Loans Aren't Getting Cheaper

If you thought falling interest rates meant cheaper loans, I'm afraid you're going to be disappointed.

The days when personal loans offered enticingly low interest rates under 6% are long gone. In fact, the cheapest loans on the market are now closer to 8% or 9% APR, and the chances of getting accepted for one of these are slim, unless you have an excellent credit score.

So does that mean loans are no longer a good way to borrow? Well, let's take a look at the best buys first of all.

Best buy personal loans today

Based on a loan of £5,000 repayable over 36 months. *Part of Co-op Bank.

Loans are not like mortgages

Loans rates have certainly crept up steadily over the last couple of years, with many more not shown in the table charging well over 10%. Unfortunately, loans are not like mortgages. Mortgage lenders have been put under huge pressure from the government to pass on the latest base rate cuts. But this doesn't apply to other types of credit, including loans

The base rate dropped to just 2% this month, but that has had no impact on the loans market. So while mortgages are getting cheaper, loan rates aren't coming down.

PPI

Loans look set to get more expensive in 2009 too. The Financial Services Authority (FSA) has recently cracked down on the sale of payment protection insurance (PPI) policies by loan providers. A PPI policy will cover the cost of repayments on your loan if you can't pay them yourself as a result of an accident, illness or because you lose your job.

But PPI is often ridiculously overpriced, especially if it's sold by a loan company rather than an independent provider. The FSA will force big price cuts and will ban loan companies from selling PPI at the same time as loans. That will give customers the opportunity to shop around for a cheaper policy.

The trouble is PPI has meant big profits for lenders until now, so we could see loan rates step up even further to compensate for the lenders' lost PPI business. (Read more about the FSA's ruling here.)

Can you actually get a best buy loan?

It's almost certainly true you won't be eligible for a best buy loan unless you have a good to excellent credit rating. After all, lending criteria for all types of credit is pretty tight these days.

You can check out your credit status using our credit rating tool, which will give you a rough idea of your rating. If your rating is average, you may be better off targeting your loan application, rather than automatically applying for a best buy. My Foolish friend, Neil Faulkner, explains the smart way to choose a loan in his article: Up Your Chances Of Getting A Loan**.

Better ways to borrow

If you're beginning to think loans are looking rather expensive, is there a better way to borrow?

Try a credit card with a low APR

You could try borrowing using a credit card which offers a low interest rate for life instead. The Barclaycard Simplicity credit card, for example, offers a market-leading 6.8% APR (variable) on all purchases and balance transfers. This rate easily beats the current best-buy loan rates, and could be a better solution if you need to borrow over the longer-term.

Try a 0% on purchases credit card

Instead of applying for a loan, you could put your purchases on a 0% credit card. But don't forget, this is only going to work if you intend to borrow over the short-term. Halifax still offers a fantastic 0% deal on new purchases for ten months with the All in One credit card.

If can't manage to clear your debt that quickly, it'll turn out to be a pretty false economy because the typical APR will shoot up to 15.9% once the interest-free period is up. Be warned Fools!

**This article was written 12 months ago. The interest rates are out of date, but the principles are still the same.

More: The 11 Cheapest Personal Loans | Compare loans at The Fool