Borrowing from the bank is not so much interesting as an expensive nightmare. But here’s how to beat the system. Martin Lewis reports.

NIP to a bank right now and prepare for your jaw to drop. Interest rates may be at their lowest rate for more than 200 years, but small loan rates have more than doubled. If you want to borrow less than £2,000, then even the market’s very cheapest loan is a whopping 18.7 per cent interest.

Yet there’s a way to manipulate the finance market to replicate a loan at under half that cost– but it requires a “logical switcheroo”.

Why loan rates have jumped

Loan rates are at a nine-year high, and it’s those people borrowing small amounts who have been hit the hardest. While the cheapest loan for amounts under £2,000 is 18.7 per cent, many lenders are charging well in excess of 20 per cent. Roll the clock back to autumn 2007, and the cheapest loan was 7.4 per cent. Borrow that amount now, and on a three-year loan you pay nearly £400 more.

There are three reasons why: the credit crunch means lenders’ access to funds is limited; banks are less keen to sell small loans so competitive pressures have relaxed; and loans used to be subsidised by profits from payment protection insurance (PPI) that was hard-sold with them.

Lenders made more money on the insurance than on the loan, and they don’t have to include the insurance cost in the APR. Yet over the past few years there have been strong calls from many (and I’m one) for people to avoid bank’s PPI and, if it’s needed, to go to standalone insurers who can be more than 80 per cent cheaper.

More than 800,000 templates of reclaim letters to get bank mis-sold PPI have been downloaded from my site and people are getting £1,000s back (moneysavingexpert.com/ppi)

The loan market’s perverted

These rates mean we have a fascinating current phenomenon. The cheapest rate for borrowing under £5,000 is 11.9 per cent per cent. Yet borrow £5,000 to £7,500, and it’s 8.8 per cent. This means it’s cheaper to borrow £5,000 than £4,500. I’m not talking about the interest rate – but the amount you would have to repay.

The differences in threshold levels mean that if you’re near one of the boundaries, which come at £2,000, £3,000, £5,000 and £7,500, it’s worth checking out whether you should borrow a bit more to make it cheaper.

The way to do this is ask, “what is the total amount of money I will repay?”, and go for the loan that has the smallest total, even if it means borrowing a little bit more.

What’s the cheapest way to borrow small amounts?

If you need a smaller loan, there are two options to keep it cheap. By “need”, I mean you do a budget, plan, ensure you can afford the repayments and borrow as little as possible (with the above exception) and repay as quickly as possible.

Yet borrowing isn’t just for when you’ve cash flow issues. Sometimes it can save you money. For example, if you go to the football each week, a season ticket is cheaper than buying individual seats. So, provided you can borrow efficiently, if it enables you to get one, then here the debt would save you cash.

Interest-free social security loans

Before going for commercial debt, it’s worth seeing if there are any loans available from the Government’s social fund available to you.

There are two types and both are for people who have no savings.

The first is the crisis loan, for emergencies or disasters. I’m talking about things like the roof falling in, or something that endangers the house or your family. You don’t need to be on benefits to get these, as long as you don’t have savings.

The next type are budgeting loans, which are only for those receiving benefits. These will allow for a wide range of borrowings, for example, to pay for school uniforms.

To get them, you need to go to the local social security office, but each area has its own pot of cash and unsurprisingly those in deprived areas tend to run out of funds more quickly than those in richer areas.

Half price credit card loans

This is where the “logical switcheroo” comes in. It’s because the cheapest way to get a loan is by using a credit card. If you’re clever and have a reasonable credit score, you can replicate the exact criteria of loans.

The obvious route: Pay for the goods with your card. Grab the longest zero per cent for purchases card that you can. The current market leader is Tesco, which will give you zero per cent for a year. You must ensure you make the minimum repayments and clear the card in that time. For more on this see moneysavingexpert.com/spendingcards

Replicating a loan: Yet more difficult is to replicate the idea of using a loan to get hard cash, for example, if you need to pay a local builder who doesn’t accept plastic. There is a way round this. A small number of credit cards allow you to do what I call a super balance transfer. You may know that a normal balance transfer is when you get a new credit card that pays off debts on other cards for you. You then owe the new card the money, but at a cheaper interest rate.

A super balance transfer is when it lets you do a transfer from your bank account – in other words, the card pays a sum into your account and you now owe the card that amount.

The two top cards for this are the Virgin, which lets to shift money into your bank at zero per cent for 14 months for a four per cent fee, or the MBNA Rate for Life card at 5.9 per cent for a 1.5 per cent fee. The Virgin card is better if you can repay in the short term, the MBNA is better if you can repay in the longer term.

These work out at less than half the APR of even the cheapest loan.

To calculate the exact cost, use the calculator at moneysavingexpert.com/plasticloans One final warning on these though: loans are fixed length, but with credit cards you repay what you like as long as it’s above the minimum.

To truly replicate a loan’s enforced discipline, set a repayment to clear debts in a fixed time, eg, three years using a direct debit, and make the same repayments each month as you would have done to the loan.

Finally, never use these cards for spending on, or the cost will rocket.

Top tip

REGISTER for the H&M fashion newsletter at hm.com and you get a voucher for 20 per cent off one item in-store. H&M will email a voucher, valid for one month from the registration date. The offer closes May 31, although rumours suggest it may return in July.

■ Get Martin’s free tips and moneyoff vouchers emailed straight to you each week by signing up to money savingexpert.com/tips

Bouquets of the Week

CAROL DUNN, of Coundon, Bishop Auckland, would like to nominate Zena and Ann, the women who run the library in the Eden Centre, Victoria Lane, Coundon, for being so friendly and helpful. “If there’s a book you want, they will try their hardest to obtain it for you,” she says.

■ If you want to say a public thank you for good service or to a helpful neighbour, kind stranger or efficient business, write with all the details to Jenny Needham, Bouquet of the Week, The Northern Echo, Priestgate, Darlington, DL1 1NF, or email jenny.needham@nne.co.uk