Recent research suggests that Brits are suffering from a post-recession hangover as far it borrowing money goes, and many people around the country are making the most of cheap interest rates to pay off debts accumulated over the previous couple of decades. Nonetheless, with finances being tight, sometimes you just have to borrow, but what’s the best way to do it?
At the moment interest rates are relatively low, so that means that mortgages take precedence over personal loans and credit cards when it comes to getting credit. However, many people have limited equity in their homes after a sharp drop in property prices, and although banks are co-operating with the government’s plan to help first-time buyers get on the property market with the assistance of mortgages and personal loans from Santander and others (read up on First Buy here), it’s not for everyone.
A lot depends on the time of project that you’re borrowing for. For example, if you’re planning a renovation, or an extension to your house, then a personal loan is probably the way to go. Over a long period personal loans have cheaper interest rates, meaning lower repayments and you can borrow much more on a loan than you’d ever want to on a credit card.
However, they are long term products and if you’re likely to struggle with repayments you can get into quite a mess, particularly if the loan is secured. In fact, it’s a good idea to avoid secured loans altogether, as the security is for the lender not for you, and although you might be attracted by lower rates, they’re not always a good idea.
Credit cards are ideal for small sums of money and general cash flow issues. They’re also not as expensive as people generally think and are quite flexible. In fact, with special deals like interest free balance transfers and introductory periods of 0%, they can be a great way to borrow money – although you have to pay them back pronto, because if you’re left with a lot of credit card debt when the 0% deals run out, you may have to pay through the nose.
That said, you may be able to switch to another 0% deal if your credit rating is good, so all is not loss.
General theory goes that personal loans are ideal for big projects, and credit cards for little ones, and if you want to consolidate your debts you should do so into a mortgage or one personal loan. However, credit cards are so flexible, that if you’re clever and disciplined you are much more likely to pay down a small debt with credit cards than you ever would with a personal loan and with the housing market as it is, remortgaging should only be done in cases of absolute emergency.
So, in summation, it’s horses for courses, and the best thing that you can do is pop into your bank and sit down and talk with a trained financial adviser, it won’t cost you anything and could save you a lot in the long run.