Compare the cost of borrowing £5,000

If you need to borrow money to buy a new car or to pay for home improvements, it’s essential to identify the cheapest credit option and repay the loan as quickly as you can. Generally, this means finding a loan that charges the lowest interest rate (APR), but it’s also important to factor in any penalty fees if you suspect that you might encounter problems repaying on time.

• Compare the cost of borrowing £5,000 across three common types of finance
• Next steps

Compare the cost of borrowing £5,000 across three common types of finance

It’s best that you understand how the different options work, shop around and check the total cost of borrowing.

Look at these typical examples and read our guides to borrowing money.

Interest-free credit card for balance transfers and new purchases for the first 15 months*

Good for:

• interest-free borrowing
• planned purchases e.g. new car, home improvements, and transferring existing credit and store card debt
• spreading the cost of borrowing if you can transfer the remaining balance at the end of the promotional period to a new 0% interest free deal.

Be aware:

• You need to have a good credit rating to be accepted for the best deals and some have minimum income level requirements.
• The APR, promotional period offer and the amount that can be transferred is dependent on your personal circumstances.
• Read the terms and conditions carefully as most cards do not offer the same interest-free period on both balance transfers and purchases.
• You will revert to the standard APR (17.7% on average but can be higher) once the introductory period finishes, so make a note of when your introductory deal ends and look to switch in advance.
• Although you won’t have to pay any interest on the amount you transfer/spend during the introductory period, you’ll still need to pay a minimum monthly payment (normally 1%-2.5% of the balance) – failure to do so could result in a late payment fee (typically £12) and you might no longer be eligible for the interest-free deal.

Find out more:

• Should you transfer your credit card balance
• How to use credit card comparison tables
• Go to the Which? website to compare credit cards

Average interest rate (representative APR)

0% on a transfer value of £5,000 (plus a transfer fee, typically equal to between 2% and 3% of the balance).

Average APR of 17.7%¹ beyond the 15-month introductory interest-free period.

Monthly repayment

£333.33**

** assumes that the loan is repaid at the end of the 15-month promotional period.

Total amount repayable

£5,150 (£5,000 original loan + £150 one-off transfer fee based on 3%).

Unsecured personal loan over three years

Average interest rate (representative APR)

11.72%

Monthly repayment

£165.40

Total amount repayable

£5,954 (£5,000 borrowed + £954 interest).

Unsecured personal loan over five years

Good for:

• budgeting – the monthly payment and interest rate are usually fixed for the term of the loan.
• planned purchases e.g. a car or for consolidating more expensive credit and store card debts.

Be aware:

• you might not get the representative APR advertised as it depends on your credit rating – so check the terms and conditions carefully before you accept the loan.
• taking the loan over a longer term reduces your monthly payments but you’ll pay back more in total.

Find out more:

• Personal Loans
• How your credit score affects the cost of borrowing

Average interest rate (representative APR)

11.72%

Monthly repayment

£110.52

Total amount repayable

£6,631 (£5,000 borrowed + £1,631 interest)

Adding £5,000 to your mortgage (a further advance) taken out with your current mortgage lender over a term of 15 years

Good for:

• Home improvements which will increase the value of your home.

Be aware:

• You might need to pay a product arrangement fee (typically £100).
• You will only be able to take this option if you have enough equity in your home.
• Your home could be repossessed if you do not keep up the loan repayments.
• Whilst the monthly cost and interest rate might be much lower than a personal loan if you repay it over a longer term the total cost will be much higher – see the example.
• The amount you pay each month is likely to be variable (possibly after an initial fixed period and there may be early redemption penalties).

Find out more:

• Why it pays to review your mortgage regularly
• Increasing your mortgage – getting a further advance
• Secured and unsecured borrowing explained

Average interest rate (representative APR)

5%

Monthly repayment

£40.14³

Total amount repayable

£7,325 (£5,000 borrowed + £2,225 interest + £100 arrangement fee)*

*assumes interest is calculated annually (will be lower if calculated on a daily basis).

Taking out a secured homeowner loan (also known as a second charge) of £5,000 over a term of 15 years

This type of loan is sometimes offered to homeowners who have at least 25–35% equity in their homes, and some who might not be able to get an unsecured loan due to a poor credit record.

Secured loans might be used to pay for home improvements or to consolidate existing debt.

Be aware:

• Interest rates on secured homeowner loans tend to be higher than those charged on further advances.
• The APR might vary according to your credit rating.
• You might need to pay a product arrangement fee (which is usually added to the loan and you pay interest on this)
• You’ll only be able to take this option if you have enough equity in your home.
• Your home could be repossessed if you do not keep up the loan repayments.

Find out more:

• Where to go to get free debt advice
• Secured and unsecured borrowing explained
• Debt consolidation loans
• Talk to the people you owe money to

Average interest rate (representative APR)

19.9% (representative)*⁴

*based on borrower having a ‘fair’ credit profile

Monthly repayment

£81.55

Total amount repayable

£14,679 (£5,000 borrowed + £9,679 interest)

^{1 See Bank of England – table G1.3 - average quoted household interest rates for credit card}

^{2 Bank of England Table G1.3 April ’13}

^{3 Council of Mortgage Lenders website}

^{4 Norton Finance (broker) via Moneysupermarket.com}

Next steps

• Do you need to borrow money?
• Deciding on the best type of credit for you
• Work out a repayment plan for your borrowing

This article is provided by the Money Advice Service.