Banks cutting rates in personal loans war

The average rate for a £7500 loan over five years is now 4.4per cent, compared with 6.4per cent in 2103, according to Moneyfacts.co.uk. A customer who takes out a new loan would therefore pay £859.30 in total interest compared with £1255.30 two years ago, a saving of almost £400 in interest payments over the term of the loan.

The top deals are even cheaper. This week M&S Bank launched its lowest ever loan rate at 3.5per cent for loans between £7500 and £15,000. The rate is open to new and existing customers with a gross annual income of at least £10,000. The monthly payment over five years is £136.25 and borrowers would pay total interest of £675.

The interest rate on a £7500 loan at Sainsbury’s Bank is 3.6per cent, but Nectar card customers can get a better deal. The bank charges Nectar card holders 0.1 percentage points less on all loans sizes over one to three years. So, if you had a Nectar card and were prepared to pay off the £7500 loan in three years the interest rate would be 3.5per cent.

Nationwide building society also gives preferential treatment to its current account customers. The rate on a £7500 loans is 3.6per cent, or 3.9per cent if you don’t have a current account with Nationwide. The building society is further committed to a price promise. It has pledged to undercut any like for like competitor offer by 0.5 percentage points for customers with a main current account. So, if M&S bank quotes 3.5per cent, you could go back to Nationwide and pay a rate of just 3per cent.

First Direct and Tesco Bank both charge 3.6per cent on a £7500 loan, giving a total interest payment of about £695. However, there are restrictions. First Direct reserves the low loan rate for current account customers. Tesco Bank’s 3.6per cent deal is exclusive to Clubcard holders. Customers without a Clubcard will be offered a higher rate.

StepChange, the debt charity, estimates that 6.5 million people rely on credit to manage their day-to-day expenses, so a more affordable loan could make a big difference to the household finances. Personal loan rates are also often cheaper than overdrafts or credit cards.

The minimum amount you can borrow is usually £1000, with a maximum £25,000. The interest rate is fixed over the term of the loan, usually one, three or five years. You therefore know at the outset exactly how much the loan will cost and how long it will take to pay off.

Some people take out a personal loan to consolidate other, more expensive debts. Let’s say you have an overdraft of £1500 and a debt on your credit card of £6000, both at high rates of interest. You could take out a £7500 personal loan to pay off the costly debts and reduce the monthly payments.

Rachel Springall, finance expert at Moneyfacts.co.uk, says: “Shockingly, many consumers still rely on credit to manage their outgoings each month, but they could be making the mistake of turning to some of the most expensive sources, such as overdrafts, high interest credit cards or even payday loans. However, by taking time to review their finances, consumers could consolidate their debts to a manageable monthly payment with an unsecured personal loan.”

Rates are typically cheaper for bigger loans. For example, M&S Bank would charge 4.5per cent on a loan of £5000, jumping to as much as 12.6per cent on a £3000 loan. If you wanted to borrow an amount near a rate threshold, it might therefore be better to take out a slightly larger loan and pay a lower rate of interest.

It might be tempting to take out a loan over a longer term in order to reduce the monthly payments. For example, if you borrowed £7500 over three years at 3.6per cent, the monthly payments would be £219.91. Stretch the loan over five years and the monthly payments would drop to £136.58. But the total cost of the loan would be higher at £694.80 compared with £416.76, so it could prove a false economy.

If you took out a loan several years ago and would now like to switch to a better deal, you can usually pay off the old loan and take out a new one. However, you should first check whether there are any penalties for early repayment and offset the costs against the cheaper interest rate.

Low loan rates are not available to everybody. Many banks and building societies are fussy about their customers and will charge low rates only to applicants with high credit scores. If you have a poor credit history, you could be offered a higher rate or you application could be refused. However, most lenders and comparison websites allow you to check your eligibility with a soft search that does not leave a footprint on your credit file.