When the financial markets are volatile – and when your own finances are particularly under pressure – the prospect of getting a cheaper loan can seem daunting.
It’s an important decision to make, and it’s worth taking your time to shop around to be sure you don’t get caught in a downward spending spiral battling to pay off interest or stuck in a long-term repayment agreement for years.
Whether you’re looking for a loan, or you’ve already got one and want a better deal, there are options. Read on for Moneymagpie’s tips on getting your finances in order and finding a cheaper loan.
Please note, this article is only dealing with unsecured loans (they aren’t secured against your property like a mortgage or secured loan) between £1,000 and £25,000.
- Credit cards for small loans
- Loans for bigger amounts
- Swap to a better loan deal
- Alternative options to loans
The highest rates on the market are for borrowing small amounts of money. This is because smaller amounts of money can be borrowed over a shorter period of time and so the lender will not have as much time to make money in interest payments. So instead, they hike up the interest rate ensuring they make a profit.
Because of this, for smaller amounts of cash that you think you’ll be able to pay back in a relatively short period of time, you should look for ways to borrow that aren’t strictly loans.
A 0% APR on purchases credit card allows you to pay for transactions using your credit card without charging you any interest for a certain amount of time – usually six to 12 months – depending on which card you get.
The longest-running 0% APR on purchases deal currently available is the Tesco Clubcard credit card which gives you 22 months before it charges you interest. You collect one Clubcard point for every £4 you spend on the card anywhere in the world.
Also worth considering (especially if you shop at Sainsbury’s) is Sainsbury’s Credit Card, which offers its shoppers 0% for the first 29 months for balance transfers and 0% on purchases for the first six months, or a card offering 27 months 0% interest on purchases. As with the Tesco card, you collect loyalty points as you shop on your Nectar card – in fact, you have to be a Nectar card holder, and have actively used it within six months of applying for the credit card to be applicable.
The same principle applies to all of these cards; you use the card to pay for whatever it is you need, and then you have the duration of the 0% interest period to pay off the balance. After this time you will be charged interest – so pay it off quickly!
How much can you spend?
The amount you can spend on the card will depend on your credit limit, which is in turn defined by your credit rating. Credit limits can vary from very little (in the regions of £250) to as much as £50,000. However bear in mind, the more you spend, the more difficult it will be to pay back in full during the 0% interest period, so make sure you have the funds available to pay it back.
Not everyone is approved for these cards. And remember that each time you apply for credit and get rejected it reflects negatively on your credit rating.
If you find out that your score isn’t excellent, it’s probably best not to apply for one of these cards. Read more about viewing and improving your credit score.
Go instead for a card with a low regular balance. Check here for the lowest standard rates.
Need more time to pay off the balance?
What you can do if you can’t pay back what you need to borrow within a year, is then take out a 0% APR on balance transfers credit card. These cards won’t charge you interest on balances transferred over from other cards – i.e. the card that you used to pay for the transaction in the first place.
The longest 0% balance transfer deal, without having to apply for a platinum card, is the Natwest Balance Transfer card, offering 0% on transfers up to 20 months.
This greatly increases the amount of time you have to pay back your loan, but it’s not a foolproof method. With things changing all the time you need to make sure that when you get to the end of your 0% APR on purchases period that there is definitely a suitable card for you to transfer your balance on to. Saying this, it’s unlikely they will suddenly disappear altogether; it may be that the interest period will reduce slightly instead.
The advantage of a personal loan is that you can make sure you borrow money at a monthly repayment rate you are sure you can afford, and for a fixed period of time.
However, personal loans can be confusing. Not only must you look at the interest rate you’ll be paying on the amount borrowed, but also at the length of time you’ll be repaying it.
Lots of people don’t realise that a loan is actually like renting money from a bank. You get all of the cash you ask for, and then each month you pay a bit of it back, plus a bit more in rent. The longer you borrow the money for, the more ‘rent’ you are paying in total. See below for an illustration of this.
If you take out a loan of £7,500 over three years at 8% APR you’ll pay back £234.14 each month totalling up to £8,429.04 – that’s £929.04 total in interest.
If you take out that same loan (actually charged at 7.9% APR) over five years instead, your monthly repayments will be just £150.81 but in total you will repay £9,049 – a total of £1,549 in interest – spending over £600 more.
Ideally, you need to borrow at the lowest rate you can find for the shortest time possible.
If you’ve already tied yourself into a long loan deal you can save money by taking out another loan, using it to repay your original loan, and then making repayments to the second loan provider – a bit like remortgaging.
The only hitch with this is early repayment charges or penalties.
The problem with loans is that the cheapest ones are rarely flexible. Banks want to lock you in for a set period to ensure that they make the return on lending you money. Just as consumers find it reassuring to know exactly how much they’ll have to repay each month, banks like to know exactly how much they’re going to make in interest.
So if you decide you can pay back the loan early, they’ll charge you a fee to at least recoup some of the lost interest.
Calculating the cost
To work out if it is worth switching you need to work out how much money the new loan you’re thinking of switching to will save you. You do this by:
- Calculating how much interest you’ll pay in total over the term of the loan you currently have, and the new loan.
- Add the early repayment penalty to the interest paid on the new loan and work out the difference between this total and the total you’ll pay for your current loan.
If you can cover the early repayment penalty with the difference between the two loans and still have some left over then it’s worth switching. If not, you’re better off where you are.
When switching you can save money either by getting a lower interest rate, or reducing the term over which you repay.
Reducing the term of your loan
Let’s take the previous example of a £7,500 loan.
The difference in cost between the three-year term and the five-year term is £619.96. The early settlement charge is up to two months’ interest, which for the five-year period would come to approximately £300.
Therefore if you switched from the five-year loan to the three-year loan, even with the early repayment charges you’d save over £300 (as £619.96 – £300 = £319.96).
So it would clearly be worth your while to switch in this case.
Find a lower interest rate
As well as reducing the term of the loan, you can try and get a better rate. This is a bit more tricky as getting a marginally lower rate won’t always save you money considering the early repayment charges.
For example, if you were currently repaying a loan of £10,000 from Halifax at 8.9% APR over five years and you saw the same loan advertised from Tesco Personal Finance at 7.9% APR, you might consider switching.
The early settlement charge for the Halifax loan is equivalent to 58 days’ interest, which means you’d actually pay more by switching, as the difference in APR rates is not enough to outweigh the early settlement charge.
The first thing to do before applying for any loans is to check out your credit rating, just remember to cancel it at the end of the 30-day free period if you don’t want to subscribe.
By checking your credit rating you’ll know which loans you have access to, as some will only apply to those with very high ratings. This will give you a realistic idea of what you’re looking at, enabling you to see exactly how much you can save.
Credit unions are independent co-operative organisations, set up and owned by the members. They offer loans and credit at competitive rates, and are generally aiming to improve the community.
There are no early repayment charges and you often have to save alongside paying off your loan. It includes life insurance, too. This means if you were to die before repaying the loan, the insurance would cover the outstanding charges.
The amount of interest varies from union to union. By law they’re not allowed to charge any more than 2% a month on the reducing balance of the loan, which equates to 28% APR. It’s worth weighing this up against loans available to you from banks.
You can check the loan calculator provided by the Association of British Credit Unions Limited.
Click here to find your local credit union.
Peer-to-Peer Lending with Zopa
Zopa is an online market place, where people sign up to loan their money – and are promised to receive a great return on it – with this money being distributed to users who sign up for a personal loan, at a low cost. The deal works so well for both sides because taking a bank out of the equation means that the borrower does not have to pay for expensive overheads.
The site offers loans on a one to five-year term, and makes its money by charging borrowers a transaction fee, and lenders a 1% annual service fee.