Let’s say you want to buy a car. Or a new kitchen, bathroom or boiler. Or maybe there’s a family wedding coming up, you want to go on holiday or have expensive debts to consolidate.
Where are you going to get the money from?
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For many, the choice will be between a personal loan and plastic. So which is the better option?
Do your sums
The answer partly depends on how much you plan to spend. That’s because the interest rate you pay on a personal loan can differ hugely depending on the amount you borrow.
With a personal loan, you borrow an agreed amount then repay it in fixed monthly sums over a set term.
You get the lowest rates on loans for £7,500 or above, with APRs starting from just 2.9%, depending on your credit rating. Over a three-year term, your monthly repayment would be £217.65 and the total interest bill £335.40. Which isn’t bad.
However, let’s say you want to borrow just £2,000. Suddenly, the interest rate shoots up, partly to ensure the lender still makes money and covers its admin costs.
Most of the loans I found for £2,000 charged 13.4% or more. At that APR, the total cost of borrowing £2,000 over three years is £413.44. Incredibly, based on the example rates for borrowing £7,500 and borrowing £2,000, for a £2,000 loan you pay £78.04 more interest to borrow £5,500 less!
The interest rates on personal loans give credit cards the edge for those borrowing smaller sums, especially if you qualify for a card with a lengthy 0% introductory rate on new purchases. Some market-leading cards give you as long as 27 or 28 months to repay the money.
However, there may be a catch. First, while most retailers accept credit cards, many tradesmen, such as your boiler repair man, do not.
Similarly, you can’t use a credit card to pay off your overdraft. For this, you need a money transfer card, which lets you send money from the card directly to your current account.
Watch out, because there is a fee for transferring money with a money transfer card, typically 4%. I still reckon that fee may be worth paying, because the best money transfer cards charge 0% interest for up to 28 months.
So if you borrow £2,000 on a money transfer card, you could pay as little as £80 in total. Bargain!
If you think you can pay the money over a short term such as 12 months, you might find a money transfer card with a lower fee of 2%.
As ever, these figures assume you can get the advertised deal, but that’s down to your credit rating.
You also have to repay at least the monthly minimum, and should aim to clear the entire debt within the 0% period. If you don’t, you could quickly find yourself paying an APR of 18.9% or even more, and that’s where your problems really begin.
Clear that debt
Personally, I would go for a credit card that charges 0% on purchases, or for a money transfer card if I were paying someone who didn’t take plastic. Then again, I am pretty disciplined with money. I’d back myself to clear the debt in full before the 0% rate ran out.
If you don’t trust yourself, consider a personal loan instead. A personal loan gives you the enforced discipline of a regular monthly repayment until your debt is cleared in full.
You may also prefer a personal loan for larger amounts. Many cards set maximum credit limits of just £1,200 for new customers. That’s no good if you want to borrow £2,000, £7,500 or £15,000. That’s when the pendulum swings back in favour of personal loans.
As always, the decision is down to you.