With the best planning in the world, sometimes we come up against an unexpected bill we haven’t budgeted for. That might be for a new set of tyres for the car or a new boiler should yours decide to pack up.
A short-term loan would be the answer to help you spread the cost and there are a number of options to choose from. The right one will depend on how much you need and for how long.
Here we look at the options available for getting hold of the money.
0% purchase credit card
Purchase credit cards offer interest-free spending for a set period. If you are facing a big expenditure, these cards could be the answer to borrowing without paying a penny in interest, as long as you can repay before time is up. At the moment there are cards offering a 0% period of up to 26 months.
If you spent £5,000 on such a card you would need to repay around £192 a month, to clear the balance in time.
If you can’t repay the full amount before the interest-free period offer is up, you face interest rates of up to 37.7% being charged on the remaining sum, depending on the terms of the card.
To avoid these fees there’s the option to take out a balance transfer card to access another 0% period on the debt. Search for a 0% purchase card on a comparison site to ensure you find the best value deal.
Standard credit card
If you already have a credit card in your purse or wallet then you can spend on this, up to your limit, and pay no interest as long as you pay back the outstanding amount in full the following month. This only works if you start with the balance at zero.
You can apply for a card if you don’t currently use one. You just need to ensure that the spending limit is enough for your needs.
Arrange or extend an overdraft
Overdrafts are typically an expensive way to borrow. Interest rates from banks and building societies on their overdrafts typically sit at around 40%. But for a quick-fix solution to a short term need, it might be the answer.
Speak 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 won’t be one for you. Equally, basic bank accounts provided for people with poor 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 are offering the most attractive 0% overdrafts. Just bear in mind the overdraft facility 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.
A personal loan can be a cost-effective solution because interest rates are so low. However, interest rates are tiered according to how much you borrow. You can borrow anything from £1,000 - £25,000 over anything from 12 months up to seven years with the rate fixed, so that you know exactly what you’re paying each month.
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. The quicker you pay the money back the less the loan will cost you.
Use comparison websites to make sure you find the cheapest rates on the market. Enter what you want to borrow over how long and you will be given the options starting with those offering the lowest rates.
Once you have found an affordable loan you can typically apply online and as long as you are accepted the money can sometimes be with you on the same day.
Be warned that you should never pay a fee to access a loan. A scam is doing the rounds where fraudsters get in touch to offer you a loan (they target people who have borrowed in the past) and ask you to pay an ‘advance fee’ to release it.
Needless to say the fee is paid but the loan never materialises. Worse still, the scammers walk away with your card details too.
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, like a bank.
The interest rate you’re offered will depend on factors such as your credit rating. If your credit history is less than squeaky clean, you will be offered a higher rate of interest than someone who has an excellent credit score.
It can be cheaper than borrowing through a conventional loan and because the peer-to-peer lending sector is now regulated by the Financial Conduct Authority, 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.
Borrowing £200 for three months could cost £100, with interest charges accelerating thereafter.
A payday lender will do a credit check which will be logged on your history. This entry could harm an application in the future – especially a mortgage application - because the presence of a payday loan implies there's an underlying financial problem.
Overall, you may end up in a worse situation than you started out with by taking out payday loans.
If you still end up resorting to a payday lender, make sure they are listed on the register at the Financial Conduct Authority to ensure you’re dealing with a regulated firm. Being regulated means there are some consumer protections.