Four Tips On How To Obtain Cheaper Unsecured Financing

Post by Sharat on May 12, 2009 · Under Featured Articles, Hints and Tips, Personal Finance, Self Help, banking, credit cards, home loans, interest rates, loans, mortgages, personal loans · Comment

Often Annual Percentage Rates (APR’s) and fees do not provide consumers or borrowers with the complete picture of the costs involved in borrowing money, many times they are manipulated by lenders to make the loan sound more attractive. Here are five tips to borrow cheaply

1. Borrowing for absolutely nothing

Obviously the most inexpensive way to borrow is to use 0% purchase cards. Provided borrowers make the minimum monthly payments and ensure that the balance is paid before the interest free period expires, and the card is not used for any other purpose such as balance transfers or cash withdrawals. This method is the cheapest way to borrow money, because it does not carry any interest charges.

2. Borrowing for less than 6% Using A Mortgage

The Reserve Bank of Australia has cut interest rates to their lowest in 45 years and they now stand at 3 percent, which means most lenders are offering mortgages below six percent. Therefore adding debt to a mortgage is a very cheap way of borrowing money with interest rates being at record lows.

This type of borrowing however is only cost effective is the borrower has competitive deal on their mortgage and they overpay their mortgage with the intention of clearing the additional debt quickly.

Before a borrower considers this method, they should check that the bank allows them to overpay their mortgage without imposing a penalty.

Re-mortgaging generates additional fees, but for borrowers who want to take advantage of low interest rate finance and plan to re-mortgage anyway, then adding an additional sum should not cost more.

Borrowers should strive to overpay and clear the additional debt, failure to do so means it will remain for much longer than debt which is carried on credit cards or as a personal loan, and though the rate of interest may be lower than either of those two products, the fact that it is carried for longer means that it will end up costing more than other forms of borrowing.

If you don’t overpay and clear the extra debt, it’ll linger for much longer than with an ordinary loan or credit card. Even if you have a competitive deal, and even though your monthly costs might seem low, the total interest you’ll pay over that time will likely end up being far higher than most other forms of borrowing.

3. Borrowing for less than 6% APR

Another method that is also very cheap is transferring existing debt to a new credit card which offers 0% interest on balance transfers. This type of transfer, despite the 0% interest are not really free, and borrowers should be aware of implied charges.

Usually the fee is 3% which is not charged as an APR but rather an upfront fee on the entire amount transferred.

If you compare an APR of 10%, which means that approximately the interest rate is 10 % over the year that translates to a monthly interest rate of 0.8 %.

The big difference between an upfront fee and an APR is, so long as the borrower is reducing the amount owed over time, the amount of interest paid every month will also reduce, so in this example 10 per cent is not paid on the entire debt, whilst an upfront fee charges a rate across the entire debt.

Expressing upfront fees as an APR is a useful way of comparing the true cost of a balance transfer. If a 3 percent fee is incurred and the balance transfer has an interest free duration of 12 months, and the entire debt is paid off within that time frame, that is the equivalent APR of 5.6 %. If the debt is paid off in half that time say six months, then that is the equivalent of 10.7%

If the borrower has debts which are too large to pay off over a year, they could try to obtain successive deals.

Two twelve-month deals in a row, both charging 3% fees, with the debt off over 24 equal installments, would mean still paying the equivalent of 5.6% per year, which is a reasonable rate of interest.

Again, when using balance-transfer deals, borrowers should always pay at least the minimum and should not use the card for any other purpose, otherwise they will likely be caught out by expensive fine print.

4. Interest rates of less than 12%

Another method a borrower could use to obtain financing cheaper than the usual method is to use a combination of personal loan and long-term balance transfer deals. The best personal loan deals in Australia are just under 11 per cent, whilst credit cards have best offers at just under 10 per cent for long term deals.

The headline personal loan interest rates is often misleading. Compulsory payment holidays on most loans add to the cost, so that they actually work out to be more like 11 to 14% per year.

Compare Australian Personal Loan Deals