Cons
Interest rates can be high if you don’t clear your balance within the 0% period
Best deals are reserved for those with good credit scores
Charges will apply for late or missed payments
Repayments aren’t fixed so it’s easy to underpay
Personal or unsecured loans
A personal loan is more suitable for sums above £3,000. It allows you to borrow a lump sum which you repay over a set term (1 to 7 years) in fixed monthly payments. Although you’ll pay interest, rates can be competitive. For example:
If you need to borrow £1,000 to £25,000, rates are from 6.2% APR with loans from Santander.
If you need to borrow £1,000 to £35,000, rates are available from 6.9% APR at Virgin Money.
If you need to borrow £1,000 to £40,000, you can get rates from 6.1% APR from the Post Office.
You can use a personal loan to fund home improvements or a wedding, for example, or to consolidate existing debts into monthly payments with 1 provider.
Pros
Fixed monthly payments make it easier to budget
Can repay over a longer term
Higher borrowing limits than a credit card
Cons
Payments are not flexible so you must be able to meet them
Early repayment charges may apply
Interest will be charged
Buy now pay later
For smaller borrowing amounts, you could consider buy now pay later (BNPL). You will often be offered this when you go to pay for items online. There are a number of different buy now pay later providers and while they all work slightly differently, they all allow you to spread the cost of your payment over a few weeks or months. Before you sign up for a BNPL service, make sure you read the terms and conditions carefully and, as with any type of borrowing, only spend what you can afford to pay back.
Pros
Interest-free
Easy to get accepted
Fixed repayments
Cons
Can be easy to overspend
It’s currently unregulated (but that’s likely to change)
No Section 75 protection on purchases
Bank overdraft
Another option for borrowing money is to use an arranged overdraft on your current account (basic bank accounts don’t offer overdraft facilities). Your overdraft limit will depend on your credit score and income and can be from a couple of hundred pounds to a few thousand.
The downside is that interest charges tend to be high so it’s important to compare options carefully. The Nationwide FlexDirect account offers an interest-free arranged overdraft for the first 12 months. But after that the rate jumps to 39.9% APR.
Alternatively, the First Direct 1st Account offers a £250 interest-free overdraft and you’ll also get £175 for switching to the account, which could help you to clear some of your debt.
Pros
Flexible way to borrow
No monthly repayments
Cons
Can be an expensive way to borrow
Can be easy for debt to build up
Cheapest ways to borrow larger amounts over the long-term
If you’re looking to borrow a larger amount over a longer term, your best option is to use a secured loan. You can usually borrow funds of £25,000 or more over a term of up to 25 years.
Secured loans work in a similar way to unsecured loans as you can borrow a lump sum over a set term, and repayments are made on a monthly basis. The difference is that you’ll need to secure the loan against an asset, usually your home. Because of this security, you can usually borrow a much larger sum compared to a personal loan, and interest rates tend to be lower. However, should you be unable to keep up with your monthly repayments, your home could be at risk.
Pros
Fixed monthly repayments
You can borrow a larger sum of money
Monthly repayments are lower as you’re borrowing for longer
Cons
Your home is at risk if you don’t keep up with your repayments
Longer repayment terms means you’ll pay more in interest overall
Early repayment charges may apply
Where to get free debt help
If you find yourself struggling to repay debt, don’t bury your head in the sand. There are a number of national organisations you can approach for free, impartial help and advice. They can help you work out which debts you should prioritise and negotiate with creditors to arrange an alternative repayment plan.
Organisations to contact include:
Citizens Advice
StepChange
National Debtline
PayPlan
Debt Advice Foundation
Frequently asked questions
This will depend on your situation and how much you want to borrow. Some credit cards are designed specifically for those with bad credit, but credit limits will often only start at around £200 and you’ll pay a high rate of interest if you don’t clear your balance each month.
Alternatively, some loans are also available for those with bad credit, but again you might not be able to borrow as much as you need and interest rates can be high. Read more in our guide to bad credit loans. If you can find a relative who is willing to guarantee the loan for you, you may be able to qualify for a guarantor personal loan.
Most lenders will approve and fund a personal loan within a couple of hours to a couple of days. Alternatively, you can often request an immediate overdraft on your bank account. Be wary of advertisements for same-day loans as these are usually payday loans which can be a very expensive way to borrow.
The cheapest option will usually be a secured loan, but remember that you’ll need to use an asset such as your home or car as security. Should you be unable to keep up with your loan repayments, you risk losing that asset.
Other options you could consider include peer-to-peer lending and credit unions.
Peer-to-peer lending sites let you get a loan directly from other individuals and they can offer low interest rates, low fees and a fast turnaround time. As with other types of borrowing, the better your credit rating, the better your interest rate.
Credit unions are not-for-profit organisations where members pool their savings to provide each other with credit. Members must have a common bond such as living or working in the same area or working for the same company. Use the Find Your Credit Union website for more information.
Rachel Wait is a freelance journalist and has been writing about personal finance for more than a decade, covering everything from insurance to mortgages. She has written for a range of personal finance websites and national newspapers, including The Observer, The Mail on Sunday, The Sun and the Evening Standard. Rachel is a keen baker in her spare time. See full bio
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