Having an emergency fund is the best way to cover an unexpected cost, but it just isn’t realistic for everyone.
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Borrowing cash should always be a last resort and you should always check you are getting all the help you are entitled to first.
If you do need to take out a loan though, it is important to find the cheapest rate, so you don’t end up racking up big interest charges that can add to your financial pressures.
Always make sure you read the terms and conditions, and understand the full amount you’ll repay over the term of the loan – as well as any potential penalty charges or late fees.
Unfortunately, borrowing has on average become pricier over the past year as the Bank of England has raised central interest rates.
However, there are still ways to access low-cost or even interest-free cash. We take a look at some of the options.
Interest-free overdraft
A free overdraft with your bank account can provide a handy buffer for unexpected outgoings, but not all banks offer them.
Overdrafts can have incredibly high interest charges, so it’s important to check before you go overdrawn.
First Direct offers a £250 buffer interest-free.
If you go over this limit though, you’ll pay 39.9% interest on any amount above £250.
And Nationwide’s FlexDirect current account has an introductory offer where it won’t charge any interest for the first 12 months.
But it’s only 0% for a year, after which you’ll be charged 39.9%.
Credit from retailers
Some stores will let you spread the cost of your payment, particularly on bigger purchases.
Common examples that spring to mind for in-store interest-free credit include furniture such as sofas or electricals and appliances such as a new TV.
For example, sofa company SCS lets customer spread the cost of their purchases, and offers 0% interest on orders over £320.
Applying for this type of finance involves a credit check, so if you’re refused it will be noted on your file for other lenders to see, and could impact your score.
Obviously, this type of credit is only useful if you’re making a specific purchase too – there’s no point buying a sofa just because you can get an interest-free payment plan for it.
Buy now pay later
Buy now pay later (BNPL) is an increasingly popular payment option – it lets you spread the amount you owe into small chunks.
It’s not a loan, but if you do need to make a purchase but can’t afford it immediately, it’s a way of delaying the point of payment.
BNPL is interest-free and fee-free – but some providers will have late payment charges if you miss an instalment.
Typically payments are made weekly or fortnightly over a short period.
For example, Klarna lets you pay in three instalments over 60 days, with the first chunk taken at the time of purchase.
Alternatively, you can pay nothing at purchase, but need to pay the full amount within 30 days.
With BNPL, money is taken automatically from your card or account, so you need to make sure you have enough to cover it.
Most BNPL firms will do a credit check to decide how much to you can borrow.
Be sure to check the terms and conditions, as all BNPL providers work slightly differently, and late fees and charges will vary.
You will usually have to go through a credit check before you can use BNPL and missed payments could result in a black mark on your record.
Interest-free credit cards
Some credit cards charge no interest for a set period.
You need to at least make the minimum monthly repayments though, or the 0% rate could be pulled – always check the terms and conditions.
Be careful not to go over your limit either.
The longest interest-free credit cards on the market at the moment are with Barclaycard, for up to 21 months and M&S Bank, for up to 20 months.
You will still have to make a minimum repayment each month or you could find the lender pulls the deal.
And before applying for any credit card, use an eligibility calculator to see how likely it is that you’ll be accepted to avoid hurting your credit score.
If you get a 0% balance transfer card, you can move across debt from other credit cards.
This can be a great way to clear debt, as any money you repay goes towards paying off your balance rather than on interest charges.
Again, you will need to meet minimum repayments and work out how to clear the debt before the interest-free offer ends.
Interest-free help with mortgage repayments
The Support for Mortgage Interest (SMI) is a government loan scheme available to people on Universal Credit and other benefits.
The low-interest loan can go towards mortgage repayments or debt from repairing damage to your home.
You will need to repay the loan and interest due when you sell your home. The current rate of interest is 4.5%.
The amount you get will vary depending on the size of your mortgage.
You can get help paying interest on up to £200,000 of your loan. This reduces to £100,000 if you’re getting Pension Credit.
Contact the office that pays your benefit to find out if you could be eligible.
Universal Credit Budgeting Advances
Some people receiving Universal Credit can get an emergency loan known as a Budgeting Advance.
It is available to help cover unexpected costs, such as your boiler breaking or car repairs.
You can get up to £348 if you’re single, £464 if you’re part of a couple and £812 if you have children.
The exact sum offered will depend on your ability to repay, but you won’t pay back any more than you borrow.
Repayments are deducted from future Universal Credit payments over up to 12 months – so you’ll find your benefit will be reduced while repaying the money.
To apply you should contact your local job centre.
Budgeting Loans
A budgeting loan is similar to a budgeting advance but available to people getting either income support, income-based jobseeker’s allowance, income-related employment and support allowance, or pension credit.
As with advances, you can get up to £348 if you’re single, £464 if you’re part of a couple and £812 if you have children.
Repayments are deducted from benefit payments.
Credit union loans
Credit unions are usually set up by a not-for-profit organisation, offering cheaper loans to local people who need them.
Savers of the Credit Union pool their cash to lend out to others.
The saver gets a return on their money through the interest paid by the borrower.
Rates are often lower than what a borrower might be able to get through a traditional lender.
You may need to be a member of the union to get a loan but this will vary so check around your local options.
You can find your nearest credit union through the Association of British Credit Unions Limited website.
Interest-free local council loans
If you are looking to borrow money, it’s definitely worth checking if your local council can help.
Many offer interest-free loans to people on a low income but the exact criteria and circumstances in which they offer loans vary.
For example, Lewisham Council provides interest-free loans of up to £30,000 to help people pay for disability adaptions to their homes.
Where to get debt help
If you are feeling overwhelmed by money or debt, it’s important to get free and independent help.
We’ve previously looked at all the places you can get debt help for free, including Citizens Advice, StepChange and National Debtline.
Don’t take money from loan sharks, and try not to resort to very expensive debt, such as doorstep lending.
If you are in arrears with any payments, don’t shy away from speaking to the company – it should help you work out a manageable payment plan to get you back on track.
You might be able to apply for Breathing Space, a scheme which pauses interest charges for a certain period and stops you from being hassled for payment.
A benefits calculator can help you work if you might be entitled to extra cash.
Several energy firms also offer hardship grants to people who are in arrears with their bills.
You should also check whether you’re eligible for grants or extra help, such as from the Household Support Fund or your local council.
Do you have a money problem that needs sorting? Get in touch by emailing [email protected].
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