There comes a time in most of our lives when we need to borrow money, whether it’s to cover a relatively small cost such as a new washing machine or pay for something much more expensive like a home extension. At this time, it pays to be financially savvy.
There are numerous potential sources you can borrow money from and it’s not always immediately clear which is the most affordable.
Although there’s no single method of borrowing that works for everyone, there are some methods that tend to be consistently more affordable than others.
In this guide, we’ll give you a rundown of some of the most common borrowing types and discuss how affordable they tend to be.
0% purchase credit cards
Undoubtedly one of the cheapest ways to borrow money is by using a 0% purchase credit card. It lets you buy items upfront that you can pay off over a set period without having to pay any interest.
If you clear the debt by the end of the pre-agreed 0% period, borrowing the money will not cost you a penny.
Credit card limits are typically lower than the amount you’d be able to access by taking out a loan. You also need to watch out for the high rate of interest that will kick in at the end of the interest-free period.
However, if you want to make one or two relatively expensive purchases and are confident you can repay the full balance in time, this is likely to be the cheapest way to do it.
Personal or unsecured loans
Personal or unsecured loans are typically offered for a period of one to 10 years and allow you to borrow more than you’d typically be able to access using a credit card.
The interest rates available on personal loans can be excellent. Affordable loans are available from lenders such as banks, building societies.
Even commercial lenders like Wonga.co.za have thrown their hat into the ring with a more competitive product than the standard 30-day payday loan.
The exact interest rate you’ll be offered is determined by a range of factors including the amount you want to borrow, the repayment term and your credit history.
Bank overdrafts can prove to be a convenient and flexible way to borrow a small amount of money very quickly. However, they can also be expensive if you have not pre-arranged an overdraft limit with the bank.
Before going into an overdraft, you should always speak to your bank first and discuss how far into your overdraft they’re willing to let you go before you incur a penalty.
You should also read the terms and conditions very carefully to find out what fees and interest rates apply if you exceed your overdraft limit.
If you want to borrow a lot of money to fund a major expense, secured loans are likely to offer the best value. In a secured loan, the money you borrow is secured against an asset you own, such as your home.
If you’re unable to repay the loan, the lender can seize and sell that asset to recover the balance of the loan.
The additional protection this gives the lender means the interest rates you can access tend to be lower than with unsecured loans, making it an affordable way to borrow money.
However, the repayment periods tend to be quite long, so you can still end up repaying significantly more than you borrowed. You can find out more about the pros and cons of personal loans here.
Always do your research!
These are just a few of the different ways you can borrow money and you might be able to find a more affordable method for you.
The rates you can access will always come down to your goals, your financial situation and your credit history, so do your research and never blindly accept the first deal you’re offered.