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MONEYFACTS ARCHIVE. This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Published: 29/08/2017

The current low interest rate environment is undoubtedly popular with borrowers, yet it's still important to compare the options before you take the plunge. After all, our research shows that an unsecured personal loan isn't always the most cost-effective choice when it comes to borrowing small amounts, as you could save over £200 by using a credit card instead.

Continued competition

Loan rates have fallen considerably over the years, so much so that the lowest rate available on a small personal loan of £3,000 now stands at 5.9% (a deal offered in branch by Metro Bank), which would result in interest payments of £272.76 over three years.

However, competition is just as fierce in the 0% credit card sector. This means that, if the purchase was made on the best 0% purchase card instead (which currently comes from Sainsbury's Bank with £100 repaid every month, you wouldn't pay any interest at all, as the debt would be repaid in 30 months.

Alternatively, if you're looking to consolidate debt and used the best 0% balance transfer card from Barclaycard, you'd only pay a £50.40 fee (1.68%), saving £222.36 compared with the best available loan*.

Take a look at the table below and you'll see just how much you could save with the best 0% interest credit card compared with the top loan rates:

£3,000 over 3 years Product and rate Total interest*
Best branch loan Metro Bank - 5.9% £272.76
Best online loan Hitachi Personal Finance - 7.3% £338.28
Average loan rate 15.3% over 3 years £759.74
Best 0% purchase card Sainsbury's Bank - 0% 32 months, no fee £0
Best 0% balance transfer card Barclaycard - 0% 40 months, 1.68% fee £50.40
Source: Compiled 24/08/2017

"There is no denying that the fall in interest rates on loans has boosted unsecured borrowing, which has helped consumers to consolidate debts or better plan costly upfront purchases," said Rachel Springall, finance expert at

"However, at the same time, there has been fierce competition in the introductory interest-free credit card market – something that consumers would do well not to overlook if they are considering taking out a loan.

"The card deals are in fact so competitive that if borrowers were to use a Best Buy 0% credit card today to borrow £3,000, they could save themselves from having to pay unnecessary interest compared with an unsecured personal loan and still have their debt paid within three years."

Savvy borrowing

Sounds like a win-win situation – but just make sure you really are committed to repaying your credit card debt.

After all, loans have a fixed repayment plan so there's no option but to repay it by the end of the term, while credit cards are designed to be a lot more flexible when it comes to making repayments. "While this is a handy feature, it could cause borrowers to neglect paying beyond the minimum repayment," added Rachel. "This puts greater responsibility on customers to ensure there are on track to pay off their card debt."

It's worth remembering that, no matter which option you go for, you must be sure to never miss any repayments so that you don't damage your financial footprint. In line with that, it's also vital that you check your credit score before you apply to make sure you're in the best possible position to be accepted for the top deals.

As Rachel explains, "if borrowers find that they have poor or even little to no credit history upon checking their credit report, they may find it difficult to get one of the best deals". That's why you'll want to do everything you can to improve your credit score
before taking the plunge, and you may even want to consider credit repair cards or alternative loans to improve your position before you apply for anything mainstream.

*Metro Bank would charge 5.9% APR on a £3,000 loan over three years, which results in payments of £90.91 per month (£272.76 interest in total). The lowest loan rates do not include peer-to-peer loans. Credit card costs assume a minimum repayment of £100 is made each month.


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. Links to third parties on this page are paid for by the third party. You can find out more about the individual products by visiting their site. will receive a small payment if you use their services after you click through to their site. All information is subject to change without notice. Please check all terms before making any decisions. This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

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