Cheaper loans hit the market, but hurry!

Great news for borrowers: loan rates have just reached their lowest level since the credit crunch hit, but you'll have to act fast.

You would hope the current super low base rate meant an era of super cheap borrowing. This has been the case for some lucky homeowners with top tracker mortgages. Even fixed rate lending is growing increasingly competitive, particularly if you have plenty of equity in your property or a healthy deposit.

Unfortunately, if you’re looking for unsecured borrowing via a personal loan, those rules just don’t apply. Lenders have always priced loans with a complete disregard for the base rate, even though it has remained at an all-time low since March 2009. If anything, loans rates have actually been quietly creeping up since the credit crunch first took hold.

Good news for borrowers

But it’s not all doom and gloom because lately, rates have begun to improve a little with a handful of loans now charging less than 8%. In fact, the cheapest loans are now available at rates we haven't seen since Lehman Brothers collapsed in September 2008.

That said, the most competitive loan of all is only available to existing customers. This is great news for a small minority of borrowers, but of little use to the rest of us.

With that in mind, let’s take a look at a selection of the best loans which are available exclusively to existing customers of the loan provider, followed by the best-buy products which are available to everyone.

Although rates vary depending on the amount you borrow - with smaller loans generally subject to higher rates than larger ones - the tables below are based on a loan of £7,500 which you’ll repay over five years. The ‘existing customer only’ loans are shown first:

Most competitive loan available to existing customers only

Tesco has recently reduced the rates by 0.2% taking it right to the top of the best buy tables. But to qualify for this competitive rate you’ll need to be an existing Tesco loans customer.

You can borrow between £7,500 and £14,999 using the Tesco Bank Existing Customer Personal Loan which has a new rate of just 7.6% (typical). This rate is fixed for the duration of the loan, and you can choose to repay the amount you have borrowed over 12 months to 10 years.

A loan of £7,500 over a five year term would cost £149.74 per month with the total amount repayable running to £8,984. That means the cost of credit comes to £1,484.

If you meet the eligibility criteria for this loan and you like the look of what Tesco has to offer, you’ll need to act fast because the low rate is only available until 10 November 2010.

Tesco also offer the opportunity to take a repayment holiday at the beginning of the term. This will enable you to defer repayments for two months, so that you don’t begin to clear the debt until month three. This may seem like a tempting option, but remember interest up will continue to rack during this period which will effectively push the APR far higher than the table shows.

Just behind Tesco is the Nationwide BS Existing Customer Personal Loan with a slightly higher rate of 7.7%. But the margin between the two in terms of the cost of credit is pretty tiny since the extra 0.1% on the rates translates into paying just £20 more over the five year term.

Tesco and Nationwide are closely matched, but after that rates jumped by more than 1%, which means the exclusive loans are becoming more expensive compared with loans that are available to all borrowers.

With this in mind, the next selection of the loans shows the best-buys for everyone:

Most competitive loans available to everyone

Although I have said these are available to all, this statement should come with a caveat. Whereas the first selection of loans was exclusively available to existing customers, you’ll sometimes find that loans without these restrictions won’t be on offer to you if you have already borrowed from the lender in question.

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Tesco, for instance, states that applicants are likely to be rejected if they have already taken out a Tesco loan. However, other lenders are happy to lend to both new and existing customers alike. You should check this out when deciding which loan to go for.

Getting back to the best buy selection and you’ll see that Tesco has taken the top spot again with its new and improved Tesco Bank Personal Loan. This time the rate is a smidgen higher at 7.7% (typical), compared with 7.6% for the ‘existing customers only’ version. Repayments for the same loan amount come to £150.07 per month which means the total cost of credit is £1,504.

Next up the Sainsbury’s Finance Nectar card Personal Loan is just behind with a rate of 7.7%, and slightly higher monthly repayments of £150.41. That means it would cost just 34p a month more than the Tesco best-buy. If you don’t already have a Nectar card, you can easily qualify for the Sainsbury’s loan by applying for one at the Nectar website. Sainsbury’s may check the card has been used as part of the application process, so makes sure you put it to use when it arrives.

As we saw in the first selection, the second set of best-buys follows a similar pattern with the rates jumping significantly by more than 1% after the first two top choices. And interestingly, the supermarkets are the most competitive place to look for a loan. Cash with your groceries, anyone?

Compare personal loans at lovemoney.com

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