One of the most important considerations when you’re borrowing cash is the costs associated with the transaction. Therefore, the most efficient way of borrowing money is to choose the method that is the least expensive.
So, what’s the most inexpensive method of borrowing money? Frankly, it largely depends on your personal situation. This post examines a range of ways in which you can borrow money, including personal loans, low-interest credit cards, and tapping up your friends and family. Hopefully, it will provide you with guidance on which method of borrowing money is most suitable for your situation.
Read on, however, to find out about the cheapest ways to borrow the money you need!
One of the easiest ways to borrow money is to apply for an unsecured personal loan. This entails borrowing a fixed amount of money at a pre-agreed rate of interest before you’re required to make monthly repayments until the balance is paid off.
What’s the most inexpensive way of borrowing money?
While there’s no universal answer to this question as it depends on your personal circumstances, we cover some of the cheapest ways to borrow money, beginning with the most inexpensive.
Borrow from family and friends
Most people can borrow money from their family and friends without paying interest, depending on their availability and willingness, of course!
But you need to be careful when borrowing from your loved ones, as it can place incredible strain on your relationships, especially if you struggle with the repayments. You should definitely weigh up the pros and cons of borrowing from family or friends before diving into an agreement.
We’d recommend LoveMoney’s guide to borrowing money from friends and family, as it helpfully articulates some of the issues that you might encounter.
Zero-interest credit card
A zero-interest credit card (or 0% credit card) is precisely what the name suggests – interest-free – and can be used for specific purchases. But be careful, as there tends to be a catch with 0% credit cards. In most instances, the interest-free period is only for a fixed duration, typically no longer than 1-2 years. Following your interest-free period, interest rates spike. Therefore, if you’re unlikely to pay the money back in the zero-interest period, think twice about applying.
Of course, if you’re confident of paying the balance of your loan off during the interest-free period, this credit arrangement is an attractive proposition. But as you’re probably aware, credit cards are capped with limits (not more than a few thousand pounds). You also need a good credit history to be approved for a credit card, so if your credit card score is far from impressive, you’ll have to work hard to find a good deal or be subject to a shorter free-interest period.
Another option is balance transfer credit cards, which work in a similar way. Most typically used for debt consolidation purposes, you can transfer a balance rather than spending on purchases.
If you maintain a current account with a bank, you can probably apply for an overdraft on your account, which is essentially a small credit line. While interest-free overdrafts do exist, others require interest payments. This tends to vary from bank to bank.
The disadvantage of overdrafts is that the credit line is usually capped in the hundreds or low thousands, so they’re only suitable for dipping into from time to time. They’re not ideal for larger purchases like buying a car or making payments on your wedding.
Unsecured personal loan
Unsecured loans aren’t the cheapest option for everyone as interest is due. However, interest rates can be extremely low for borrowers with a good credit rating, making it a viable, low-cost option. To find out more, check out our guide: what is a personal loan.
Two reasons why a personal loan might be the most inexpensive way to borrow
While a personal loan comes with interest obligations, there are a couple of reasons why it’s still worth your consideration. And you never know, it might be a cheaper option for you in the long run.
1- Fixed interest rate
Personal loans come with a fixed interest rate that stays the same for the duration of your loan. This is in contrast to many credit cards, which have low interest rates, to begin with, before shooting up after several months. A fixed-interest loan is beneficial because you don’t need to worry about forgetting about the interest terms of your loan.
2- Borrow for a fixed amount of time
As you know, credit cards don’t come with a fixed monthly payment. Instead, you’re required only to make a minimum payment, which means you could end up dragging your credit card debt out forever. Although it’s a tempting proposition, it will cause you to pay huge amounts of interest over time if you’re not careful.
Personal loans require you to commit to a fixed-term of borrowing, which comes to an end at an agreed date. Providing you make your payments on time (which tend to be taken automatically via direct debit), you will be out of debt at the end of the period. Ultimately, you will probably save money if you can pay it off more quickly than a credit card.
Are there other cheap ways to borrow money?
Credit unions are an attractive option for people with shared interests or lifestyles (for instance, people working for the same company or those within the same religious group) and work by members pooling money together into savings. Members can then apply for loans from the union as and when they need cash.
In most instances, credit unions are run not for profit, and they’re required to cap the interest rate at 3% per month, but it’s considerably less in many cases. To find out more or to look into your local credit union, click here.
Another way of borrowing money from your community is peer-to-peer lending (P2P). This provides people with money the chance to lend it out to borrowers in their community.
For the borrower, P2P lending works similarly to a bank loan, but the rates tend to be more competitive. Currently, two of the biggest P2P lenders are Zopa and RateSetter.
Add to your mortgage.
For anyone looking to borrow a significant amount of money (think, tens of thousands), adding to your current mortgage is an effective way of tapping into additional funds at competitive rates. In practice, you essentially add to the balance of your mortgage, increasing the amount you need to pay back.
To add to your mortgage, you are required to have sufficient equity in your house. For those who have recently purchased a home with an 80% or 90% mortgage, it’s not the most suitable way to borrow money. But given the fact that mortgage rates are currently at historic lows, you will be able to find a comparatively low rate if you’re eligible.
The disadvantage to this approach is that your interest payments will really add up, as mortgages are paid back over longer periods of time. Also, your house is at risk if you don’t pay the loan back, and you will also have to fill in a lot of paperwork.
What to do next
Now that you know what some of your options are, you can begin to do some research and look at what’s available. But be careful not to make any hard credit search applications.
Acquiring a loan can be tough if you’re new to the UK, and our guide articulates how foreign nationals can apply and be accepted for a UK loan. We explain how long you need to have resided in the UK to be approved for credit and give you some tips on how to maximise your likelihood of getting approved.
For a flexible loan of between £1,500 – £7,500, have a look at our loan calculator or apply directly on our website at www.koyoloands.com. Representative APR 27%.
If we’ve missed anything off, be sure to tell us in the comments section underneath!
FAQs about the cheapest way to borrow money
Which type of loan is the cheapest?
The cheapest loan depends on your personal situation. Ultimately, a provider that offers a good deal to one person might prove restrictively expensive to someone else.
It’s vital that you shop around to find a cheaper loan and take in all your available options. You might consider working with a loan provider that does things slightly differently.
For instance, Koyo is an Open Banking lender. This means that we securely view data from your bank account in order to make our lending decisions. Instead of listening to what someone else says about you, we make our decisions based upon your actual financial situation.
How can I borrow money for free?
Of the options introduced above, there are three that might be free:
- Borrowing from family and friends
- Zero-interest credit card (be wary of fees)
- Overdraft (providing you’re eligible)
But remember, there’s no such thing as a free lunch! So, be mindful to review any strings attached to the loan, so you don’t get stung by charges at a later date.