Tesco cuts loan rate to 6%

Tesco has cut its best rate for personal loans to 6%. This follows rate cuts from Sainsbury's Bank earlier in the month. Things are hotting up in the loans market.

We’re all very familiar with Tesco and Sainsbury’s fighting hard for our grocery spending, but they’re now fighting hard to grab our borrowing business.

The latest move comes from Tesco. It’s cut the main rate on its personal loans to 6%. This is for loans between £7,500 and £15,000 over five years. That’s the core part of the personal loans market.

Tesco’s rate cut puts the supermarket bank in joint first place for personal loans. 6% is a very attractive rate for a fairly large unsecured loan, so if, for example, you wanted to do some fairly major work on your home, a personal loan would be a great way to fund it.

Best personal loans £10,000 over five years

Sainsbury’s is only 0.1% more expensive than Tesco in this part of the market, but Sainsbury’s really wins out if you’re looking for a shorter-term loan. If you want to borrow £10,000 over just three years, you’ll only have to pay 5.9% at Sainsbury’s whereas Tesco will charge you 6% for a three-year loan.

Any catches?

There is a big catch to both the Tesco and Sainsbury’s loans though. You may not be offered the top rates that I’ve mentioned. Tesco and Sainsbury’s are only obliged to offer their best rates to 51% of their successful applicants.

In other words, there are no guarantees that Tesco or Sainsbury’s will be willing to lend to you – it all depends on the strength of your credit rating. And even if the supermarket banks are prepared to lend to you, they may offer you a higher rate than 5.9% or 6%.

If you’re not sure how good your credit rating is, check out our article: What REALLY damages your credit rating. 

If you suspect your credit rating is poor, you probably shouldn’t apply for a loan as applying for a loan and then getting rejected could inflict further damage on your rating.

Could you borrow more cheaply?

If you want to borrow for a significant purchase, you should also consider taking out a 0% on purchases credit card.

Let’s say you want to spend £1000 on some new furniture for your home. Use a new 0% purchases card for the transaction and you won’t have to pay any interest on the resulting debt for a period that could last as long as 18 months – depending on the card.

Obviously, a 0% card is cheaper than a personal loan, and these cards make a lot of sense if you’re looking to spend somewhere in the region of one to five thousand pounds. But for a bigger purchase, many folk will struggle to get a credit card with a big enough credit limit.

And in general terms, you’re more likely to be granted a personal loan than a 0% credit card. Banks are only prepared to lend at 0% to people with spotless credit histories.

It’s also well worth checking out what kind of deal you could get if you borrowed via one of the social or peer-to-peer lending sites.

Should you borrow at all?

I suspect that many readers are going to think: "Why is lovemoney.com encouraging borrowing in this article? Isn’t debt the reason why we’re in our current financial mess?"

And there’s some truth in that concern. Debt can be very dangerous. If you get into a situation where you’re struggling to repay a debt, it can cast a massive shadow over your life.  I know this from personal experience.

That said, I think you also have to be realistic. People want to buy things for their home and family and a modest amount of prudent borrowing normally works out fine for most people. The crucial point is that the borrowing should be modest and you must be very confident that you’ll be able to repay on time.

And if you’re going to borrow, it makes sense to borrow at 6% rather than the extortionate rates you can end up paying elsewhere.

So if you’re looking for a loan, Tesco and Sainsbury’s are great places to go.

More on borrowing:

Sainsbury’s launches price guarantee for loans

Overpay your loan without penalty 

Cashback websites profiting from payday loans

MasterCard ordered to dump rip-off intercharge fees

The end of free banking: winners and losers