I won’t ask what the disaster was or if it could have been avoided! It is there and you need £2,000 to deal with it and you need it now!
First, do you have enough savings to cover it? And yes, I know that is your house deposit or your holiday fund but what rate of interest does it earn – 2%, 3%? And what rate will you pay on a loan if you take one out? A lot more than that, I can tell you. So spend that £2,000 out of your savings and then make a standing order to yourself for £200 a month and it will all be paid back and earning interest by next Christmas. Job done.
If you are among the one in five people who has no savings then you really should put that right. We all need some emergency funds for a rainy day – or rather for when the rain comes through the roof. Or the boiler breaks. Or you lose your job, fall ill, or find yourself pregnant. So everyone should have at least three months’ net pay tucked away, and ideally six, for those big – or little – emergencies. So once this emergency is over, start saving.
Credit card
The cheapest way to borrow is to take out a 0% purchases card and use that to pay for the emergency. These cards do what they say on the plastic – no interest charged on anything you spend up to your credit limit. The catch? After a fixed period, that 0% is whacked up to the standard rate – an average of around 26% a year. The length of that period depends on your credit record. It can be as long as 25 months, though it will be less if you have a poor credit record.
Before you even think of applying for one, swear an oath.
I will not use this card for anything other than the emergency.
I will pay for the emergency now, cut the card into little pieces and recycle it.
I will divide the amount borrowed by the length of the free period and repay that amount every month without fail.
Swear that now, or I will feel guilty for even suggesting it.
Personal loan
A loan from a bank can be cheap but rates are rising. For £2,000, you will probably find 12% is around the best deal and they will want you to borrow for two years, not one. The more you borrow and the longer the term, the lower the percentage but that will be a long-term, unbreakable commitment for a short-term emergency. The offer you get will depend on your credit rating. So even if you see 12% advertised you may be asked to pay more.
Credit union
All of us can find a credit union that is either local to where we live or work, or helps people with a particular job, or who belong to a particular community or society. Credit unions are not-for-profit community organisations that pay savers to save with them and charge reasonable rates of interest to people who borrow. Most now let people borrow before they start saving. The rate they charge is a maximum of 3% a month which is an APR of 42% but many charge a lot less – as little as 1% a month (12.7% APR), which is the maximum allowed in Northern Ireland. As you pay the loan off, the amount of interest due falls. More at findyourcreditunion.co.uk.
Other ways to borrow
A normal credit card will charge around 26% APR – so, if you borrow £1,000, you pay £260 a year interest before you repay a penny of the debt. An overdraft is usually 39.9%. Never Google for a loan as you will find the successors to payday lenders who will charge hundreds, even thousands, of per cent for a short-term loan. Avoid them like the plague they are. All you need to remember about APR is that small is best – the smaller it is, the less the loan will cost you.
More information:
Up to date savings rates: savingschampion.co.uk
Up to date credit card offers and personal loans: moneysavingexpert.com
Avoid all the others.
Money Box: Your Toolkit for Balancing Your Budget by Paul Lewis is out now
