Cheaper ways of borrowing

Living is expensive and getting by without using credit at all can be extremely difficult. At some point in their lives almost everyone will have to borrow money on credit – whether it is a mortgage, a car loan, student loan or to pay for a new kitchen.

Credit can be useful but, all too quickly, it can become too easy to accumulate debt and before you know it you’ve built up a vast amount which leaves your finances hostage to fortune.

The trick is to find the cheapest way of borrowing money, paying as little interest as possible and keeping debts to a minimum.

The first thing to consider when looking to borrow money is deciding exactly how much you need – and whether you need it at all. Perhaps you could save the money you require in a few months or a year without borrowing?

If not, never be tempted to take more than you need, and always aim to pay the amount off as quickly as possible to avoid too much interest. That said, trying to pay it off too quickly, by agreeing high monthly payments, could cause you problems should you have an unexpected expense.

Know your budget, and commit to monthly payments that allow you flexibility to save something every month that will deal with one-off expenses or could allow you to pay off your credit early.

Depending on the amount you are looking for, it could be that a 0% deal on a credit card is actually the most effective method. You can use 0% balance transfer offers to maintain zero interest on borrowings for some time, but a good credit rating is required and you must always remember to plan for when the zero interest period comes to an end to avoid any interest payments. You also have to be careful to ensure that you understand the terms of the transfer in full. Many credit cards that offer 0% on transfers charge a fee for the transfer. So whilst you are not paying interest for a period your debt has automatically increased by something like 2% of the balance.

Loans are another common way of borrowing money and there are two types – secured and unsecured. Mortgages are secured loans – if you default on payments you risk losing your house as your mortgage provider may sell it to recoup its money.

When considering taking out a personal loan, an unsecured loan is almost always the best option as the money is not secured against your house or car.

Being fully informed of how much a loan will cost you in interest is important too because it can be confusing when different interest rates are given.

Most interest rates will be given as an Annual Percentage Rate (APR) which basically means the rate at which you are charged on outstanding balances. Lenders are required to tell you the APR, but you may find that they also tell you the flat rate, which is the amount of interest you are charged on the total borrowing. This is usually added to the loan at the beginning and the balance is divided by the number of payments you’ll make to arrive at you monthly payment, which will be fixed.

In a retail situation interest rates are often presented like this because it makes the cost of borrowing look cheaper, but in general the APR will be double the flat rate – eg. a five percent flat rate will equate roughly to 10 percent APR. The best way of comparing the cost of a loan is to look at the total amount you have to pay back. You may be buying something for £5,000, but actually what is it costing you?

Also, check to see if there are any early repayment penalties. Most loans can be paid off early with lump sum payments but this may sometimes incur an early settlement charge.

With any loan, careful monitoring of when payments are due is essential to avoid unnecessary penalties – setting up a direct debit is the best way to avoid this happening.

Shopping around on the internet can help you find the best deals on loans and credit card rates and it is always worth consulting a professional on the best ways of managing money and clearing debts.

Never assume debt consolidation is the right answer, take advice, there may be other solutions and it is important to understand how the debt accumulated and what has to change to make sure debts are repaid without causing problems down the line.