Money Mensch: Big ways to save when borrowing small
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Interest rates may be at their lowest rate for over 200 years, but small loan rates have more than doubled. But there's a way to manipulate the finance market to get a loan at under half that cost.
Why rates have jumped
● Loan rates are at a nine-year high, and it is those borrowing small amounts who have been hit the hardest. While the cheapest loan for amounts under £2,000 is 18.7 per cent, many lenders are charging more than 20 per cent. In autumn 2007, and the cheapest loan was just 7.4 per cent, yet, borrow that now, and on a three-year loan you would pay nearly £400 more.
There are three reasons for this: the credit crunch means lenders' access to funds is more limited; banks are less keen to sell small loans, so competitive pressures have relaxed; and loans used to be subsidised by profits from payment protection insurance that was hard sold with them. Lenders made more money on the insurance than they did on the loan, and they don't have to include the insurance cost in the APR. Yet over the last few years there have been strong calls from many for people to avoid banks' Payment Protection Insurance (PPI) and, if it's needed, go to stand-alone insurers, who can be over 80 per cent cheaper.
The loan market is perverted
● The cheapest rate for borrowing under £5,000 is 11.9 per cent. Yet borrow £5,000 to £7,500, and it's 8.8 per cent. This means that currently it is cheaper to borrow £5,000 than £4,500. I'm not talking about the interest rate here, but the actual amount you would have to repay. The massive differences in threshold levels mean that if you're near a boundary, which come at £2,000, £3,000, £5,000 and £7,500, it's worth checking out whether you should borrow a little bit more to make it cheaper.
The way to do this is ask, "what is the total amount of money I will repay?" Go for the loan that has the smallest total, even if it means borrowing a little bit more.
What's the cheapest way to borrow small?
● If you do need a smaller loan, then there are two options to keep it cheap. And by 'need', I mean you do a budget, plan, ensure you can afford the repayments and borrow as little as possible and repay as quickly as possible.
Yet borrowing is not now just for when you have cash-flow issues, sometimes it can save you money. Let me give you an example. If you go to the football each week, a season ticket is cheaper than buying individual seats. Provided you can borrow efficiently then the debt could save you cash.
Interest-free Social Security loans
● Before going for commercial debt, it is worth seeing if there are any loans from the government's social fund available to you. There are two types, and both are for people without savings of their own. The first are crisis loans, which are for emergencies or disasters. I'm talking about something that endangers the house or your family. You don't need to receive benefits to get these, anyone can supply, as long as you don't have savings.
The next type are budgeting loans, which are only for those receiving benefits. These will allow for a wide range of borrowings. To get them, you need to go to the local social security office, but that causes a big problem. Each area has its own pot of cash and, unsurprisingly, those in deprived areas tend to run out of cash more quickly than in richer areas. So you may find there's no money left even though you qualify.
Half price credit card loans
● The cheapest way to get a loan is by using a credit card. If you are clever and have a reasonable credit score, you can replicate the exact criteria of loans.
The most obvious route for this is simply to pay for the goods with your card.
Grab the longest zero per cent for purchases card that you can.
The current market leader is Tesco, which will give you zero per cent for a year. However, you must ensure you make the minimum repayments and clear the card in that time.
Replicating a loan
● More difficult is to replicate the idea of using a loan to get hard cash - for example, if you need to pay a local builder who does not accept plastic. However, a small number of credit cards allow you to do what I call a super balance transfer. You may know that a normal balance transfer is when you get a new credit card that pays off debts on other cards for you. You then owe the new card the money but at a cheaper interest rate.
A super balance transfer is when it lets you do a balance transfer from your bank account - in other words the card pays an amount of money in there - say £3,000, and you now owe the card that amount. The two top cards for this are the Virgin card, which lets you shift money into your bank at zero per cent for 14 months for a 4 per cent fee, or the MBNA Rate for Life card at 5.9 per cent for a 1.5 per cent fee. The Virgin card is better if you can repay in the short term, the MBNA is better if you can repay in the longer term.
These work out at less than half the APR of even the cheapest loan. To calculate the exact cost, use the special calculator at www.moneysavingexpert.com/plasticloans
The loads are fixed-length, but with credit cards you repay what you like as long as it is above the minimum. To truly replicate a loan's enforced discipline, set a repayment to clear debts in a fixed time, and make the same repayments each month, as you would have done to the loan.
Finally, never use these cards for spending or the cost will rocket.