Cheap loans come with a catch

Think carefully before borrowing from your flexible friend. By Rachel Fixsen
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The Independent Culture
WHY TAKE out a bank loan if you can borrow more cheaply on a credit card? With competition between card issuers positively feverish, some introductory interest rates are below the rate your bank would charge for an authorised overdraft or arranged loan.

The Co-operative Bank issues its Advantage Visa card, and has a fixed introductory rate of 10.8 per cent on cash advances until April next year. With a standard current account at a high-street bank such as Barclays and NatWest, an agreed overdraft would accrue interest at around 18 per cent a year, according to the financial data provider MoneyFacts.

Some credit card deals appear too good to miss. The card issuer The Associates is currently offering a cash advance of up to pounds 2,000 interest-free up to March next year for anyone who takes out its Visa Platinum card. Applications for this card are only accepted from people who received one of the millions of direct mail "invitations". But most of the teaser rates offered by credit card issuers on cash advances only last for six months, after which they revert to the issuer's standard rate. This is normally far higher than any authorised overdraft, typically 18 to 25 per cent.

Sophie Gumpel, the head of money research at the Consumers' Association, says there is no doubt borrowers can get better rates with credit cards. "People don't often take out credit cards with a view to borrowing, but with the amount of competition and the array of cards available, you should definitely consider them," she says.

But you have to be disciplined, she warns. When a client arranges a loan with a bank, there is a set repayment schedule in place, designed to repay the loan over an agreed period. But with a credit card there is simply a stated minimum payment, which is generally a proportion of the outstanding balance - typically 3 per cent.

"If the cardholder only ever made this minimum payment, the debt could in theory go on forever," says Stephen Dight of Grosvenor Financial Services. "The danger with these cards is that people just pay the minimum balance, and then it becomes a very expensive way to borrow money," he adds.

All too often cardholders fail to pay the full advance back before the higher rate kicks in. Anyway, bank overdraft rates can be far lower than they officially appear. "The banks will negotiate... don't accept the rate they quote," says Mr Dight. "Particularly if you have a high salary, banks will be flexible in order to keep you as a customer."

Debbie Thorne of Barclayloan says that there are many different ways to borrow money, so before deciding who to go to you should consider how much you need and whether you want to repay it quickly or over several months. "Whichever way you choose, make sure you understand the terms before signing on the dotted line," she says.