New market-leading 6.7% loan

Competition is hotting up in the personal loan market...

The personal loan sector is starting to show a few signs that the scars of the credit crunch are beginning to heal.

Earlier this year loans rates dipped to 6.9% APR, the lowest since the recession; and for the past few months they’ve hovered around that mark. Until now that is.

Cheapest unsecured loans

Nationwide were the first to move their rates a couple of weeks ago, offering a 6.80% loan for new applicants as well as a market leading 6.70% rate for existing FlexAccount customers.

But they didn’t lead the pack for long, as barely three days later Alliance & Leicester moved to 6.70% for unsecured loans of up to five years between £7,500 and £14,950 (available to new and existing customers). So if you borrowed £10,000 over five years you would repay £195.67 per month and the total amount of interest paid would come to £1,740.20.*

Now Nationwide has cut its rate down to 6.70% for all new borrowers, taking equal top spot in the best buy tables, while if you have a FlexAccount you can get a rate of just 6.6%!

*These figures exclude interest accumulated during optional payment holidays.

Rates at a 12 year high

If you’re after a smaller loan, you should expect to pay considerably more than the above rates. In fact – as we reported earlier this month – the average rate on a loan of £5,000 is now a whopping 12.7%, the highest it’s been since May 2000.

However looking at our loan rate calculator, the best APR (typical) available for a three year loan of £5,000 is 8.30%; offered by Alliance & Leicester, Santander and Sainsbury’s Finance. This would see you repay £156.68 each month, or £640.48 over the full three year term.

Yes, this is a far better APR than the 12.6% average I noted above, but remember not everyone will be given the advertised rate.

That’s just typical

All of the APRs I have listed in this article are ‘typical’. This means that the advertised rate of the loan will not apply to everyone. In fact, the lender only has to give the ‘typical rate’ to 51% of people who apply for the loan. This means that the remaining 49% can expect to receive a higher APR if they are granted the loan.

So if your credit history has a few black marks in it, you could well be given an APR above the advertised rate. Make sure you check your credit report before you apply; head over to Credit Expert where you can get a free 30 day trial.

It’s also worth pointing out that most loans come with an early repayment fee. This means that if you decide to clear off the remainder of the loan mid-way through your repayments, you’ll have to pay a fee. This is usually between 30 days and two months of interest on the remainder of the balance.

Alternatives

Before you take out any loan, it’s important to consider all the available options so as to ensure you pick up the deal best suited to your needs. So with that in mind, take a look at these loan alternatives...

 0% purchase credit card: If you’re only looking to borrow a small amount of money, you may not even need to go near a loan. There are now a whole range of credit cards that will not charge any interest on purchases for several months. Tesco Bank has the market leading deal at the moment, offering 15 months at 0% on new purchases. What’s more, by using a credit card instead of a loan, you’ll be able to overpay by any amount each month; or if you have the cash, clear off the whole balance in one.

However if you do go down this route, make sure you pay off all the debt before the 0% period ends, or you could find yourself hit with spiralling interest rates.

Social lending: Recently, a new breed of lenders has emerged that can occasionally offer extremely low rates, especially if you’re not after a large amount of cash. Social or peer-to-peer lenders cut out the middle man of the bank and essentially allow you to borrow from – or indeed lend to – other users.

I reviewed all of the top social lending sites earlier this year in Earn 7.6% on your savings without going near a bank or you can just head over to our social lending comparison centre for a breakdown of all the latest top rates.

Just get saving: It sounds obvious, but if you don’t really need to borrow– don’t do it! Personal loans can be a good option for large, essential purchases or clearing costly bills, but you should always be 100% sure that you can pay back whatever you borrow.

If you don’t really need to borrow, then open up a savings account and get hoarding!

And one final point, if you do decide to get a loan and the lender offers you a payment holiday; don’t take it. A break from repaying can sound like an attractive option, but remember – you’ll still be accruing interest on your debt; meaning the loan will take longer to clear or you’ll have to up your payments.

More: Compare loans with lovemoney.com | The cheapest loans the banks have to offer! | Get a loan by applying tactically