Cut the cost of your personal loan by switching deals

Cheaper loan rates could save existing borrowers money.

The rates on unsecured personal loans have tumbled to new lows over the last couple of years.

At Nationwide, for example, the average rate paid by borrowers applying in branch for a medium-sized loan during May 2013 was 8.5%.

Now the building society offers a joint market-leading rate of 3.6% to its current account customers (or 3.9% to non-current account holders) on borrowing between £7,500 and £14,999.

M&S Bank, First Direct, Sainsbury's Bank and HSBC also offer a leading rate of 3.6% on medium sized-loans right now.

So for people with existing debt there's never been a better time to reduce the amount of interest they are paying and lower their monthly repayments on their loan by switching onto a cheaper deal.

Switching deals

To switch onto a cheaper deal, you’ll need to refinance or consolidate your debt.

This means taking out a new loan at a much better rate and using the money to pay back what you owe on your existing debt straight away.

By refinancing a loan or consolidating debts into a single loan with a cheaper rate, borrowers can make big savings.

For example a borrower who took out £15,000 over five years at 8.5% in June 2013 with Nationwide would today have a balance remaining of £9,721.85 – made up of £8,446.37 principal and £1,275.48 interest.

But if they transferred the outstanding principal balance (plus a typical early repayment charge of 58 days' interest) to a new rate of 3.6% over 36 months, Nationwide estimates they would save £728.49 in interest over the remaining three years.

In addition monthly repayments would fall from £307 a month to around £251 a month under the new deal.

Fine a better deal on a loan with loveMONEY

Can I switch without penalty?

Loan providers have to allow you to pay off your loan in full before the end of the term. However, this is usually subject to an early repayment charge which is typically one or two months’ interest.

You will need to check the agreement you signed to see what your lender will charge you if you decide to leave early. It’s also a good idea to check what the set up costs of the new loan will be, if any.

Once you have all this information you’ll be better placed to understand whether it’s a sensible and worthwhile move to refinance or consolidate debt with a cheaper unsecured personal loan.

The cheapest personal loans

When looking for a personal loan you can generally choose between a small loan of £5,000-£7,499, a medium loan of £7,500-£15,000, or a large loan of more than £15,000. But the most competitive rates are normally found in the medium range.

You can visit the loveMONEY loan comparison engine to compare deals based on your specific needs. But in the meantime here’s a roundup of the cheapest personal loans for those borrowing £10,000 over three years.

*Available to Nationwide main current account customers only

**Available to 1st Account customers only

***Available to HSBC current account customers only

Compare loans with loveMONEY

More on banking and borrowing:

RBS Group hit by new banking glitch

Emoji alternative to PINs launched

Barclaycard launches InterContinental Hotels Group reward card