Before you start looking for a cut-price personal loan, here's a cheeky way to enjoy ultra-cheap borrowing.
Shop tills ring much louder during December and January than at any other time of year, as we go on our annual Christmas spending spree, followed by the January sales.
Given that we spend tens of billions of pounds in these two months alone, it's hardly a surprise that many of us end up borrowing money to spend during Christmas and the New Year. Indeed, according to one report, as a nation, we're spending £110 for every £100 of take-home pay. Ouch!
Naturally, our Yuletide spending spree is followed by a huge increase in borrowing, with January being the busiest month of the year for personal loans. Alas, hundreds of thousands of us will rush off to arrange a personal loan in 2006 without taking these two simple steps:
1. Take the best deal, not the first deal!
When you arrange a personal loan, your goal is to pay as little interest as you can. The best place to find low-cost loans is on the Internet; the very worst place is on the high street. Indeed, trotting down to your local bank branch for a loan can mean pay twice as much in interest, or even more. I explained the laws of the loan game in Five Tips To Choose A Loan.
2. A low-cost substitute for a loan
According to Moneyfacts, you can borrow £5,000 over three years and repay just short of £5,440 in total, which means an interest bill of almost £440. At the other end of the scale, you could pay as much as £6,503 - over £1,060 more. Ouch!
However, if you're crafty, you can get an even cheaper deal by sneaky use of "low-rate lifetime balance transfer" credit cards. Here are four of the cheapest cards in this category:
| Card | Lifetime balance
transfer rate | Rate on spending | Minimum annual
income (£) |
|---|
| Platinum American Express | 4.9% | 19.9% typical APR | £20,000 |
| British Airways Amex | 4.9% | 8.9% typical APR | £12,000 |
| Nectar Credit Card from Amex | 5.9% | 12.9% typical APR | £12,000 |
| Morgan Stanley Cashback or Platinum | 5.9% | 15.9% typical APR | None listed |
These cards are available via our Credit Card centre.Here's how the trick works: first, you need to have a balance to transfer, so let's say that you spend £5,000 on a new kitchen on your current credit card. You then open a new lifetime-transfer card and transfer the £5,000 across to it. Thus, you now have £5,000 at an annual rate as low as 4.9%.
Now let's see how much you could save; let's assume that you pay the same monthly repayment as the cheapest personal loan, so you set up a Direct Debit or standing order for £151.11 a month. According to my calculations, after 35 monthly repayments of £151.11 and a final repayment of £84.69, your debt would be repaid. In total, you'd repay £5,373.54, which means that this method works out over £66 cheaper than the very cheapest personal loan. Cool, huh?
Now for three warnings:
- Make sure that you don't miss a repayment on your card; otherwise you'll be hit by punitive fines, typically £25+ per offence. Paying by Direct Debit or standing order avoids this pain!
- Never spend on a lifetime-transfer card, as you'll pay interest at standard rates of up to 20% a year, as the above table shows.
- Don't sign up for expensive payment protection insurance, otherwise you'll end up paying about £1,000 more than you need to!
Finally, you can use this method to borrow cheaply for a number of reasons, such as to fund a major purchase (or a string of purchases) or consolidate existing debts. However, if you are financially disciplined and clued up, you can borrow without paying a penny of interest by becoming a "0% rate tart". Learn more in Your Ultimate Guide To Credit Cards.
More: Check the deck of charming cards in our Credit Card centre!
