Now I don’t want to encourage anyone into debt, but there are times when we all need to borrow money.
A 0% credit card is a great way to get your hands on an interest-free loan, but credit cards don’t work for everybody. Some borrowers prefer the discipline and structure of a personal loan, especially for larger amounts.
You can typically borrow between £1000 and £25,000 with a personal loan and you pay the money back in monthly instalments over one to five years. The interest rate is also fixed, so you know how much the loan will cost.
You will be pleased to know that loan rates have been coming down recently, with several lenders cutting their cost of borrowing since the start of the year.
The average rate for a £7,500 loan is now 6.39%, compared with 7.87% in January 2011. The average interest rate for a loan of £5,000 is also down from 10.11% to 8.94%.
M&S Money, Sainsbury’s Finance and Tesco Bank are currently offering some of the top deals on personal loans. M&S Money, for example, charges 6% if you want to borrow £7500 over five years. The rate at Sainsbury’s and Tesco is 6.1%. So you can pick up a loan along with the weekly shop. Who knew?
The monthly payment on the M&S loan would be £144.43 and you would pay total interest of £1,165.80. If you chose a shorter term of three years, your monthly payment would jump to about £228, but you would pay only £695 in total interest, so you would save money in the long run.
You can also save money on interest if you clear the debt early, though you should check whether penalties apply for early redemption. Research from Defaqto shows that 42% of loans charge an early repayment fee of 30 days’ or one month’s interest – and 36% levy an early repayment charge of between 58 days’ and two months’ interest.
Watch out for deferred payments, too. Some lenders allow you to defer payments so you pay nothing in the first few months. It might be tempting, but the interest still racks up, so the monthly payment and the total interest will ultimately be bigger.
Naomi Caine was editor of The Sunday Times Money section for six years before she moved out of London to bring up a young family. She now juggles two children with a freelance career, and has written for a variety of publications, including MSN, Yahoo, The Times, The Sunday Times, Which? Money, Money Week and The Sunday Herald.