Getting your hands on cash for a short time, such as a pre-bonus loan or ‘tide-over' money during a house sale is usually neither easy nor cheap. Banks thrive on locking us into loans for years maximising the interest that they get.
Yet a few canny techniques and tricks can leave you in the money, at low cost. Read our top hints and tips for how to borrow at low or no cost.
Choosing the right technique for you
The financial services industry likes to box us into categories. Yet play by their rules and you pay by their rules. Getting a loan isn't necessarily the cheapest way to…. well… er… get a loan! Loans are usually inflexible products, lasting years not months, with penalties for early repayment.
Instead, ask ‘what's the cheapest form of borrowing over the period?' Then take whatever form that is and manipulate it into flexible cash. Confused? Don't worry, the whole point of this guide is to show you how.
Three questions to ask yourself
- How much do you need? Do you really need to borrow? If you do, honestly appraise how much and try and keep it to a minimum.
- Do you actually need cash? Or are you buying something specific that could be paid for on plastic. Sometimes you'll need to check to find out, eg, some car dealers will allow you to pay on plastic, others won't.
- How long do you need to borrow for? What's realistic? This technique is primarily for borrowing for less than a year, though it can be stretched. Truthfully establish how long you'll need the cash for. Will you really be able to pay it back in six months?
Deciding on the correct route
There are three main methods of securing cheap, short-term cash. The questions below will guide you to the correct route.
. Can you make purchases on a credit card?
Simply buy it at 0%
Get a credit card with an introductory 0% rate for ‘purchases' and buy what you need on it:
- Who's it for? Those with a decent credit history whose spending can be done on a credit card
- Cost? 0%
- Maximum length of borrowing? 18 months (can be extended if you play)
- How much can you borrow? Up to your credit limit, £5,000 is around standard
How to do it
Apply for a new credit card which offers 0% interest on new purchases (do ensure it's on purchases not just balance transfers). You can get up to 18 months at 0% (read the 0% Credit Cards guide).
Assuming you're accepted, you'll be given a credit limit (the maximum amount you can borrow) depending on your credit history and income. If this isn't high enough, there's nothing stopping you applying for another card elsewhere and using them in conjunction – though don't apply for lots as that will damage your credit score (see the Credit Ratings guide).
Now simply make the purchase(s) on the card, and make the repayments within the 0% period. You need to pay at least the card's fixed minimum repayment each month (usually around 3% of the outstanding balance), yet to clear the card over the 0% period you need to repay more than that.
If there's a problem and you can't repay in time, then shift your debt to a cheap balance transfer offer before the end of the 0% period (for a full explanation see Best Balance Transfers) otherwise the rate will shoot up to 15% - 20%.
Use a 0% overdraft
Shift to a bank account with an introductory 0% overdraft and use that:
- Who's it for? Those who rarely use their overdraft, and are looking to borrow low amounts for a short period
- Cost? 0%
- Maximum length of borrowing? 12 months
- How much can you borrow? Up to £1,500 depending on credit history
How to do it
The Nationwide FlexDirect* account offers new current account customers a 0% overdraft for the first year of holding the account, after which the charge on the overdraft is 50p per day.
Of course, if you already have an overdraft you can't use it for new borrowing (though it will cut the cost as you can shift it). Simply set up the account and use the money for whatever you need. For full details and other bank account options, read the Best Bank Accounts guide.
Flexible loans allow you to borrow money like a normal loan, but repay more quickly and without penalties:-
- Who's it for? Anyone who needs a larger cash loan, and wants a simple route
- Cost: 5-18% but only for the length of the borrowing
- Maximum length of borrowing? 12 months (any longer and you should consider a standard loan)
- How much can you borrow? Up to £15,000 depending on credit history
How to do it
The vast majority of loans available are designed with structured repayments over a fixed period. Pay them off early and you will be charged a penalty. Yet a few firms offer more flexible loans, which you can repay in full whenever you like, without facing any punitive fees (see Cheapest Personal Loan article for more info).
If you've a good credit score, Zopa* and Ratesetter* can be cheaper than high street bank loans. These are peer-to-peer lenders, the idea being that they unite people who want to lend with those who want to borrow.
Loan rates vary daily and are determined by the amount needed and length of borrowing. For example, borrowing £7,500 for four years can be done at a fixed interest rate of 4.1%. However, a borrowing fee of £90 pushes the APR to 4.7%, and the fee is payable in its entirety whether the loan is repaid early or not.
When you want to pay back, simply contact the lender, and ask to repay the loan, in full with funds from your current account. The advantage of these loans is that there's no early repayment penalties levied (many bank loans will charge you to repay early).
An alternative to the above is to consider joining a credit union where short term loans are usually available. Read my full Credit Unions guide for full details.
Credit Card 0%: Card Trick
Use a special credit card which allows you to move money into a bank as a ‘mule' card. Move 0% debt from other cards to it, then put it into your bank account and use it as cash:
- Who's it for? Those who want a loan in cash form, and are able to play with credit card techniques
- Cost? 4%
- Maximum length of borrowing? 31 months
- How much can you borrow? Up to £5,000 depending on credit history
How to do it
This needs to be done carefully. It's a powerful technique, but is easy to mess up. You first need to understand how money transfers work. If you don't, please read Money Transfers first. Don't simply try to withdraw cash from your credit card; you'd incur fees and massive interest charges.
Not all cards let you do this, you need a specialist Money Transfer card. Once you have one, you can use it to transfer 'cash' from the card into your bank account. Make sure you tell the card provider explicitly that you want to do a money transfer.
Let's use an example. Suppose you do a money transfer of £2,000 from a card to your bank account. You now have £2,000 in your bank account ready to spend, and owe a debt of £2,080 on the card (including the 4% transfer fee). Money transfers usually give you a 0% period, so use this to pay off the debt on the card.
What happens when the 0% period ends?
Hopefully you have already repaid the debt, after all, that is the point of this technique. If you've been unable to, you need to move the debt onto a card which offers cheap balance transfers, to avoid paying expensive interest – you need to do this in the month before the 0% period ends (see Best Balance Transfers guide).