If you’re planning on making a large purchase but your savings won’t stretch to paying for it in one go, there are other options.
From 0% purchase credit cards to taking out a personal loan to borrowing from family and friends, let's look at different ways to spread the cost of a big spend and the pros and cons of each.
0% credit cards
If you’re planning on making a large purchase, then play your cards right and you could effectively have an interest-free loan for two years or more.
A 0% purchase credit card allows you to spend up to your limit without paying interest on it for a set period of time – as long as you make minimum monthly payments and pay off your balance at the end of the interest-free period.
But watch out, as some credit card providers may charge you a fee for the privilege.
Also, if you fail to make the monthly minimum payments or you don’t pay off your balance before the interest-free period ends, then you could face hefty interest charges of around 18.9% APR (annual percentage rate), much higher than other types of credit card.
If you do find that you aren’t able to pay off the balance once the 0% interest period ends, you may want to consider transferring the balance to a 0% balance transfer card. This will allow you to move your existing balance from one card to another, giving you an extension on your interest-free period.
But don’t forget that you will have to pay off the debt eventually or face soaring interest rates.
Another option for financing a large purchase is to consider a personal loan. Generally speaking, a personal loan allows you to borrow more money than you may be able to with a credit card.
The larger the amount you borrow, the lower the interest rate.
You can choose how much money you’d like to borrow and over what time period you intend to repay the loan. Once that’s been decided monthly repayments and interest rates are usually fixed, meaning you’ll know exactly what you need to pay each month, which makes it easier to budget.
However, if the interest rate on your loan is flexible, you may pay less one month and more the next depending on fluctuations in interest rates.
A personal loan may also be subject to an arrangement fee, so make sure you take this into consideration when working how much the loan repayments will be.
As with all loans and credit cards, it’s a good idea to shop around for the best deal that suits your pocket before you sign on the dotted line. Although you do get a 14-day cooling off period after you’ve signed, just in case you do change your mind.
If you’re considering a personal loan, the Money Advice Service’s loans calculator is a useful resource for working out how much a loan will cost you or how long it will take you to pay off.
Hire purchase, or HP as it’s more commonly known, is another form of borrowing which allows you to spread the cost of a large purchase. However, unlike other forms of borrowing, you won’t actually own the goods you’re buying until you’ve made the final payment.
Essentially, you take out a loan against the value of whatever you’re buying. You may be required to put down a deposit to qualify for HP and you then have to pay off the balance in monthly instalments over an agreed period of time.
HP usually offers competitive rates of interest; however the downside is you will end up paying more for whatever you buy than if you bought it outright. And fail to keep up with repayments and you may see your purchase being repossessed.
As with any form of borrowing, make sure you shop around for the most competitive deal.
Borrowing from friends and family
If you’re unable to get credit from a bank or credit card company, a family member or friend may be willing to help you finance your purchase of that big-ticket item.
There are many positives to borrowing money from a friend or family member. They’ll give you credit when you might otherwise be unable to get it.
The loan may well be interest free (and if it isn’t then the interest rate will probably be at a more favourable rate than any bank or building society), and the arrangement will probably be more flexible than a traditional loan in terms of minimum repayments and length of loan.
However, while the offer of an ‘interest free’ loan from someone you know is a tempting, you should think carefully about it. Could your relationship go the distance if you can’t pay the money back?
It’s a good idea to set out in writing some ground rules about how and when the money is going to be repaid and whether the loan is interest free. This could avoid any frosty gatherings further on down the line.
Although, as with any loan, if you’re not sure how you’re going to pay the money back, perhaps you shouldn’t be borrowing it in the first place!