Credit card debts should always be paid off in the cheapest possible way and as quickly as is manageable. Some of the best ways of achieving financial freedom include taking out a low-cost loan or switching to a credit card which offers a period of 0% interest.
With the current low rates, there are some fantastic deals around for both loans and credit cards. So which type of borrowing should you choose? As with anything, each option has its pros and cons. Take a look at these below to help you to make the right decision about borrowing and release you from debt as soon as possible.
Loans — Pros
With interest rates at an all-time low, now is a great time to take advantage of a cheap homeowner loans. Loan companies have been doing their best to outbid each other and this has brought rates down even further.
For those who have a qualifying credit score, it is possible to borrow between £7,500 and £15,000 at considerably less than 5% APR. In addition to the fantastic rates available, borrowers know that by taking out a fixed-term low-cost loan, they will be debt-free at the end of the repayment period.
Loans — Cons
For those who wish to borrow less than £7,500 or more than £15,000, rates are typically higher. This is because they fall out of the ‘mid-range’ loan amount preferred by lenders.
So for those wishing to borrow between £5,000 and £7,499 or between £15,001 and £25,000, rates tend to be in the region of 6-7% APR. Those wishing to take out secured loans of under £2,000 are likely to pay significantly more interest — around 19.5% APR.
If you are borrowing outside of the mid-range, a loan is therefore less attractive, especially for those eligible for credit cards offering 0% interest on balance transfers.
Credit Cards — Pros
Signing up for a credit card with 0% interest on balance transfers is a smart move for those who are certain they are disciplined enough to completely pay off the balance within the 0% interest period.
The really good news is that companies are offering some amazing balance-transfer deals at the moment. A number of lenders are currently able to offer an interest-free period of up to 30 months. This gives the debtor two years and six months to repay the debt before being charged a single pound in interest. Even with the inevitable balance-transfer fee of around 3%, this is a great opportunity to save money.
For those who are looking to pay off their debts for even less and are in a position to clear them more quickly, it is a good idea to consider credit cards with a shorter interest-free period. These typically require a smaller fee for balance transfers. For a 24-month interest-free period it is possible to find lenders offering balance transfers for a fee 1.5%. For a 12-month period, fees can be even less at around 0.75%.
Credit Cards — Cons
Balance-transfer fees are obviously one disadvantage of interest-free credit cards. But there are more. Customers who are unable to clear their debts before the end of the interest-free period will end up paying extremely high rates of interest on the remaining balance. Rates in the region of 18%-20%, and sometimes even higher, will cost a significant amount of money, even over a period of one or two months.
This makes an interest-free credit card a bad choice for those who are already struggling financially, or who lack the discipline to pay off the debt. Many lenders also limit their best offers to new customers and, as such, existing customers may not benefit from the top deals, no matter how good their credit score.
Homeowner loans are a good option if:
– You owe between £7,500 and £20,000.
– You require a repayment period of over two and a half years.
– You prefer fixed payments for increased financial security.
A credit card with 0% interest on balance transfers is a good option if:
– You owe under £5,000.
– You have good financial discipline and will follow a repayment plan.
– You are definitely able to completely repay the debt within 24-30 months.
– You would prefer not to pay any interest.