Borrow Using Credit Cards Instead of Loans to Save

The current low interest rate environment is no doubt popular with borrowers, however, an unsecured personal loan is not always the most cost-effective choice when it comes to borrowing small amounts. The latest research from moneyfacts.co.uk reveals that consumers could save over £200 by using a competitive credit card instead.

Loan rates have fallen considerably over the years, so much so that the lowest rate available on a small personal loan of £3,000 now stands at 5.9% (a deal offered in branch by Metro Bank), which would result in interest payments of £272.76 over three years. If the purchase was made on the best 0% purchase card instead, with £100 repaid every month, then consumers wouldn’t pay any interest at all as they would be able to repay the debt in 30 months. If they were consolidating debt and used the best 0% balance transfer card, borrowers would only incur a £50.40 fee (1.68%), saving £222.36 compared with the best available loan*.

 

Rachel Springall, Finance Expert, said:

“There is no denying that the fall in interest rates on loans has boosted unsecured borrowing and helped consumers to consolidate debts or better plan costly upfront purchases. At the same time, there has been fierce competition in the introductory interest-free credit card market – something that consumers would do well not to overlook if they are considering taking out a loan.

“The card deals are in fact so competitive that if borrowers were to use a Best Buy 0% credit card today to borrow £3,000, they could save themselves from having to pay unnecessary interest compared with an unsecured personal loan and still have their debt paid within three years.

“While loans provide a fixed repayment plan, credit cards are designed to be much more flexible when it comes to making repayments. However, while this is a handy feature, it could cause borrowers to neglect paying beyond the minimum repayment. This puts greater responsibility on customers to ensure there are on track to pay off their card debt.

“It’s worth remembering that regardless of which choice consumers make for their short-term borrowing, they must be sure to never miss any repayments so that they don’t damage their financial footprint. It is also imperative for consumers to check their credit score before they apply to make sure that they are in the best possible position to be accepted for the top deals.

“If borrowers find that they have poor or even little to no credit history upon checking their credit report, they may find it difficult to get one of the best deals. Before making any credit application, they should consider credit repair cards or alternative loans to improve their position.”

*Metro Bank would charge 5.9% APR on a £3,000 loan over three years, which results in payments of £90.91 per month (£272.76 interest in total). The lowest loan rates do not include peer-to-peer loans Credit card costs assume a minimum repayment of £100 each month is made.

The Market Oracle

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