Martin Lewis: Debt can prove useful at times but don’t get your fingers burnt

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Debt is like fire – it’s a very useful tool, but get it wrong and you get burnt. Bizarrely after a debt fuelled economic crisis, borrowing is back, in fact we’ve deals now that are far cheaper than even before the debt crisis, and they’re likely to stay cheap now inflation is at 0 per cent too. While borrowing isn’t wrong, it does need care, and what really counts is you’re using the right tools for the job…

1 Is borrowing worth it?

Unless you’re seriously financially savvy and are stoozing (where you make money by playing 0 per cent credit card deals – see www.mse.me/stooze) only borrow if you really need to. Otherwise it’s far better to wait and save up for something instead. If you are planning borrowing, it will usually fall into one of two categories…

Just funding your ongoing lifestyle. This is the worst type as it means you’re consistently living beyond your means and risk a debt spiral. Avoid it. Instead, stick to a budget. If in trouble, seek help from a non-profit debt counselling agency like www.citizensadvice.org.uk or www.stepchange.org.

For a needed, planned purchase. Eg, a car for a new job, or to pay annual car insurance as it’s cheaper than monthly. Here you need to minimise the amount borrowed, repay quickly to keep interest costs down and ensure your repayments are comfortably affordable. If not, don’t do it.

2 The cheapest way to borrow – 20 months 0%

With no interest and no fee, 0 per cent credit cards are the cheapest way to borrow provided:

a) you can pay for the purchase(s) on plastic;
b) you can clear the debt within the 20 months; and 
c) you pay at least the monthly minimum. And currently we have three cards offering new cardholders the longest ever fees free 0 per cent deals on new spending – all at 20 months, they are Clydesdale bank (www.cbonline.co.uk), its sister Yorkshire Bank (www.ybonline.co.uk) and www.halifax.co.uk. Fail to clear the debt in that time and they jump to 18.9 per cent representative APR.

Now you may be thinking, “hold on, I’ve seen longer 0 per cent deals?” There are longer deals, but they’re only for balance transfers (best buys at www.mse.me/BTs) – where you shift debt from an existing credit card – not for new borrowing.

3 The cheapest ever loans

If you can’t pay on a card, need to borrow more or for longer, or want the discipline of fixed monthly repayments, personal loans win. The loans go as cheap as 3.6 per cent, lower even than anything before the credit crunch. However they’re tougher to get now, and loans if you’re borrowing smaller amounts are a lot more expensive.

£2,500-£2,999: www.hitachi.co.uk is 8 per cent rep APR. Yes I know you usually think of Hitachi as electronics, but it is trying to break into the loans market, and for small amounts is far cheaper than anyone else – the next cheapest for this amount is 14.9 per cent.

£3,000-£4,999: Hitachi again at 7.8 per cent rep APR. 

£5,000-£7,499: www.cahoot.com is 4.6 per cent rep APR

£7,500-£15,000: www.bank.marksandspencer.com is 3.6 per cent rep APR as is www.sainsburysbank.co.uk if you’re borrowing for 1-3 years and have a Nectar card.

It’s also worth checking out www.zopa.com and www.ratesetter.com – who can be cheaper than those above, but their rates are more personalised so it depends.

There are two key need-to-knows though... A 3.6 per cent loan can charge you 20 per cent. All loans are ‘representative’ rate, meaning only 51 per cent of those accepted need get that rate. There is no way to know in advance, which is outrageous because the mere act of applying marks your credit file. My www.mse.me/eligibilitycalc can give your likely acceptance odds (without impacting your future credit) for each loan and in general the higher your acceptance odds are roughly, the more likely you are to be given the advertised rate

Secondly, borrow more, pay less? As rates decrease the more you borrow, at the borders you can play the system. Eg, borrow £2,499 and the cheapest is 14.9 per cent, borrow £1 more and it’s 8 per cent. On a five-year loan you’d then repay £540 less. Keep the extra cash for repayments.

4 Can I use a 0% card for a loan?

Yes. For smaller amounts, if you need cash or are buying something you can’t pay for on a card then the winner – for a fee – is a specialist 0 per cent money transfer credit card. These pay money directly into your bank account, so you owe the card firm instead.

www.mbna.co.uk offers 24mths 0 per cent for a 1.94 per cent fee and www.uk.virginmoney.com gives an extra year at 0 per cent (36mths), but for a much larger 4 per cent fee.

Always ensure you clear the card by the time the 0 per cent ends, or you’ll pay 22.9 per cent and 20.9 per cent rep APR after, respectively. And never miss the min monthly repayments, or you can lose the 0 per cent. If this is new to you read my full www.mse.me/moneytransfers guide first.

5 Struggling – You may be eligible for a Government 0% loan

If you can’t get the mainstream credit above and are instead looking at horrid debts such as payday loans or store card, then there are  Government loans that are a far better. There’s no credit check, but they will check you can repay.

Local council support schemes: Typically for those in emergencies with no savings, these are administered by local councils (www.gov.uk/find-your-local-council), making it a postcode lottery as to whether support’s available.

Budgeting loans: If you’re on some income-based benefits, you could be eligible for a loan of up to £800 to help you meet essential living costs. Apply for one via the Jobcentre or via the form on Gov.uk at www.gov.uk/budgeting-loans.

Alternatively, try your local credit union. These are small savings and loan mutuals, helping local communities. They usually lend from £50 to £5,000. To find your local one go to www.abcul.org

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