One in four plan to borrow money for Christmas: what's the best way to do it?
A quarter of people are likely to borrow money or use credit to fund spending over the Christmas period, according to a survey of 3,016 UK adults by the Money and Pensions Service (Maps).
Among these borrowers, half say they’re likely to use a credit card, a third would use buy now, pay later (BNPL) schemes, and a quarter would use an overdraft.
Shop prices and energy bills remain high amid the ongoing cost-of-living crisis, so it’s no surprise many of us are looking for a way to make ends meet to get through the expensive Christmas season.
Here, Which? looks at the ways people are borrowing to fund Christmas this year and how they compare if you need to do the same.
How are people borrowing money this Christmas?
Credit cards, BNPL schemes and overdrafts are the most popular ways people are thinking of using to borrow money, according to the Maps survey. But they’re not the only places people are turning.
One in six say they’ll borrow money from friends or family, and one in ten will go to a credit union.
Higher-risk forms of credit were also popular, with one in ten saying they’d take out payday loans.
Some people are looking to borrow hundreds of pounds over the period. Some 45% said they’d borrow between £101 and £300, a quarter said £301-£500 and one in 10 said over £500.
What’s the best way to borrow up to £500?
As we’ve seen, people are considering all sorts of places to borrow money this winter. But what’s the cheapest, most secure and most useful way to do so?
Here’s a breakdown of what you need to know about five of your options:
Overdrafts
If you have an arranged overdraft on your bank account, you could use this to borrow money at Christmas.
Which? Recommended Provider, First Direct, offers a £250 interest-free overdraft on its 1st Account, but it charges 39.9% EAR on borrowing above this. On a £500 overdraft that would mean you pay £1.61 a week in interest.
Currently, the lowest interest rate you can find is around 15% EAR. That means if you went £500 into your overdraft, you’d accrue £1.35 interest per week.
Overdraft usage shows up on your credit report, so try to avoid getting into a habit of using it too much if you’re planning to apply for a mortgage in the future, as an over-reliance on it may put off potential lenders.
- Find out more: best bank accounts for overdrafts
Credit cards
If you have a credit card and a decent limit, your best bet might be spending on that for your Christmas borrowing.
The average credit card interest rate is 32.2% APR, but you can avoid paying interest by repaying what you spend in full the next month.
If you don’t think you can clear your balance, make sure you can afford at least the minimum monthly repayment, typically around 1% of the balance and interest. This is a short-term strategy though, as it will take you longer and cost you more if you only make the minimum payments on your card.
If you don’t already have a credit card, you might want to consider a low-interest option; the market-leading deals charge 10.9% APR. You’ll need to pass a credit check to take one out, so it’s worth checking your credit report and score before applying to see your chances of getting a deal.
- Find out more: best low-interest credit card deals
Buy now, pay later
You might be tempted by the ‘buy now, pay later’ button options you’ll see at online checkouts. Instead of paying upfront, a company such as Clearpay or Klarna will cover the cost and you’ll pay them back over a set period.
They’re interest-free, so if you make all your payments on time, you’ll only have to pay back exactly what you borrowed.
If you miss a payment, though, you can incur late fees ranging from £10 to £24, which could add up quickly if you make multiple small BNPL transactions.
Also, these schemes aren’t regulated by the Financial Conduct Authority, so if you have an issue, you can’t take your dispute to the Financial Ombudsman Service (like all the other options listed), and if something goes wrong, you won’t benefit from Section 75 protection.
- Find out more: buy now, pay later explained
Personal loans
You could take out a personal loan from a bank or building society to help pay for Christmas, but it could be quite expensive and restrictive.
You’ll typically have to take out at least £1,000, which is more than what most people are planning to borrow, according to the Maps survey. Plus, you usually have to spread the cost of borrowing over at least three years and commit to fixed monthly payments. It’s worth remembering a personal loan won’t offer ‘revolving credit’, so you can’t dip into the money you have paid off through your monthly payments if you experience a cash flow problem.
Also, rates tend to be higher on smaller loan amounts. A £1,000 loan with Tesco Bank taken out over three years charges 15.6% APR and you would need to make 36 fixed payments of £34.46. A £5,000 loan over the same period offers a rate of 7.9% APR and monthly repayments of £155.82.
- Find out more: best personal loan rates
Payday loans
The public is far more wary of payday loans now than it was in their heyday. But 12% still said they might use them in the Maps survey.
Payday loans are an expensive form of borrowing, even though the overall cost is now capped.
You’ll pay up to 0.8% in interest per day. So if you borrowed £100 for 30 days and repaid on time, you’d pay a maximum of £24 in interest. If you were late repaying, the most you could be charged is £15.
Payday loans will also appear on your credit report, which could harm your chances of being accepted for a mortgage, as lenders see this type of borrowing as a sign of financial distress.
- Find out more: payday loans advice
