Reducing your borrowing costs
Whether you have a mortgage, personal loan or credit card, it’s worth making sure you are not paying over the odds for your borrowing.
When to review
Part of good money management is to regularly review your borrowing particularly if your circumstances change:
- If your income rises you may want to increase your monthly repayments so you can pay off loans and debts more quickly.
- If you lose your job or your income falls, you may need to look at ways of reducing your monthly repayments. This could mean extending the term of loans or asking for a payment break while you reorganise your finances.
- If your credit rating improves you could switch to cheaper borrowing.
- To check the cost of your borrowing is still competitive. For example, you may find your credit card provider charges more interest than its competitors.
- To ensure you’re still borrowing efficiently. For example, if you've had an overdraft for some time and are likely to need it for the foreseeable future, it may be better to take out a personal loan which charges less interest instead.
- If you’re paying more for borrowing than the interest you’re earning on your savings you may decide it’s sensible to use some of your savings to pay off your debts. However, you need to keep an emergency fund and be mindful that you may not be able to borrow the money again.
Switching to cheaper borrowing
Different methods of borrowing suit different situations. If your circumstances change or you’re no longer borrowing at a competitive rate, you could consider switching to a cheaper option.
|Take out a personal loan||Pay off more expensive debts such as an overdraft, credit card or store card bill
||Can you keep up the regular payments on a loan? Unlike an overdraft or plastic, you’re unlikely to be able to vary your repayments each month.|
|Extend the term on a loan||Bring down the cost of monthly repayments||You'll be paying interest for longer so the loan will cost you more overall. You may want to get some free debt advice to review your finances before doing this.|
|Secure the loan against your house||Borrow at a lower rate for a longer period of time||If you fail to make your repayments you could lose your home.|
If you've borrowed money from several sources and are having trouble keeping track, you may want to consolidate your borrowing. This involves taking out a new loan to pay off all or several of your existing debts such as overdrafts, credit card bills and loans. As well as helping you take control of your finances this also is an opportunity to reduce the cost of your borrowing.
Ways to consolidate
- With a loan. If you do decide to consolidate your loans you can do this yourself with a personal loan but you'll need a good credit history to get a decent interest rate.
- With a card. Or if you've got a good credit record, you could move your credit card debts to a card with a low or 0% interest rate. This is known as a balance transfer. You may have to pay a fee to transfer the debt and be aware that the interest rate will jump once you're out of the low or 0% interest period.
- With a plan. There are also debt consolidation plans which are advertised on TV and in newspapers. But be very wary of these as the new loans they offer are usually secured against your home so you could lose your home if you’re unable to keep up the repayments. Also, this type of borrowing often comes with stringent penalties if you’re late with payments, go into arrears or want to pay off the loan early.
Consolidating debt? Check first
- Your credit history. If it’s poor, lenders may be unwilling to lend to you.
- The monthly repayments on a new personal loan. Can you afford them? If you just pay off the minimum on your credit cards each month, then you may not be able to afford even if the interest rate on the loan is cheaper.
- Other ways to reduce your borrowing costs. For example, could you negotiate a better deal with your lender or could family help out?