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Borrowers can bag a bargain rate in loan deals

NOW is a good time to bag a bargain loan as lenders slash their rates and competition hots up.

MONEY MATTERS: Clydesdale Bank slashed its rate for unsecured loans last week. Picture: Colin Mearns
MONEY MATTERS: Clydesdale Bank slashed its rate for unsecured loans last week. Picture: Colin Mearns

Clydesdale Bank, M&S Bank and Sainsbury's Bank are just some of the big name lenders that have cut the rates on their personal loans over the past few weeks.

The best deals are on loans between £7500 and £15,000. Sainsbury's Bank, for example, charges as little as 4.6% if you take out its Standard Loan, which is available to Nectar cardholders who have used their card in Sainsbury's within the past six months. The low rate is available until the end of the month.

You would also pay 4.6% on an AA loan exclusively through MoneySupermarket, the comparison website, though you have to act fast as the deal expires on Monday.

But Clydesdale Bank joined the fray last Thursday, cutting its rate for unsecured personal loans between £7500 and £15,000 to its lowest ever 4.6%. It's available to new and existing customers on loans with terms of between one and five years. Andrew Pearce, retail director, said: "We have never seen rates as low as this, and it provides an ideal opportunity for people to look at reducing the cost of existing borrowing or making a considered purchase they might otherwise have thought too expensive."

The interest rate at M&S Bank is 4.7%, as long as you are an M&S cardholder or have a current account or existing loan with the bank. Other customers pay 4.8%.

Loan rates are lower today than last year, according to MoneySupermarket. The average of the top five rates for loans of £7500 was 6.14% in January 2013, compared to 4.7% now, saving £284 in interest over five years.

Kevin Mountford, head of banking at MoneySupermarket, says: "Over the last year we have seen loan rates continue to plummet to all-time lows … and it's great news for anyone who is looking to borrow for a New Year purchase or to help pay off the aftermath of last Christmas."

A personal loan allows you to borrow a fixed amount over a fixed period of time at a fixed rate of interest. For example, you might take out a loan for £10,000 over five years at 4.7%. The structure means you can keep your borrowings under control as you know at the outset exactly how much the loan will cost and how long it will take to clear. You can usually borrow between £1000 and £25,000 and the terms are typically one, three or five years. It can be tempting to opt for a longer term as the monthly payments will be lower. But it could be a false economy as the total cost of the loan will be higher.

For example, let's say you borrow £10,000 over three years at 4.7%. The monthly payments would be £298, so you would pay £728 in total interest. If you extended the term to five years, the monthly payments would drop to £188, but you would pay total interest of £1280.

You might decide to pay off the loan early if you come into some money - but watch out for early repayment charges. Lenders are entitled to charge a penalty if you clear your loan before the agreed term, so you could end up worse off. Interest rates vary, but you can often get a better deal if you are an existing customer.

You also usually pay a higher rate if you borrow a smaller amount. For example, M&S Bank would charge existing customers interest of 18.5% on a loan of between £1000 and £2999. Some lenders also apply lower rates of interest if you borrow the money over a shorter term. Sainsbury's Bank, for instance, charges interest of 4.6% if you borrow £10,000 over three years. If you increase the term to five years, the rate goes up to 4.7% - and to 6.7% if the term is longer than five years.

A number of lenders offer to defer payments at the start of the loan, so you do not have to make any repayments in the first few months. Deferred payments can help you to manage your debt when money is tight, but remember that interest continues to build up during the payment holiday and deferred payments can ultimately extend the term of the loan.

You could consolidate other debts into a personal loan to bring down the cost of your borrowings. Let's say you have built up a debt of £3000 on a store card that charges interest of 29%. You could take out a loan for £3000 at, say, 9%, to pay off the store card balance and reduce the monthly payment.

Cheap loan rates are not available to everybody as lenders preserve the best deals for the best customers - borrowers with a spotless credit record. The bank will assess your creditworthiness when you apply for a loan and if you are judged likely to default, or if you have experienced credit problems in the past, you will either be charged a higher rate of interest or your application will be turned down.

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