Interest charges can mean you end up paying way more for a purchase than you ever intended so it makes sense to cut this cost as much as you can. We reveal the best way to borrow if you need to spread the cost.
Deciding how to pay for a big purchase can often be tricky, especially if you need to spread the cost over several months or years.
Here are your main options - consider each in turn, work out which will cost you the least overall once interest and charges are factored into the equation and then choose the cheapest means of borrowing the money you need.
1. Use a 0% purchase credit card
You can use a 0% purchase credit card to pay for items up front and then repay the balance over a set number of months interest free.
Using a 0% purchase credit card in this way allows you to borrow without incurring hefty interest charges. So providing you clear the balance by the time the 0% period ends you won’t have paid any more for your purchase than if you’d have bought it outright in cash.
However you will need to ensure that you make at least the minimum repayments each month or you will forfeit your interest free deal.
You also need to make sure you repay the balance in full before the end of the interest free period or you will be charged interest at the card’s standard rate on the balance.
If you are unable to clear the card before the end of the 0% purchase period, you could look at transferring the outstanding to a 0% balance transfer credit card. Although you will need to pay a handling fee, doing this will help you to avoid high credit card interest rates for longer.
You can compare 0% purchase credit cards using our 0% purchase credit cards comparison and read our article How to Choose the Best Credit Card for Purchases for more information.
2. Make a 0% balance transfer
0% balance transfer credit cards tend to offer longer interest free periods than those available on cards with 0% purchase deals. For this reason, if you need a little longer to pay back your borrowing they are worth considering.
To do this you'd need to pay for your purchase on an existing credit card (providing it has a sufficient credit limit) and then arrange a balance transfer to a new card that offers a 0% balance transfer deal before you're charged interest.
You will need to factor the added cost of balance transfer fees into your cost calculations. However, by working out how long you realistically need the 0% rate for, you should be able to find a card that combines a long enough interest free period and a low handling fee.
To make sure that you're not caught out it makes sense to apply for the 0% balance transfer deal before you make your purchase. This way you can be confident that you have a sufficient credit limit to cover the amount you've spent.
Of course, once you've made your balance transfer you'll need to make at least the minimum repayments each month and have a plan in place for clearing the card in full by the time you're charged interest.
If you're unable to clear the balance by the time the 0% balance transfer offer ends you'll need to look at making another balance transfer so you don't end up paying interest.
If this isn't something you can see yourself remembering to do then a life of balance credit card may be a better option. These cards will charge a low, but fixed rate of interest on your borrowing until you've cleared the balance.
Read our article Balance Transfers - Your Questions Answered to find out more, and use our 0% balance transfer comparison to find the best card to fund your purchase.
3. Arrange a 0% money transfer
If you can't pay for your purchase and need the money available as cash then looking for a credit card that offers 0% money transfers would be an option worth considering.
This will allow you to transfer cash from your credit card to your current account and borrow for a number of months interest free (it's like a balance transfer but to your bank rather than your credit card.
You will need to pay a money transfer fee (of around 4%), but providing you pay off the amount you've borrowed by the time the 0% deal is up (or made another balance transfer), the cost of your borrowing will be minimal overall.
Read our article Can I Transfer Money From My Credit Card? to find out more about money transfers.
4. Get a cheap personal loan
If you need to borrow cash or want a structured repayment schedule then a personal loan could be a good choice.
Unlike a 0% purchase credit card, however, you will be charged interest from the outset. This will add to the total cost of your purchase, so you need to make sure you look for the cheapest loan rates possible.
Loan rates tend to fall the more you borrow, with the ‘headline interest rates’ banks boast about often only being available on amounts between £7,000 and £15,000.
This tends to make them a cheaper choice for large purchases but means that if you’re only looking to borrow hundreds of pounds rather than thousands you might be able to borrow for less on a credit card. Doing this would also give you more flexibility over repayments too.
Read our article 9 Top Tips for the Best Deal on a Personal Loan for more info on finding the best deal and our loans comparison to compare the rates on offer.
5. Opt for in store finance
If you’re looking to make a large purchase, such as a car, furniture or an expensive piece of jewellery, it’s likely that the store you’re buying from will offer a finance option.
Often these are simply loans from high street banks sold through the retailer and as a result charge the same rates as a personal loan from a bank. You should treat all in store finance offers with a degree of scepticism because of this as they’re unlikely to be the cheapest way to borrow.
However, on some occasions you may be offered a 0% finance deal or the option to ‘buy now pay later’.
While these can seem attractive, before signing up to any offer of finance from a store you need to check it makes financial sense.
Ask for a ‘cost illustration’ of what you might expect to pay rather than a full quote (which would leave a financial footprint on your credit report) and then compare the costs with what you’d get elsewhere.
Carefully check the interest charges, how and when you’ll be expected to repay the debt and any potential fees, and compare this to how much you’d pay overall if you financed your purchase through some other means.
Remember to do this even if the salesman is pushy so you know exactly what you’ll be charged and have to pay should you decide to accept the finance agreement.
You need to be aware that any finance deal you’re offered will be subject to a credit check, and can be costly if you fail to stick to the set agreement. It’s possible you’d also be charged for repaying early so this is something else to be aware of.
Despite this, a genuine, fee-free 0% finance deal, could be a feasible alternative, so would be worth investigating if it’s offered.
