The UK's cheapest personal loans

As two more banks slash their loan rates, we uncover the new Best Buys!

In the past few days, two leading lenders have unveiled cuts to their personal loan rates.

Rate cuts

On Monday, 3 October, mega-bank HSBC is reducing the rate on personal loans between £7,000 and £15,000 to 6.4% APR, from 6.9% APR. But this reduction only lasts until 13 November.

HSBC isn’t alone (no pun intended!). Also, from Tuesday, 27 September, Tesco Bank cut its interest rate on personal loans between £7,500 and £14,999 to 6.7% APR, from 7.4% APR.

The new loan war

In May 2006, when the credit boom was still in full swing, the average rate on a £5,000 loan was just 7.8% APR. Five years later, by May 2011, this average rate had hit an 11-year high, peaking at 13.1% APR -- the highest rate since 2000.

Hence, loan rates have leapt upwards since the credit crunch kicked off in August 2007. However, following a four-year run of rising rates, several lenders have repeatedly cut their loan rates this year.

In other words, if you need a loan, now is a good time to get one.

Why get a loan?

Of course, this is not the best way to buy something. Rather than borrow money to buy, say, a car, my parents would always save hard, because they shared a working-class dislike of credit. Hence, as soon as they replaced one car, my folks would immediately start saving for three years to pay for their next one.

However, Britain's savings habit isn't what it once was, because we became a nation of 'debt junkies' in the great credit boom of 1995 to 2007. Too many people borrowed too much money and now struggle in this post-crash period.

Even so, getting a personal loan can be a relatively inexpensive way to raise money for a big purchase, especially if you are sensible and do your homework. As well as debt consolidation, most personal loans are used to pay for lifestyle enhancements, such as home improvements, cars and motorcycles, holidays and weddings -- or even divorces!

Five reasons to get a loan

1. Unlike mortgages, personal loans are not secured against your home. This means that you won't lose the roof over your head if you can't keep up your repayments.
2. Interest rates on almost all personal loans are fixed (very few charge variable rates). This means that your monthly repayments will be fixed throughout the life of your loan.
3. When you take out a personal loan, you know exactly how much you're going to repay. By law, this 'total amount repayable' must be shown.
4. The rip-off payment protection insurance (PPI) sold alongside loans is optional, so you don't have to buy it. Instead, if you need this cover, shop around online for Best Buy PPI.
5. The easiest way to find the perfect personal loan is to shop around online by using a loan search wizard.

Best Buy personal loans

The difference between the interest bill on the cheapest and most expensive loan of £5,000 is nearly £1,200. Thus, you can't afford just to stroll into your local bank and apply for a loan. In fact, you'd probably be better off going to local supermarkets, as their loans are usually much cheaper.

To get you started, here's my table of the six cheapest loans for borrowing £7,500 over five years:

Six of the best 

As you can see, Tesco Bank's rate cut has pushed it into the top six for personal loans of £7,500 over 60 months. When HSBC's rate cut to 6.4% APR takes effect on 3 October, it will leap to joint second in this list.

Nevertheless, the gold medal goes to Nationwide BS, whose existing customers pay 6.3% APR (with new customers paying just 0.1% more). Joint gold goes to Alliance & Leicester, which exactly matches Nationwide's best deal.

Finally, with banks cherry-picking the best borrowers, these loans are available only to customers with spotless credit histories. Hence, only the most sensible applicants can grab these low rates, so don't apply if your credit has gone awry!

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