The Cheapest Way To Borrow A Grand

This article has already been emailed to Fools who are part of our 'The Good, The Bad and The Ugly' campaign. 

As our 'Good, Bad and Ugly' series continues, I'm going to be focusing on the good places to look if you want to borrow a relatively small amount of money.

When it comes to consolidating debt, a loan can provide a cheap and handy way to get your finances in order. However, with conventional loans, if you're only looking to borrow a couple of thousand pounds, competitive deals can be few and far between.

For example, at one high street bank, you'd only qualify for their best rate of 7.9% if you were borrowing £7,500 or more. Borrow anything less than £5,000, and the annual interest rate climbs to a staggering 18.9% APR. Many other banks offer broadly similar terms.

So where's the best place to look if you're only looking for a small cash injection?

The Good... And The Bad

Firstly, whatever you do, don't be tempted to borrow the money using a cash advance on your credit card. In other words, don't use your credit card in a hole-in-the-wall.

Cash advances are one of the worst ways you can borrow money, even for a short period of time. Not only do they charge you an initial fee for drawing out the money, but the APR interest rate on cash advances can go up to a staggering 28%.

On The Other Hand...

Conversely, if you're good at managing your money, borrowing on a credit card may provide the best solution if you only need a small amount of cash.

This is because some providers allow you to transfer money from your credit card as cash into your bank account, which you can then use to pay off other debts, or fund that lavish new purchase.

Although this is also classified as a cash advance, some cards allow you to do this as part of a promotional balance transfer offer, meaning you'd qualify for 0% APR on this cash transfer.

For example, all MBNA credit cards allow you to do this, known as a 'money transfer'. You make the transfer at the time of application, or through a special credit card cheque sent to you through the post.

The amount available to you is dependent on your credit score, and the advance is subject to MBNA's handling fee - usually around 3% of the advance.

Still, 3% is a low price to pay for a loan, so if you're able to pay the loan off within a short amount of time or are prepared to switch to another card when the promotional period ends, this is a cheap way of borrowing.

Example cards include the MBNA Platinum Plus credit card, which currently offers 0% on balance and money transfers until May 2009. The Virgin credit card (also operated by MBNA) is another strong card and includes a 0% balance or money transfer offer for a massive 15 months.

Other cards operated by MBNA include the Sony and AOL reward credit cards, as well as charitable cards such as the National Trust and Dogs Trust credit cards.

Bear in mind that if you do take up the balance transfer deal, don't be tempted to spend on the card as well. This is because interest on your new purchases will start to accrue once the initial three months are up, and any payments you make will go towards your balance transfer debt first, not the purchase. Read more about this credit card rip-off here.

Borrowing From Regular Joe

If credit cards aren't your thing, another alternative is Zopa.

Zopa provides an innovative way of borrowing, allowing potential borrowers access to money from other individuals, as opposed to applying for a loan at a bank. You can borrow anything from £1,000 to £15,000, over a period from one to five years.

Lending criteria are quite stringent, and Zopa says you'll need to have a higher score than most of the population to qualify for a loan. In return, if you have a reasonably good credit score, Zopa can be a great way to borrow a relatively low amount.

At the time of writing, Zopa was offering a typical APR of 7.2% on a £1,000 loan over twelve months. You also get the added bonus of being able to pay the loan off early without any repayment fees.

However you decide to fund that cash injection, remember to consider all the options available before signing on the dotted line.

Don't always look towards the conventional route, as many high street lenders offer poor rates to what they see as non-conventional borrowers.

Finding a good interest rate for these types of loans may not be easy, but look hard enough, and you could still bag yourself a great deal.

Find a great 0% credit card or cheap loan today with The Motley Fool!