Best ways to borrow £5,000

·5-min read

There are all kinds of reasons you might need to raise £5,000 – to pay for a holiday, a wedding, to furnish a new home or to consolidate existing, expensive debts.

With interest rates low, borrowing from mainstream lenders – banks and building societies is more affordable than it has been in the past.

Here are the options for accessing that all-important lump sum.

Personal loan

A personal loan might be your first port of call. It can be a very cost-effective solution with interest rates so low. You can borrow £5,000 over anything from 12 months up to seven years with the rate fixed, so that you know exactly what you’re paying each month.

Use comparison websites to make sure you find the cheapest rates on the market. A loan calculator lets you enter the amount you want to borrow, in this case £5,000, and shows typical repayment costs over different periods.

For example, a £5,000 loan over 24 months at 3.6% would cost £216 a month and overall you’ll repay £5,186.56. Stretch that over 36 months and the monthly repayment drops to £146.60 a month, paying back £5,277.72 in total.

Once you have found a loan with affordable repayments you can usually apply online. If you are accepted the money can sometimes be in your bank account on the same day.

The best rates are offered to those with the best credit scores so there’s a chance you might be offered a higher rate than advertised. Always use an eligibility checker where one is available to view your chances of being accepted for a loan before officially applying.

Top tip: Watch out for a loan scam where fraudsters phone or email you out of the blue, promising a cheap loan in return for a fee to “release the funds”.

The scammers steal your money and your card details used to make the payment which could be used for further theft. A genuine loan offer will never require a payment to activate the loan.

Related: Compare Loans & Find The Right Deal For You

0% purchase credit card

Purchase cards offer an interest-free period for spending and are a good alternative to a loan if you can pay back the £5,000 within a shorter period of time. The most generous cards offer a 0% period of around 26 months which means you can raise your £5,000 and pay back £192 a month to ensure the debt is cleared by the time the interest-free period finishes. This makes it a completely free loan.

Top tip: After the 0% period runs out, the rate reverts to high rates of up to 37.7%, depending on the card you take out. If you don’t manage to wipe the debt by the end of the interest-free period, there is the option of taking out a 0% balance transfer card to maintain the 0% interest rate for another fixed period.

Overdraft on your current account

Overdrafts are not the most cost-effective way to borrow. But they are convenient and worth considering if the cheaper options are unavailable to you for any reason and the cash is required urgently. Interest rates on overdrafts from banks and building societies can reach 39.9%.

This level is typical among high street banks which means £5,000 will cost £144.59 in charges a month. That equates to £1,735 a year and confirmation of why this option should only be considered as a very short term solution to avoid such excessive fees.

Speak to your bank about what you need and how long it might take you to pay it back.

Top tip: You can explore switching to a new bank account which offers a 0% overdraft for a period – usually 12 months. Check comparison sites to see what banks are offering. Just bear in mind the overdraft facility and limit will be subject to credit score checking.

Swapping current accounts is straightforward thanks to the Current Account Switch Service, which moves all your payments, direct debits and standing orders within seven working days.

Peer-to-peer loan

Peer-to-peer websites match ordinary investors with borrowers who need to borrow cash but do not want to - or cannot - get a loan from a mainstream lender.

A peer-to-peer borrower is loaned the money from an individual or a group of people instead of by a financial institution, like a bank or building society.

You can choose how long you want to borrow for, with loan terms typically ranging from 6 to 12 months, up to five years. You’ll also need an income that makes your loan affordable.

Interest rates are higher than those offered by a bank.

They are often typically quoted as starting at around 4%. But the annual percentage rate, or APR, as it is called can be much higher at around 14%. For example, borrowing £5,000 at 14.4% will cost £239 a month over 24 months.

The rate you’re offered will depend on factors such as your credit rating, so ensure you have a clean record for the best rates.

The loan contract works in the same way as a bank loan. You will face charges for failing to keep up with repayments, plus, any late or missed payments will also be noted on your credit file. This potentially makes it harder to get credit in the future.

Make sure you compare loans before committing to one.

Top tip: As the peer-to-peer lending sector is now regulated by the Financial Conduct Authority, you have a level of consumer protection should anything go wrong and you need to escalate a complaint.

Related: Compare Loans & Find The Right Deal For You