Money Mensch: You don’t have to feel bad for borrowing
The adage "neither a borrower, nor a lender be" is no longer fit for purpose. Unless you are super-rich, you will need to borrow to buy a house or go to university.
The key is learning when and how to borrow. If it is a planned purchase and you keep the amount to a minimum, do a budget to ensure you can afford repayments, pay it off as quickly as possible and ensure it is as cheap as you can, then it is a reasonable choice. Here are the 10 things you need to know:
● Spend on a credit card and clear full to get a month interest-free
If you need short-term borrowing, use any major credit card (except Lloyds Advance) to pay, then repay it in full at the next statement and there is no interest.
● Borrow at 0% for 18 months with no fee
If you have a decent credit history, consider a 0 per cent credit card deal. Only do this if you can always fully repay or transfer your balance before the 0 per cent ends, or the rate you pay will rocket. Diarise when the deal is due to end and act in advance.
The longest 0 per cent deals for new borrowing are Tesco Clubcard Card and M&S, which are both interest-free for the first 15 months. Nationwide gives a longer 18 months, but only for its existing FlexAccount holders. Ensure you pay off in full or you will pay 16.9 per cent, 15.9 per cent and 12.9 per cent APRs respectively.
● Borrowing if you have savings might not be best
£5,000 in a top savings account only pays around £125/year interest after tax. But borrowing that on an 18 per cent credit card can cost £900. So unless you have super-cheap debts, it usually pays to use the savings instead of borrowing. This can often work with mortgages too. See www.mse.me/repaymortgage.
● Poor credit scorers can get 0% too, but take care
Capital One's Balance Card is 0 per cent until November on shifted debts, however it then jumps to a huge 34.9 per cent representative APR.
Usually, this should only be a route to cut existing debt costs. But as it is the only cheap deal for poorer credit scorers, if a payday loan is your only other option, shifting existing debts to it to temporarily free up space on other cards beats that. Please be wary about this as it can easily go wrong, Ensure you can clear it all before the 0 per cent ends.
● The cheapest loan is 6%
If you need bigger borrowing and want a fixed disciplined repayments, The Derbyshire charges six per cent for loans from £7,500 to £15,000. Sainsburys is 7.7 per cent for £5,000 to £7,500 for one to three years and six per cent over £7,500 for one to three years but needs a Nectar card. Be warned, these are "representative APRs" so only 51 per cent of accepted applicants must get that rate. Others can pay more. Outrageously, to find out your rate you need to apply and that marks your credit file.
Plaudits to Nationwide's 6.8 per cent APR (6.3 per cent for existing customers) above £7,500, as it tells you your rate without a formal application.
● Flogging unused stuff beats costly loans
If you are looking at costly cards, or worse, payday loans, sell or even pawn unused items to raise cash instead. Use www.mobilevaluer.com if you are selling an old mobile. Flog unused stuff on eBay, Gumtree or at car boot sales.
● Flexible loans
If you are over 26 with a decent credit score, peer-to-peer lender Zopa.com triumphs. It is cheapest for smaller loans. Plus it lets you overpay without penalties.
● Government 0% crisis and budgeting loans
Two Jobcentre 0 per cent loans for up to £1,500 are available. Crisis loans are available to anyone for real emergencies. Budgeting loans are only for benefits recipients, but allow spending on a wider range of items. Sadly, each region has limited cash available.
● for cheap small loans play with plastic
If you need a lump sum, normal credit cards can't help. However, Virgin's Balance Transfer Credit Card allows "money transfers" to your bank account at 0 per cent for 20 months (20.9 per cent rep APR after that) for a one-off four per cent fee. In other words, it pays the cash into your account and then you owe it instead. Don't try it on other cards - it will cost a fortune and be very careful to follow the right process with Virgin. See www.mse.me/plasticloans.
● avoid payday loans
While many rant about APRs of 5,000 per cent, that is not what scares me. The problem is that many of these firms encourage you not to repay, so the debt rolls over. Don't risk it. Try your local credit union instead.
Finally, for those who already have debts and are struggling, free one-on-one help is available, and it works. The Consumer Credit Counselling Service, Citizens Advice and National Debtline can all help.