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A rate tussle is still going on in the personal loans market...

Last month I reported on the price war that’s been going on between various personal loan providers, and to be honest it couldn’t have come at a better time. Rates had been racing up for the past two years and after an expensive austerity Christmas many people may now be looking for a simple, cost effective way to consolidate their debt.

In fact, new research from Sainsbury’s Finance shows that up to 139,000 personal loans worth as much as £1.55 billion could be taken out in the first quarter of this year to consolidate debt.

But worryingly one in three people do not shop around when they’re looking for a loan, settling on the first offer quoted to them instead.

So how can you ensure you get the best rate and more importantly the right loan?

Large loans

It’s the larger loans that have been seeing the biggest rate drops recently.

In my previous loan report, Alliance and Leicester and Santander were leading the pack with a 7.2% rate on loans of up to five years between £7,500 and £14,999. Santander have now increased its rate back to 7.3% and Sainsbury’s, which was at 7.4%, has dropped its rate to 7.2%. This means both Sainsbury's and Alliance & Leicester offer the market-leading rate of 7.2%.

Here’s a table showing the top seven loans around at the moment based on £10,000 repaid over five years:

You will need to get hold of a Nectar card to qualify for the Sainsbury’s loan – but these are free and available in all of the supermarket’s stores.

I have put Tesco and Nationwide at the bottom of the table even though the rates they offer are very low because these rates are only available to existing customers.

It’s important to point out that the most effective way to get the best deal when borrowing money is to ensure you take out the correct loan for your circumstances. So while the rates of large loans are currently quite competitive, if you don’t need £7,500 you’re going to lose out if you go for any of the loans I’ve listed above.

But there are alternatives...

Smaller loans

Borrowing smaller amounts will push up your rate, but obviously lower the total amount of interest you pay.

Here are the top four deals for a £5,000 loan paid back over three years:

So Sainsbury’s are again leading the pack with an 8.4% deal that will see you pay back £156.90 a month with the total amount of interest paid across the three years reaching £648.40.

But there is another way to get an even lower rate on a smaller loan...

A social way to pay less interest

Don't just make your decision based on the table above. Tap in £5,000 over three years into our loan calculator and see what comes up. This is because rates from the social lending site Zopa change all the time and can sometimes beat the market-leading loans from banks.

Now, for those not in the know, Zopa  allows you to cut out the middle man of the bank and lend to or borrow straight from other registered users. We’ve previously looked at how Zopa can be used to maximise on your savings, but you can also borrow money from it at a competitive rate.

Last week, you could borrow £5,000 at 8.3% over three years. But this week, the rate has shifted back up to 8.6%, but it may go down again so it's worth keeping an eye on the site.

Just be aware that, to be eligible for the best interest rate on a Zopa loan, you will need to have a spotless credit record.

Credit cards

Getting a credit card is another alternative to a loan if you’re after a smaller amount of money.

There are now a large number of 0% balance transfer cards around that will eat up your credit card burden and hold it at a 0% rate (handling fees do apply) – giving you more time to repay it and saving you valuable pounds in interest. The current market leader is the Barclaycard Platinum offering a whopping 17 months interest free on balance transfers.

MBNA and Virgin also have competitive 16 month 0% balance transfer cards which also offer interest fee money transfers for 16 month (subject to a 4% handling fee). Money transfers allow you to shift cold hard cash from your credit card into a current account. This could be ideal if you’re attempting to pay back an expensive overdraft or if a mountain of bills from the cold winter months have just dropped through the door.

To find out more about credit cards that can help with debt read 20 top 0% balance transfer cards.

What not to do

Whatever your situation, there are a few cardinal sins that you should never commit when contemplating taking out a loan or credit card.

Don’t rush in: Only take out a loan or credit card if it is totally essential and you’re 100% sure that you can pay back what you’ve borrowed.

Don’t securitize: Opting for a secured loan may allow you to borrow more, but you could potentially lose your house or car if you default. Not a risk worth taking in my opinion.

Don’t plump for your first offer: Shop around using our loan calculator to ensure you get the best deal.

Don’t take payment holidays: Taking a couple of months off making payments may sound like a good idea but it will push up your interest fees as you’ll still get charged even if you’re not clearing off any of the balance.

NEVER take out a payday loan: I know we keep saying it again and again but payday loans really are one of the biggest rip-offs around.

*These figures exclude interest accumulated during optional payment holidays.

More: Get a great loan | Best ways to borrow £250 to £25,000! | Fight back against rising loan rates