Who should and shouldn’t borrow?
After years of high interest rates, inflation dropped to 0% last week and the cost of new borrowing has plummeted to an all-time low – with every type of borrowing at a best buy. Yet who should and shouldn’t borrow? Our money saving expert Martin Lewis is here with his top tips
Debt is like fire - it's a very useful tool, but get it wrong and you get burnt. What really counts is you know what you’re doing and you use the right tool for the job
1. Is borrowing worth it?
Unless you're a super financially savvy stoozer, only borrow if you really need to - it's far better to wait and save up for something instead. Most new borrowing falls into two categories...
· Just funding your ongoing lifestyle. This is the worst type as it means you're consistently living beyond your means and risk a debt spiral. Avoid it. Instead, stick to a budget, stop unnecessary spending, and cut your cloth accordingly. If in trouble, seek help from a non-profit debt counselling agency like Citizens Advice or StepChange
· For a needed, planned purchase. Eg, a car for a new job, or to pay annual car insurance as it's cheaper than monthly. Here you need to minimise the amount borrowed, repay quickly to keep interest costs down and ensure your repayments are comfortably affordable. If not, don't do it
2. The cheapest way to borrow – 20 months 0%
With no interest and no fee, 0% credit cards are the cheapest way to borrow provided:
a) you can pay for the purchase(s) on plastic;b) you can clear the debt within the 20 months; and c) you pay at least the monthly minimum
For full help on picking the top cards, including a tool which shows which you’re most likely to be accepted for – as all lenders credit score you - see Martin’s Top 0% Credit Cards guide
In brief though, Clydesdale, Yorkshire and Halifax all offer 20 months 0% without any fees and then 18.9% representative APR after – the longest 0% I’ve ever seen without fees
3. Cheapest loans
If you can't pay on a card, need to borrow more or for longer, or want the discipline of fixed monthly repayments, personal loans win. Here are the current best buy loans for each amount:
· £2,500-£2,999: Hitachi is 8% rep APR. Or for this level and lower (and sometimes higher), try Zopa and Ratesetter - their rates are more bespoke, and they can be cheaper
· £3,000-£4,999: Hitachi is 7.8% rep APR - far cheaper than any other
· £5,000-£7,499: Cahoot is 4.6% rep APR, Hitachi 4.8% rep APR
· £7,500-£15,000: M&S Bank's best at 3.6% rep APR. Next isSainsbury's is 3.6% rep APR for 1-3yrs with a Nectar card (avail free) or 3.7% rep APR for 4-5yrs
Though it’s crucial to understand all loans are 'representative' rate, meaning only 51% of those accepted need get that rate
4. Can I use a 0% card for a loan?
Yes, there are specialist 0% money transfer credit cards, which pay money directly into your bank account, so you owe the card firm instead. MBNA offers 24mths 0% for a 1.94% fee and Virgin gives an extra year at 0% (36mths), but for a much larger 4% fee
Always ensure you clear the card by the time the 0% ends, or you'll pay 22.9% and 20.9% rep APR after, respectively. And never miss the min monthly repayments, or you can lose the 0%
5. Struggling? You may be eligible for a Government 0% loan
If you're looking at horrid debts such as payday loans or store cards, the Government’s loans are a far better alternative. There's no credit check, but they will check you can repay
Local council support schemes: Typically for those in emergencies with no savings, these are administered by local councils, making it a postcode lottery as to whether support's available. Sometimes they’re grants not loans, or vouchers not cash (eg, for furniture, clothing)
Budgeting loans: If you're on some income-based benefits, you could be eligible for a loan of up to £800 to help you meet essential living costs. Apply for one via the Jobcentre or via the form on Gov.uk
Alternatively, try your local credit union: These are small savings and loan mutuals, helping local communities. They usually lend from £50 to £5,000 - APRs are typically about 13% but can be higher (though they're capped at 42.6% APR). To find your local one go to Abcul