Personal Loan Alternatives

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Firstly you need to consider exactly how much you need to borrow and over what period of time. Described below are three alternatives to a personal loan with suggestions as to when they may become the preferred option.

Credit Cards

If the sum to be borrowed is relatively small and you need to borrow money over a short term then credit card borrowing should be considered.

There are a select few credit cards that do offer outstanding value. For example, 0% interest on purchases for the first six months then a low variable rate thereafter. So, even if you wish to borrow money against the card for a year (assuming you made a purchase on the card, not a cash advance), and you paid off the card at the same rate as you would have paid off an equivalent loan, you could make a considerable saving.

One possible disadvantage of credit card borrowing is that you need to be disciplined in paying off the borrowed amount. Unlike a loan where a regular monthly payment must be made, the repayment amount on a credit card is down to you (subject to the minimum monthly payment). However, it is possible to set up a monthly direct debit payment from your bank or building society to ensure you make regular payments against your card.

However, the fact that repayment amounts are at your discretion can also been seen as an advantage as you can adjust your payments to pay off the loan more quickly should circumstances allow, or perhaps lower the repayment one month if unforeseen circumstances leave you short of money. Another consideration is that you may benefit from additional ‘perks’ offered by some credit cards. For example, cash back on purchases, Air Miles and insurance cover for items purchased with a card.

If you do decide to use a credit card instead of getting a personal loan, make sure you are very selective in which card you go for. There is not point getting a card that charges you interest at 17.9% APR when you could get a personal loan at half that rate.

Bank Overdraft

On the whole, bank or building society overdrafts tend to charge an interest rate far greater than that of a loan. However, you usually only pay interest for the days you are overdrawn. If you need additional money for just a few days each month this approach may the simplest and most cost effective means of borrowing.

When deciding whether this approach is a viable option or not, you will need to consider the interest rate charged by your bank and any annual or monthly fee charged for having an overdraft facility. Always arrange the overdraft with your bank in advance or you will more often than not incur additional charges. Some online banking services offer a standard overdraft facility up to 500 without charges.

Re-mortgage

If you already have a mortgage you may consider unlocking part or all of the equity in your property, i.e. the difference in value between the amount of money owed on your mortgage and the property’s current market value.

If the amount to be borrowed is many thousands of pounds and you need to borrow that money over a longer period of time re-mortgaging your property may be the answer. The clear advantage of re-mortgaging is the lower rates of interest mortgages normally enjoy compared with personal loans. I strongly suggest that you contact a financial advisor in order to understand the pros and cons of re-mortgaging.

It is always important to remember that everyone’s requirements and circumstances are different, so you should make a decision based on these factors as well as the benefits of each financial product. As always, if in doubt seek professional and independent advice.

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