Last week Tesco Bank announced it had reduced the interest rate on small loans between £1,000 and £2,999 to 14.9%, down from 18.4%. It claimed this is now the cheapest loan of its size, though you can actually get a rate of just 9.6% with peer-to-peer lender Zopa.
However, these remain pretty expensive ways to borrow. Take out £1,000 over a three-year period, and you're looking at shelling out anything from £148 to £220 in interest charges on top from Zopa or Tesco.
If you can clear that debt a bit quicker, there are much cheaper ways to borrow £1,000.
There are now dozens of credit cards offering lengthy 0% periods on both purchases and balance transfers.
Let's start with 0% purchase credit cards. The top cards here don't charge any interest for up to 23 months, meaning that everything you pay goes toward clearing the debt. Just bear in mind that the interest-free period begins when you take out your card, not when you make the purchase.
Here are the cards with the longest 0% period on purchases.
|Credit card||0% period||Representative APR|
|Santander 123 Credit Card*||23 months||16.5%|
|Clydesdale Bank Gold MasterCard||20 months||18.9%|
|Yorkshire Bank Gold MasterCard||20 months||18.9%|
|Halifax Purchase Credit Card||20 months||18.9%|
|Tesco Clubcard for Purchases||19 months||18.9%|
|M&S Credit Card||19 months||18.9%|
|Lloyds Bank 19-Month Platinum||19 months||18.9%|
|Bank of Scotland 19-Month Purchase||19 months||18.9%|
*Annual fee of £24
As long as you can clear the debt within the 0% period, these cards all offer the chance to borrow absolutely interest free. With the Santander 123 card, so long as you can pay £42 a month, you'll clear that debt in time (though there is the annual fee to consider).
Now, let's move on to balance transfer credit cards. Here you move existing credit card debt onto a new card. There's no interest to pay for up to 35 months with the top cards, though there is a balance transfer fee to pay, which will be a percentage of the debt you're transferring.
Here are the cards with the longest 0% balance transfer period:
|Credit card||0% period on balance transfers||Balance transfer fee||Cost of transferring £1,000 balance||Representative APR|
|Barclaycard 35 Month Platinum Visa||35 months||2.49%||£24.90||18.9%|
|Barclaycard 34 Month Platinum Visa||34 months||2.39%||£23.90||18.9%|
|Halifax 34 Month Balance Transfer MasterCard||34 months||2.8%||£28||18.9%|
|Tesco Bank Clubcard 34 Month Balance Transfer Credit Card||34 months||2.9%||£29||18.9%|
|Lloyds Bank Platinum 34 Month Balance Transfer MasterCard||34 months||3%||£30||18.9%|
|Bank of Scotland Platinum 34-Month Balance Transfer MasterCard||34 months||3%||£30||18.9%|
|HSBC Credit Card*||34 months||3.3%||£33||18.9%|
*HSBC current account customers only
So that's the best part of three years of borrowing, completely free of interest, with only a balance transfer fee to worry about. Again, if you can clear the debt within the 0% period, it's clearly far cheaper to borrow £1,000 through one of these credit cards than with a personal loan. With the Barclaycard 35-month card for example, you'll only need to pay off £29 a month. There is a transfer fee of just shy of £25 though.
There are actually balance transfer credit cards that don't charge a transfer fee at all. The 0% periods are much smaller, but if you can pay the debt off in time you'll be benefitting from interest-free payments without having to pay a penny for the privilege.
The longest 0% period on offer is 23 months from the Santander 123 Credit Card, though there is that £24 annual fee to consider. Alternatively the Santander 15-Month card also doesn't charge a fee, and means you don't need to worry about interest for 15 months. You'd need to be able to pay £67 a month in order to clear the balance by the end of the 0% period.
Compare credit cards
If you've already spent the £1,000 and your bank account is now languishing in the red, there's another way that a credit card can help, and that's through a money transfer. Some cards allow you to move money from the card straight into your bank account, though you'll have to pay a 4% transfer fee. You then have a 0% period in which you should aim to clear the balance.
Not all cards offer this. Currently the longest 0% offer comes from the MBNA Platinum Credit Card, which offers 33 months of 0% interest on money transfers. You will have to stump up a fee of £40 though.
A few banks offer interest-free overdrafts but they generally apply to the first £100 of the overdraft or to overdrafts on student accounts.
However, the Nationwide FlexDirect account has a 0% overdraft for the first 12 months and a 50p daily charge thereafter, which means it is a useful way to borrow a grand in the short-term.
Santander is also a useful port of call for fee-free overdrafts. The 123 Current Account and Everyday Current Account both offer an interest-free arranged overdraft for four months, reverting to £1 a day.
Compare current accounts
Credit union loans are often cheaper than bank loans as they don't incur set-up fees, administration costs or early redemption fees.
Most of them will charge an average of 1% interest a month as you pay off the loan. This can vary a little, but by law they can't charge more than 3% a month (42.6% APR).
Traditionally, you can only borrow from a credit union that you've previously saved with, though there is a bit more leeway nowadays, so have a look around.
Generally credit unions offer free life insurance with loans so that if you die while repaying the loan, the rest of the balance will be paid off for you.
They'll lend for up to five years on an unsecured loan. You can repay by Direct Debit, through your employer, in person, through paypoint or directly through your benefits.
Borrow from friends and family
I've left this option until last because it really is a last resort.
Borrowing from friends and family can be a godsend if you want to avoid high interest rates and red letters coming through your letterbox. However, if you're unable to repay them, you may be damaging a good relationship with a loved one.
If you do opt to go down this route, ensure that you make all of your repayments on time. In fact, it might be a better idea to pay off your loan early to show your loved one how committed you are to clearing the debt while maintaining a good relationship with them. At the very least, it'll earn you a few brownie points.
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