Only those living on Planet Mars for the last six months would be unaware that we are in the midst of a global credit crunch. What is now becoming clear is that the ongoing squeeze is not just hitting high-risk mortgage borrowers in the US, or a few mega banks which packaged up and sold on these risky loans, but also regular borrowers in the UK - even those with good credit records.
This does not mean it is impossible to borrow, but it will mean that banks are taking a much closer look at loan applications. But equally, it doesn't mean you should accept the first offer of finance you get either.
Whether you are taking on a small or large debt there are a number of ways to borrow, from credit cards and hire-purchase agreements to personal loans and mortgages. So if you need some cash fast, read on to find the right form of borrowing for you.
Up to £1,000
If you have a good credit record, and budget to pay off the repayments before the interest-free period ends, there's nothing wrong with the interest-free deals offered on the high street. The key thing is to only go down this route if you have the money, possibly stashed away in savings, to pay off the entire amount at the end of the loan period.
Marks & Spencer, for example, is currently offering 24 months interest-free repayments to customers buying its furniture using its &More card. At the end of two years, though, the interest rate jumps up to 18.9%, so you need to pay it off in time otherwise the price of that sofa or dining table will rocket.
Using a credit card offering an introductory rate of 0% also makes sense, even for those who have the money in savings to pay for the items up front. This is because savings can be left to continue to grow while the debt is frozen for a set period.
The best buy 0% introductory credit card offers, according to information group Moneyfacts, are HSBC for 12 months, Citi Platinum for 11 months and Capital One Platinum and Barclaycard Platinum, both for 10 months.
One final option is to ask for an extension to your overdraft. Alliance & Leicester currently offers an interest-free overdraft for 12 months on up to £2,500. However, other banks have also been increasing the sums they are willing to lend low-risk customers interest free. Research from financial group MoneyExpert found that 40% of current accounts in the UK offer an interest-free overdraft, with the average interest-free limit rising from £368 in 2006 to £428 in 2007.
Even those who do not qualify for an interest-free overdraft could still find an extension to their overdraft a relatively low-cost way to borrow a modest sum. Halifax's overdraft interest rate is 6.9%, while Norwich and Peterborough Building Society's is 7.74%.
However, if you do go down this route you need to take care - exceed your authorised overdraft limit and you could be hit with substantial charges.
Up to £10,000
Those looking to borrow a larger sum, perhaps for a new car, should think carefully before signing up for the finance package on offer from their local car dealership. Dealerships generally offer two types of finance: hire purchase and contract purchase. If a buyer has a large deposit, typically around 40% of the purchase price, they may be offered a 0% interest rate. Otherwise the average interest rate on dealership hire purchase loans is around 10.1%. The other drawback to hire purchase is that the car remains the property of the finance company until the final payment is made.
Contract purchase typically offers a lower monthly repayment than hire purchase, but crucially there will be a large final payment at the end of the term. Sometimes called a balloon payment, this method of finance can see buyers who have not budgeted for the final payment left with nothing. This is because even if they have been making payments for years, they will be forced to hand the car back to the dealership if they can't make the final payment. Effectively, this means they have merely been renting their car for the three or five-year lifespan of their finance arrangement.
A personal loan is usually a cheaper alternative. At the time of going to press, Sainsbury's Bank was offering an interest rate of 6.5% on £10,000 over five years, while Tesco Personal Finance was close behind at 6.8%. Both are at least 3.3% lower than the
dealership rate.
This considerable difference in borrowing costs is not always obvious to buyers, however, as some dealerships make it hard to make comparisons on interests rates, as they tend to talk in terms of monthly repayments. Those shopping for a new car should therefore arm themselves with the monthly repayment figure. The monthly repayment figures for the above mentioned personal loans are £195 and £196 respectively. The other advantage of a personal loan is that it allows buyers to access dealerships' cash prices. Cash buyers can expect to knock around £2,000 off the price of an Audi A4, or £1,200 off a Mercedes CLS.
For those who prefer pitching to a human being rather than a faceless institution, Zopa, a social lending site, offers this option. Its new section allows borrowers to pitch to lenders directly. Those doing the lending do not appear to be too judgemental either - as one current applicant, who has had his loan request for £4,000 filled, clearly admits his loan is to pay off his credit cards. Another user who needs £2,000 to improve access to his home for his disabled mother has also had his loan fully subscribed - at an interest rate 0.74% lower than he requested.
Up to £20,000
Those looking to borrow £20,000, perhaps to finance home improvements, will find that lenders are increasingly looking to have such borrowing secured against an asset, even with borrowers who have no history of missed repayments.
For most of us this will mean a secured personal loan, extending a mortgage or, for those over 55, an equity release product such as a lifetime mortgage. While all options will secure the needed funds, borrowers need to be aware of the extra cost and risk that such loans entail.
Extending a mortgage or taking out a secured or homeowner loan puts your home at risk if you fail to keep up repayments in a way an unsecured loan would not. If it is set to run for the remainder of your mortgage term, it will also seriously bump up the total amount of interest you end up paying.
Barclays Bank currently offers borrowers the option of a personal loan and a homeowner loan. A person borrowing £20,000 over five years via a personal loan at 7.9% would repay a total of £24,979. In contrast, if they instead chose the secured loan over 20 years they would repay a total £39,163 - a whopping £14,184 more.
As this example shows, if you have no choice but to opt for a secured loan, the key is to choose the shortest possible repayment period you can realistically afford.
Mortgage providers will usually be willing to offer a further mortgage advance, at their standard variable rate, to those who have
sufficient equity in their home. How much you end up repaying will depend on your mortgage provider. HSBC customers would pay £2,210 less than customers of Halifax, and £2,779 less than those of Royal Bank of Scotland if they borrowed £20,000 at their lender's SVR for the remaining 20-year term of their mortgage.
The final option for older homeowners is a lifetime mortgage. The difference between a lifetime and regular mortgage, is that instead of the sum being repaid monthly, interest on the debt rolls up until the property is sold.
For homeowners who are not fussed about leaving an inheritance to their family this type of loan could be an option. Some plans are now flexible enough to allow you to switch properties and retain the loan. But it is important to take advice about how much it will end up ultimately costing.
Typically, you will be able to release between 18% and 50% of the value of your property, according to Key Retirement
Solutions, and provided you choose a plan with a no negative equity guarantee, the maximum you will end up repaying can not exceed the value of your home, even if your property falls in value. Norwich Union's lifetime mortgage currently has an interest rate of 6.9%, while Standard Life charges a slightly higher 7.1%.
