If you need to borrow money, it’s vital to keep interest repayments and fees to a minimum. But the ways to do this are often counter-intuitive, from borrowing a little extra to waiting longer to clear the debt.
At the same time, you need to make sure you have strategies to repay the loan and keep your credit score high.
Which? looks at four ‘borrowing hacks’ that could save you money on interest on interest and charges.
Borrow more to save on interest
When taking out a personal loan, you generally pay interest as a percentage of the amount borrowed. So, in theory, the more you borrow, the more expensive your repayments become.
But in certain circumstances, you’ll actually spend less overall by taking out a bigger loan.
According to Defaqto, a financial information business, there are three borrowing ‘sweet spots’ at which it becomes cheaper to borrow more money. These are £3,000, £5,000 and £7,500.
As an example, for a £4,900 loan, TSB offers an APR of 23.6% across 48 monthly payments, which would cost you £2,435.84 in interest – making the total repayment £7,335.84.
If you increased the loan by just £100 to £5,000, TSB would charge an APR of 9.9% and you would only pay £1,031.68 in interest, for a total repayment of £6,031.68.
That’s £1,404.16 less than if you borrowed £4,900.
The tables below some more examples of how borrowing more can save you money in the long run.
It’s important to remember that you should only ever borrow what you can afford to pay back.
If you borrow more than you need to access a cheaper rate, hold on to the excess so that you can repay the loan as soon as possible.
- Find out more: 50 ways to save money
Stoozing is a way of using a 0%-purchase credit card to make money on savings interest.
To do this, you need to use a 0%-purchase credit card to do all the shopping you normally would from your current account.
You can then put your cash into a high-interest savings account to generate returns.
As long as you meet the minimum monthly repayments on your credit card, and clear the balance before the 0% deal expires, you stand to turn a profit on the savings interest.
Stoozing was very popular a few years ago, when savings accounts had much higher interest rates. Nowadays, it might be trickier to find rates that will give you the returns you need to make it worthwhile.
If you want to try this strategy, make sure you don’t spend more than you normally would; it’s wise to stick to bills, groceries or other unavoidable expenses.
You also need to make sure you can repay the bill in full when the interest-free term expires. A 0%-purchase credit card will often revert to a high rate of interest – often up to 20% – so you stand to lose money if you can’t pay off the card on time.
- Find out more: 50 ways to make money
Don’t pay off your debt too early
Once you’ve borrowed money, either through a mortgage or a personal loan, it might sound tempting to pay it off as soon as possible.
After all, you’d imagine your lender would be happy to have their money back sooner rather than later?
But depending on your loan or mortgage agreement, you may have have to pay a penalty if you clear your debt ahead of schedule.
For loans, an early-repayment charge is often the equivalent of one or two months’ interest. For mortgages, the penalties are usually charged as a percentage of the outstanding amount, though often these only apply during the ‘fixed-rate period’ of your deal.
As an example, your five-year fixed-rate mortgage might have an early repayment charge of 3% during the fixed period. If there’s £100,000 outstanding that you want to repay in full, you may have to pay up to £3,000 in penalties.
Often, the earlier you pay your loan, the higher the charge will be, which can make your loan significantly more expensive.
Before you take out a loan, it’s important that you check the terms of your repayments, especially if you’d like the flexibility of paying it off sooner.
If you have the cash to pay off your loan, do the maths first. On one hand, how much interest would you pay if you waited? On the other, how much would the early repayment fees cost you?
In cases where it makes sense to delay repayment, keep the cash in a high-interest savings account so you can earn on it in the mean time.
- Find out more: 10 tips for paying off your debts
Take out a credit card
Your credit score will be used by lenders to determine whether you qualify for certain financial products, such as credit cards, loans or mortgages, and a high credit score can often unlock better deals from lenders.
Most people assume that you’ll have a perfect credit score if don’t borrow any money, but this isn’t the case at all.
Lenders like to know you can manage debt, which means that if you borrow money and meet all of your repayments, your credit score will increase.
One way to build your credit score is by getting a credit card and making sure you clear your balance each month. Just make sure to use the card for bills or other payments that are unavoidable, rather than adding to your spending.
If your credit is poor, there are also credit cards designed to help you improve your rating. Bear in mind that the interest rates are often high, though, so it’s especially vital to repay in full every month.
Using tools like a credit card repayment calculator can help you work out how long it will take you to repay your balance and what the total cost will be.
- Find out more: Best credit card deals
How to find the right loan
If you’d like to explore your borrowing options, it’s best to shop around to find the right deal.
Using a comparison tool can be a great starting point to help you identify the most suitable products.
Remember, the cheapest deal isn’t always the best and it’s vital that you read the terms of any borrowing agreement carefully.
Make sure you have a clear strategy in place to repay the loan amount, plus interest, in a reasonable timeframe.
Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.