If you need to borrow a small amount of money to make that vital purchase, what would you do? Seeking a personal loan could well be the first thing that pops into your head, but unfortunately, it may not be the best solution…
It's often assumed that the simplest way to get short-term finance would be to borrow a small sum using an unsecured personal loan, but research from Moneyfacts has revealed that this could be a costly mistake.
Calculations show that those who borrow £3,000 over three years using the best loan rate on the market (which currently stands at 7.8% APR for this borrowing amount) would pay £361.32 in interest. But, if they made their purchase using the top 0% interest credit card (currently from Halifax, which offers 0% on purchases for 21 months), they'd pay just £103.04 in interest over the same period – a whopping £258.28 less!
"Personal loans are a cost-effective product, said Rachel Springall, finance expert at Moneyfacts, "but the lowest interest rates are for people applying for £5,000 or above. If consumers borrow below this amount, they will be wasting their money on interest.
"Headline-grabbing loan rates are designed to attract new customers, but borrowers should keep in mind that these advertised rates focus on loans of £7,500 or more. It's also worth remembering that advertised rates are only given to 51% of successful applicants, so you are not guaranteed the best rates."
So, doesn't it make sense to consider the alternatives? If you're looking to borrow a smaller amount for that all-important purchase, it's always best to consider low-rate (or no-rate) credit cards rather than a typical loan. And, if you're looking to pay off your debts rather than buy something, balance transfer credit cards should always be the first port of call.
These cards can give you up to three years to repay your debt and you'll incur no interest whatsoever during this period, and even the fee will be measly in comparison to the interest you'll pay on a personal loan. They can be a far more cost-effective choice, and as long as you stick to making the right level of repayments (not just the minimum), you can be debt-free without interest making it harder.
Of course, if you need to borrow a larger sum of money, then an unsecured personal loan could still be your best bet – you can find rates as low as 3.6% APR if you're after a loan of £7,500 and above, a sum that you may not be able to put on a credit card – so it all comes down to your circumstances. Check out our loan calculator to see if there's a loan to suit your needs, or for smaller amounts, our credit card best buys should be your first port of call.
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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