When you’re borrowing money, one of the most important factors is cost. All other things being equal, the best way to borrow money is the one with the smallest price tag attached.
So what’s the cheapest way to borrow money? The answer is likely to depend on your circumstances. In this article, we’ll look at various ways to borrow money, including personal loans, low-interest credit cards and borrowing from friends and family, and help you to get a sense of which source of borrowing - if any - is best suited to you.
And before we get started, If you’re looking for a flexible personal loan of £1,500-7,500, you can take a look at our loan calculator or make an application at www.koyoloans.com. Representative APR 27%.
If you want to know more though, read on!An unsecured personal loan is one of the simplest ways to borrow money. You borrow a fixed amount at an agreed rate of interest, and then make monthly repayments to pay the balance off in instalments.
What’s the cheapest way to borrow money?
Although the exact answer will depend on your individual circumstances, in this section we’ll try to cover off some of the most cost-effective options, in rough order of cost.
Borrow from friends and family
Depending on how willing - and able - friends and family are to lend you money, you may be able to borrow money from them with no interest.
Borrowing from friends and family can put enormous strain on your relationships though, particularly if you later find it hard to make repayments, so it’s worth reflecting very carefully before doing so. LoveMoney has a good guide to borrowing from friends and family, which is worth a read to understand some of the issues you’re likely to face.
Zero-interest credit card
Often marketed as “0% credit cards”, these cards can be used for purchases and - as the name suggests - are interest free. But (and there’s always a but) the interest-free element only applies for a fixed duration - typically somewhere around 12 to 24 months. After that, interest rates tend to fly up, so if you’re in doubt about whether you’ll be able to repay the balance in time, think carefully.
If you can comfortably pay off the balance within the interest-free period though, this can be a good option. Unfortunately, credit cards come with limits - usually in the low thousands of pounds - and as always, eligibility for the best offers tends to be reserved for people with the best credit histories. If you have an average or bad score, you’ll have to look harder for a good deal, and will face a shorter interest-free period.
Balance transfer credit cards work similarly, except that you can transfer a balance (hence the name) rather than spending on purchases. This is typically used for debt consolidation though, rather than new purchases.
If you have a current account, there’s a good chance that your bank provider will offer you an overdraft, allowing you a small credit line. The interest rate payable, as well as the size of your overdraft, vary from bank to bank, but some people will have access to interest-free overdrafts.
The drawback? Usually, overdrafts are capped in the hundreds or low thousands, so they can be good for dipping into but unlikely to be useful for a major expense, such as a wedding or new car.
Unsecured personal loan
Because interest is payable, unsecured loans won’t be the cheapest way for everyone to borrow, but for many borrowers, rates can be extremely low, particularly if you have a good credit rating. For more information, take a look at our guide: what is a personal loan.
2 reasons why a personal loan may be the cheapest way to borrow money
Although a personal loan carries an interest rate, there are a few reasons why you might want to consider one - and it may even turn out to be cheaper over the long term.
Get a fixed rate of interest
Unlike credit cards, which often have a low introductory rate that shoots up after a few months, personal loans have a fixed rate of interest. That means you won’t be caught out by any rate increases you’d forgotten about.
Borrow for a fixed duration
Credit cards don’t have fixed monthly payments - you need to pay off a minimum balance, but other than that, it’s possible to drag out credit card debt forever. That can be very tempting, but it’s also a surefire way to pay lots of interest if you’re not disciplined.
With a personal loan, you commit to a fixed term, and so long as you make your payments on time (which is usually managed by an automatic direct debit), once the loan term en
ds you’ll be completely out of debt. If that means you pay it off more quickly than you would with a credit card at a similar rate, you’re likely to save money.
What are some other cheap ways to borrow money?
Credit unions are a way for people with a shared interest (for example working for the same employer or belonging to the same local church) to pool money into savings, lending it out to others in the same group who want to take out loans.
They’re typically run as not-for-profits, and the interest rate they’re allowed to charge is capped, so you’ll never have to pay more than 3% per month - and usually much less than that. If you’re interested, you can find local credit unions here.
Peer-to-peer lending (often shortened to P2P lending) is another way to borrow from the community. People with money to invest can pool their money and “lend” it out to borrowers.
Add to your mortgage
If you want to borrow a large amount of money (in the tens of thousands) and you have a mortgage, you may be able to borrow at a relatively competitive rate by adding the balance to your mortgage.
For this to work, you need to have sufficient equity in your house, so it’s unlikely to be suitable if you’ve just bought your first place with an 80% or 90% mortgage. However, on the plus side, mortgage rates are at historic lows so you can get a comparatively low rate.
The drawback? Aside from involving a lot of paperwork, mortgages are usually paid off over a long period, meaning interest really adds up. And of course, because your mortgage is a secured loan, your home will be at risk if you don’t repay the full amount.
What to do next
Now that you’re aware of what your options might be, the next step is to start to shop around, being careful to avoid making any hard credit search applications.
If you're new to the UK, accessing a loan can be difficult. Our guide explains how foreign nationals can get a loan in the UK. We look at how long you need to have been in the UK to be approved for a personal loan, and how you can maximise your chances of accessing credit.
If you’re looking for a flexible personal loan of £1,500-7,500, you can take a look at our loan calculator or make an application at www.koyoloans.com. Representative APR 27%.
And if there’s anything we haven’t answered above, let us know in the comments section below!
Frequently asked questions about the cheapest way to borrow money
Which type of loan is cheapest?
The cheapest type of loan will depend on your personal circumstances - a company that gives a good deal to one person might be much more expensive for another.
The important thing if you want a cheaper loan is to shop around and get a sense of your options - that can also include loan providers with a different way of doing things.
For example, Koyo is an Open Banking lender, which uses Open Banking data to securely view your bank account data and make lending decisions based on your real financial situation, rather than solely on what someone else says about you.
How can I borrow money for free?
The three options listed above which may be free are:
- Borrow money from friends and family
- Zero-interest credit card (although watch out for fees)
- Overdraft (in some cases - not everyone will be eligible for this)
In general though, there’s no such thing as a free lunch, so carefully consider what strings may be attached or any charges that might be payable later.
What about payday loans?
Payday loans can look cheap because they usually charge interest only for a short period of time (usually a few weeks or months) and on smaller amounts. However, according to the Financial Conduct Authority (FCA) (1), payday loans actually have an annual percentage rate of more than 100%, (and in many cases much higher), making them a very expensive form of credit.
Not only that, but they can also act as a red flag to lenders when they look at your credit file, as short-term credit like this is sometimes viewed as a sign of financial distress.