The cheapest loan around

Does a loan at close to the inflation rate mean it's free money?

Nationwide's loan is market-leading again having been reduced to just 6.1% APR, continuing the loan wars that have seen dozens of reductions over the past 12 months among a handful of providers, including Sainsbury's Bank, Tesco Bank, Santander (and its brand Alliance & Leicester) and HSBC (and its subsidiaries, M&S Money and First Direct), each competing to offer the cheapest loan in town.

Inflation is still high at 5.4%, based on the Retail Prices Index, which is the most comprehensive measure of rising prices. High inflation, once it is followed by rising wages, makes it easier to repay debts so Nationwide's debt at just a bit more than inflation should get easier to repay over time.

Free money?

Some people make the mistake of thinking that if a loan costs around the same as inflation then it is almost free. You have to ask yourselves: will I be richer and have more stuff if I borrow, or if I don't? The answer is almost always you will be richer if you don't, which means you'll be able to both save more and have more possessions over the course of your life. Read more about that, and the exceptions to the rule, in How to spend less and have more.

For those with good reasons to take out a loan, here are the cheapest ones currently available:

Cheapest loans for £7,500 to £15,000

In Cheapest loans since 2007 I put a price warning on the Sainsbury's Bank loan, because it had an enforced waiting period at the start that would add hundreds of pounds to the final cost. The supermarket's website now states this payment “holiday” is an “option” which fooled me temporarily, yet when you click through to the details it seems to clearly say that you will have to wait several months before you're allowed to start paying.

That might sound like a nice benefit, but because extra interest piles up during and after the period as a result, you can expect the loan to cost you more compared to another loan with the same interest rate. Adjusting for that, it's still a top loan, but it scrapes into fifth place.

That said, if you want to snap it up, you'll need to move quickly as the Sainsbury's deal ends on Monday 21st November.

Most people won't get these top rates

That said, almost all interest rates are misleading in another way, in that the majority of applicants usually don't get offered the top rates. Many applicants are rejected outright, and half of those who are accepted get offered worse rates than the headline-grabbing one. One lovemoney.com reader reported getting offered just shy of 20% APR when she applied for the Nationwide loan, for example.

"Temporary" high inflation

So how long can we expect the rate of inflation to be so close to the rates on offer from our leading loans? I admire the Governor of the Bank of England's use of words when reporting on it.

He has claimed in a letter to the Chancellor that the causes of high inflation are “temporary”, which is a clever thing to say. Most factors that affect the rate of inflation are temporary, so he can't help but be right.

If the Bank of England prints £100 billion, for example, the effect on the rate of inflation will be temporary. It will devalue the pound while the money spreads through the system, but it won't keep boosting the inflation rate once it has done so. If the Bank then prints another £100 billion, the effects of that on the rate of inflation will be temporary too. The Bank could theoretically keep printing lorry-loads of money at a rapid rate and yet claim the effects are temporary for decades, and they'd be right.

It's just that consecutive printings will see one temporary effect on the inflation rate followed by another, and then another, and then another.

If you're interested, I tried to have a stab at explaining the effects of inflation in “What is real money?”

More: Compare personal loans through lovemoney.com | Why house price forecasts are dangerous | Switch energy before the shock bills