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What’s the cheapest way to borrow money now?
With the pandemic putting people’s finances under pressure, many of us are paying down debt to get into a more stable financial position. Data from UK Finance reveals the annual growth rate of outstanding credit card balances fell 12.6% during the final month of lockdown, as consumers rushed to reduce their liabilities.
But for those who still need to borrow, it is more important than ever to pay as little interest on that money as possible and, with the Bank of England base rate so low, there are good deals to be found.
The credit card shuffle
The credit card lending market is changing, with deals dwindling and lending criteria tightening.
In the past, with a limit of perhaps a few thousand pounds, you would have been able to get a credit card offering 0% interest on purchases for a fixed period, and then transfer your balance to another card once the term ended, and then another after that, as long as you had a decent credit record.
Now though, this so-called ‘credit card tarting’ is not as easy to do. For one thing, there are fewer available deals – the total number of credit cards on the market has fallen by 24 since the start of the year, according to Moneyfacts.
‘There has been a lot of change because of Covid, and the credit card side of things has changed quite dramatically in the fact that a lot of providers have withdrawn a lot of their cards,’ explains Katie Brain, banking expert at data specialist Defaqto.
‘You can still get a 0% purchase offer or a 0% balance transfer offer but they’re not as favourable as they used to be in terms of choice and the length of time you can get the offers for.’
Having a shorter time to clear your balance could store up future problems. You don’t want to get stuck with a balance outstanding on a credit card after the interest-free period ends, as rates are high at an average 25.3% APR.
Lending restrictions are tighter now because people are finding themselves in precarious situations with their jobs and incomes due to the pandemic. This means that both the rate you get and the amount you can borrow will be subject to status, meaning how creditworthy you are in the eyes of a lender.
Despite all this, Brain says credit cards are still many consumers’ first port of call for cheap borrowing: ‘I would say they’re still the first option for people if they need to borrow money, especially if it’s a big purchase or they’ve got a balance outstanding on a credit card.’
Loans for larger amounts
For larger amounts, say £7,500 to £15,000, many people look to personal loans. The average interest rate on a £5,000 loan is currently 7.6%, while a £10,000 loan will cost you 4.6% on average, according to Moneyfacts. However, the cheapest deals available are much more competitively priced, if you can get them.
‘There are still decent options available for cheap borrowing via credit cards and loans,’ says Claudia Nicholls, a money expert at comparison website Moneysupermarket. ‘You can currently transfer existing credit card debts to a 0% balance transfer offer for up to 28 months with a 2.75% fee, or borrow £7,500 to £15,000 at 2.8% representative APR. However, whether you can get the top products at the best rates is dependent on your credit profile.’
Check the best buy tables to find good deals and then, before applying for any credit, do an eligibility check to see whether you are likely to be approved without leaving a mark on your credit file.
‘Applying this way means less chance of rejection as you have been pre-checked, and therefore less of an unnecessary hit on your credit file. Eligibility checkers are soft searches, meaning they don’t show up when lenders are looking at your credit file. When you make a full application, even if you are rejected, they do (show up on your file),’ says Nicholls.
‘This is especially important in the current situation. Most card and loan providers have tightened their lending criteria, meaning the pool of who they give a card or loans to is smaller. The products are still out there, you just need to check the right ones to suit your situation.’
If you know you have a less-than-stellar credit history, you may still be able to borrow without resorting to high-cost loans that could trap you in a debt spiral. Try your local credit union or see if there’s one linked to your workplace.
Usually you will need to meet some criteria to become a member of these non-profit organisations, such as locality or occupation.
If you can join one, they offer small loans, often charging 12.7% APR, and they will consider your individual circumstances and ability to repay even if you have bad credit. They will also encourage you to build a savings habit to prevent the need for future borrowing – sometimes this is a condition of any loan.
If you’re struggling with any existing borrowing, you could ask your lender for a payment holiday or temporary interest rate freeze. But be aware that, despite guidance to the contrary from the financial regulator, this could count against you if you apply for future credit such as a mortgage.