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Money Advice: Those borrowing small amounts have been hit the hardest
By: Martin Lewis
Money Saving Expert Martin Lewis
Lenders made more money on the insurance than they did on the loan, and they don’t have to include the insurance cost in the APR. Yet over the last few years there’ve been strong calls from many (and I’m one) for people to avoid bank’s PPI and, if it’s needed, go to standalone insurers who can be over 80% cheaper.
On top of that, more than 800,000 templates of reclaim letters to get bank mis-sold PPI have been downloaded from my site and people are getting £1,000s back daily (see www.moneysavingexpert.com/ppi)
Money Saving Expert Martin Lewis
Money Advice on loans from Money-Saving Expert Martin Lewis
Nip to a bank right now and prepare for your jaw to drop.
Interest rates may be at their lowest rate for over 200 years, but small loan rates have more than doubled.
If you want to borrow less than £2,000, then even the market’s very cheapest is a whopping 18.7 per cent interest.
Yet there’s a way to manipulate the finance market to replicate a loan at under half that cost – but it requires a logical switcheroo.
Why loan rates have jumped
Loan rates are at a nine-year high, and it’s those borrowing small amounts who’ve been hit the hardest.
While the cheapest loan for amounts under £2,000 is 18.7 per cent, many lenders are charging well in excess of 20 per cent. Roll the clock back to autumn 2007, and the cheapest loan was just 7.4 per cent, yet, borrow that amount now, and on a three year loan you’d pay nearly £400 more.
There are three reasons for this: the credit crunch means lenders’ access to funds is more limited; banks are less keen to sell small loans, so competitive pressures have relaxed; and loans used to be subsidised by profits from payment protection insurance that was hard sold with them.
Lenders made more money on the insurance than they did on the loan, and they don’t have to include the insurance cost in the APR. Yet over the last few years there’ve been strong calls from many (and I’m one) for people to avoid bank’s PPI and, if it’s needed, go to standalone insurers who can be over 80% cheaper.
On top of that, more than 800,000 templates of reclaim letters to get bank mis-sold PPI have been downloaded from my site and people are getting £1,000s back daily (see www.moneysavingexpert.com/ppi)
The loan market’s perverted
These rates mean we have a fascinating current phenomenon at the moment.
The cheapest rate for borrowing under £5,000 is 11.9% per cent. Yet borrow £5,000 to £7,500, and it’s 8.8%. This means currently it’s actually cheaper to borrow £5,000 than £4,500. I’m not talking about the interest rate here, but the actual amount you would have to repay.
The cheapest rate for borrowing under £5,000 is 11.9% per cent. Yet borrow £5,000 to £7,500, and it’s 8.8%. This means currently it’s actually cheaper to borrow £5,000 than £4,500. I’m not talking about the interest rate here, but the actual amount you would have to repay.
The massive differences in threshold levels mean that if you’re near a boundary, which come at £2,000, £3,000, £5,000 and £7,500, it’s worth checking out whether you should borrow a little bit more to make it cheaper.
The way to do this is ask, “What is the total amount of money I will repay?”, and go for the loan that has the smallest total, even if it means borrowing a little bit more. That’s something I never thought I would hear myself saying.
The way to do this is ask, “What is the total amount of money I will repay?”, and go for the loan that has the smallest total, even if it means borrowing a little bit more. That’s something I never thought I would hear myself saying.
What’s the cheapest way to borrow small amounts?
If you do need a smaller loan, then there are two options to keep it cheap. And by ‘need’, I mean you do a budget, plan, ensure you can afford the repayments and borrow as little as possible (with the above excepted) and repay as quickly as possible.
Yet borrowing isn’t now just for when you’ve cash flow issues, sometimes borrowing can save you money.
Yet borrowing isn’t now just for when you’ve cash flow issues, sometimes borrowing can save you money.
Let me give you a couple of examples. If you go to the football each week, a season ticket is cheaper than buying individual seats. So, provided you can borrow efficiently, if it enables you to get one, then here the debt would save you cash.
A similar example is car insurance; if you can’t afford your annual premium up front and pay for it monthly, insurers often charge you well over 20 percent – much more than a credit card, done right.
· Interest-free Social Security loans.
Before going for commercial debt, it’s worth seeing if there are any loans available from the government’s social fund available to you. There are two types and both are for people without savings of their own.
The first are crisis loans, which are for emergencies or disasters. I’m talking about things like the roof falling in, or something that endangers the house or your family. You don’t need to receive benefits to get these, anyone can supply, as long as you don’t have savings.
The next type are budgeting loans, which are only for those receiving benefits. These will allow for a wide range of borrowings.
To get them, you need to go to the local social security office, but that causes a big problem and each area has its own pot of cash and unsurprisingly those in deprived areas tend to run out of cash more quickly than those in richer areas.
So you may find there’s no money left even though you should qualify. I do hope our newly-elected representatives at Westminster will sit up and take notice of this.
Before going for commercial debt, it’s worth seeing if there are any loans available from the government’s social fund available to you. There are two types and both are for people without savings of their own.
The first are crisis loans, which are for emergencies or disasters. I’m talking about things like the roof falling in, or something that endangers the house or your family. You don’t need to receive benefits to get these, anyone can supply, as long as you don’t have savings.
The next type are budgeting loans, which are only for those receiving benefits. These will allow for a wide range of borrowings.
To get them, you need to go to the local social security office, but that causes a big problem and each area has its own pot of cash and unsurprisingly those in deprived areas tend to run out of cash more quickly than those in richer areas.
So you may find there’s no money left even though you should qualify. I do hope our newly-elected representatives at Westminster will sit up and take notice of this.
· Half-price credit card loans
This is where that logical switcheroo comes in. It’s because the cheapest way to get a loan is by using a credit card. If you’re clever and have a reasonable credit score, you can replicate the exact criteria of loans.
The Obvious Route: The most obvious route for this is simply to pay for the goods with your card. Simply grab the longest zero per cent for purchases card that you can. The current market leader is Tesco, which will give you zero per cent for a year. Though you must ensure you make the minimum repayments and clear the card in that time; for more on this see www.moneysavingexpert.com/spendingcards
Truly Replicating a Loan: Yet more difficult is to replicate the idea of using a loan to get hard cash with, for example, if you need to pay a local builder who doesn’t accept plastic. However, there is a way round this. A small number of credit cards allow you to do what I call a super balance transfer. You may know that a normal balance transfer is when you get a new credit card that pays off debts on other cards for you. You then owe the new card the money but at a cheaper interest rate.
A super balance transfer is when it lets you do a balance transfer from your bank account – in other words the card pays an amount of money in there - say £3,000 and you now owe the card that amount.
The two top cards for this are the Virgin card, which lets you shift money into your bank at zero per cent for 14 months for a 4 percent fee, or the MBNA Rate for Life card at 5.9 per cent for a 1.5 per cent fee. The Virgin card is better if you can repay in the short term, the MBNA is better if you can repay in the longer term.
These work out at less than half the APR of even the cheapest loan. To calculate the exact cost use the special calculator at www.moneysavingexpert.com/plasticloans
One final warning on these though: loans are fixed length, but with credit cards you repay what you like as long as its above the min. To truly replicate a loan's enforced discipline, set a repayment to clear debts in a fixed time, eg, three years using a direct debit, and make the same repayments each month as you would’ve done to the loan. Finally, never use these cards for spending on or the cost will rocket.
This is where that logical switcheroo comes in. It’s because the cheapest way to get a loan is by using a credit card. If you’re clever and have a reasonable credit score, you can replicate the exact criteria of loans.
The Obvious Route: The most obvious route for this is simply to pay for the goods with your card. Simply grab the longest zero per cent for purchases card that you can. The current market leader is Tesco, which will give you zero per cent for a year. Though you must ensure you make the minimum repayments and clear the card in that time; for more on this see www.moneysavingexpert.com/spendingcards
Truly Replicating a Loan: Yet more difficult is to replicate the idea of using a loan to get hard cash with, for example, if you need to pay a local builder who doesn’t accept plastic. However, there is a way round this. A small number of credit cards allow you to do what I call a super balance transfer. You may know that a normal balance transfer is when you get a new credit card that pays off debts on other cards for you. You then owe the new card the money but at a cheaper interest rate.
A super balance transfer is when it lets you do a balance transfer from your bank account – in other words the card pays an amount of money in there - say £3,000 and you now owe the card that amount.
The two top cards for this are the Virgin card, which lets you shift money into your bank at zero per cent for 14 months for a 4 percent fee, or the MBNA Rate for Life card at 5.9 per cent for a 1.5 per cent fee. The Virgin card is better if you can repay in the short term, the MBNA is better if you can repay in the longer term.
These work out at less than half the APR of even the cheapest loan. To calculate the exact cost use the special calculator at www.moneysavingexpert.com/plasticloans
One final warning on these though: loans are fixed length, but with credit cards you repay what you like as long as its above the min. To truly replicate a loan's enforced discipline, set a repayment to clear debts in a fixed time, eg, three years using a direct debit, and make the same repayments each month as you would’ve done to the loan. Finally, never use these cards for spending on or the cost will rocket.
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TV money guru Martin Lewis runs the consumer revenge website MoneySavingExpert.com ; ensure you get his weekly e-mail so you’re constantly saving money.
