With the best planning in the world, sometimes unexpected bills arise that have not been budgeted for – a new set of tyres for the car or a replacement boiler for example.
A short-term loan could be the solution to raising the money and spreading the cost. There are a number of options to choose from, which we have outlined below but the best for you will depend on your requirements and circumstances.
0% purchase credit card
Purchase credit cards offer interest-free spending for a set period. If you’re facing a big expenditure, one of these cards could be the answer to borrowing without paying a penny in interest – but only if you can repay your spending before the 0% promotional period expires.
If you can’t clear the balance before then, you’ll face annual percentage rates (APRs) in the region of 19.9% (variable). This makes it important to be organised and draw up a repayment plan from the outset.
Bear in mind that the 0% purchase cards you see listed on comparison sites are aimed at applicants with strong credit scores. You may be offered less favourable terms or even turned down altogether, depending on your own credit score and other factors on your application.
Your existing credit card
If you already have a credit card, you can spend on this up to your allocated credit limit without paying interest – but, crucially, only so long as you pay back the outstanding amount in full the following month. What’s more, this only works if you start out with a balance at zero.
Arrange or extend an overdraft
Overdrafts are generally an expensive way to borrow, with interest rates from banks and building societies typically charged at around 40% AER (annual equivalent rate). But, as a quick-fix solution to a short-term need, an overdraft could be the answer.
Start by speaking to your bank about what you need and how long it might take you to pay it back.
If you're already at your limit with overdrafts and can't extend, this option won’t be for you. Equally, basic bank accounts provided for people with poorer credit scores do not offer overdraft facilities.
You could explore switching to a new bank account which offers a 0% overdraft. Check a comparison site to see which banks, if any, are offering the most attractive 0% overdrafts. Just bear in mind that, like any other form of credit, an overdraft facility will be subject to credit checks.
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.
A personal loan can be a cost-effective short-term borrowing solution because interest rates comparatively low.
However, APRs are tiered according to how much you borrow. You can borrow anything from £1,000 to £25,000 (sometimes more) over terms ranging from 12 months to seven years. Interest is fixed so that you know exactly what you’re paying each month.
Interest rates are higher on loans below £7,500, but that’s no reason to borrow more than you need, or to stretch the loan term longer than necessary. Generally speaking, the quicker you pay the money back the less the loan will cost you.
Use a comparison site to make sure you find the cheapest loan rates on the market. Enter the amount you want to borrow over how long and you will be given the options ranked with the lowest rates first.
When you have found a deal you can apply online and, if accepted, the money can often be with you on the same day. Again, bear in mind the best loan deals are reserved for those with a very clean credit history and you may be offered a higher APR than the ‘representative’ one you see advertised.
You should never pay a fee to access a loan.
Peer-to-peer websites match investors with borrowers – people who want to receive an income on their savings and those who need to borrow their cash. So with a peer-to-peer loan, you borrow the money from someone or a group of people instead of borrowing from a financial institution, such as a traditional bank.
The interest rate you’re offered will depend on factors such as your credit rating. If your credit history is less than ideal, you will be offered a higher rate of interest than someone who has an excellent credit score.
In some cases, peer-to-peer can be cheaper than borrowing through a conventional loan. And because the sector is now regulated by the Financial Conduct Authority (FCA), you have a level of consumer protection should there be cause for complaint.
These loans often appear near the top of any internet search for short-term borrowing, but they should be approached with extreme caution. They do what it says on the tin: fast, short-term finance, but the interest charges are extremely high.
Typical charges work out at exorbitant levels, often with annual percentage rates, or APRs, at over 1,000%. To make them sound less off-putting, fees tend to be quoted in pounds and pence.
Borrowing from a payday lender is typically for smaller amounts between £100 and £1,000. But a loan of £200 for three months could cost £100, with interest charges accelerating thereafter.
A payday lender will carry out a credit check which will be logged on your credit history. This entry could harm future applications you make for credit– especially in the case of a mortgage – as it implies an underlying financial problem.
Overall, you may well end up in a worse situation than you started with by taking out a payday loan.