So you may have overdone it on the bank holiday DIY spending, or indeed may be looking to spring clean away that debt, so it is vital to make sure that you are paying the lowest rate possible on any debt consolidation borrowing. The good news is that unsecured loan rates are as low as 6.4% based on the smaller loan amounts, £3000 over 3 years for example. But it is entirely possible to pay no interest at all, and that’s where the 0% credit cards come in.
Analysis by consumer group Moneyfacts reveals that rather than opt for a small loan, consumers might consider a credit card with a long introductory interest free period or even a card with a lower term but fee free, both of which could save money on interest payments. Both balance transfer and purchase cards, even money transfer offers, help consumers spread to cost of debt.
Why choose unsecured loans over 0% credit cards?
You may wonder why anyone would even consider opting for an unsecured loan. Rachel Spring, finance expert at www.moneyfacts.co.uk said there are benefits to choosing an unsecured personal loan over a credit card, primarily the strict way repayments must be made each month; these loans are ideal for borrowers who want the guarantee that their debt will be paid back at the end of their arrangement.”
Unsecured loans have a very distinct advantage in that the repayments are fixed, which means that by the end of the term, and providing you have made all the repayments, then the debt will be cleared. Credit cards rely more on the borrowers themselves to make the repayments to clear the outstanding balance before the end of the 0% period. Credit cards only ask for a minimum repayment, which means that, unless the borrower has made higher repayments the balance will not be cleared by the end of the interest free period.
However, “if a borrower was instead to opt for an interest-free credit card, they could save hundreds of pounds in interest if they pay the debt back in full before any 0% deal expires,” said Rachel, so it could pay to be more organised.
So based on an average rate of 14.3%, an unsecured loan of £3,000 over 3 years would cost £706.94 in interest, though there are rates as low as 6.4% available which would reduce the total interest to £296.16.
However, not all borrowers will be offered the advertised or “teaser” rate as lenders are only required to offer this is to 51% of applicants, and the best deals are always online, so heading to the branch may not be a smart move.
It is possible to significantly reduce the amount of interest paid, or even avoid it altogether using a 0% deal. However a note of caution from Rachel “one of the greatest dangers of using a credit card for short-term borrowing is obvious, keeping up with repayments. It can be all too easy to lower a monthly repayment to the minimum requirement to free-up some outgoings, but doing so for an extended period of time will mean having the debt hanging overhead for longer than originally thought, which could result in higher interest payments. Instead, it is always a good idea to boost payments where possible in order to pay off the debt more quickly.
“For example, if a borrower had a £3,000 debt on a typical credit card incurring interest of 18.9% APR and only paid back £100 per month, they would incur interest charges of £970 and have the debt hanging over them for three years and four months. Instead, with a 0% deal, it is possible to clear £3,000 in 25 months with £120 fixed repayments without incurring any interest charge, but if customers can stretch an extra £30 a month (to £150 per month), this drops to just 20 months.”
“Furthermore, to ensure consumers have the best chance of getting one of the most lucrative deals, it’s important they put themselves in the best possible position financially before applying for credit,” concluded Rachel. “Checking a credit report regularly is a good idea, and it can be done for free, such as with Experian where consumers can gain quick and easy access to their financial footprint.”
However, whether it be a, balance transfer, money transfer or interest-free purchase credit card, always remember that many of the best offers charge a fee for switching a debt, which could eat into any potential savings earned. Therefore, make sure you check all the numbers first, as choosing a deal with a high fee could be a costly mistake, and ideally be on the lookout for cards that charge no fee whatsoever.