Four top personal loans

We highlight your cheapest borrowing options in the world of personal loans.

When my colleague Neil Faulkner wrote this personal loan article six months ago, the ASDA personal loan was ahead of the pack with a typical APR of 7.9%.

Two lenders are now offering new and existing customers typical APRs of 7.8%; so it looks like rates are (very gradually) creeping down.

I’m going to round up the best buys on the personal loan market. And I’m also going to help you decide whether this borrowing option is really the right choice for you.

The best ways to borrow

When deciding on the borrowing strategy to use, you need to take several factors into account.

How much do you need? If you need to borrow less than £5,000 and have a good credit record, there are a number of options that work out to be cheaper than a personal loan. For example, current account overdrafts and 0% purchase credit cards can both be used for interest-free borrowing.

How good is your credit record? If your credit record is dodgy, you probably won’t be given the typical APR highlighted by the lender – or even worse you won’t be accepted at all. Repeated failed applications can damage your credit score further, so it’s vital to check your credit report before you make an application.

How long do you need to pay it back? 0% credit cards and overdrafts are short-term borrowing solutions. If you need to spread your repayments over several years, a personal loan might make more sense.

To find out more about all these points, read Top loans for all borrowers.

My four top picks

For people who have decided on a personal loan, I’ve rounded up my top four picks. They come with a few caveats:

• For ease of comparison, these calculations are based on a customer borrowing £10,000 over five years. Remember that lower loan amounts typically incur higher interest rates, so it’s always worth doing an independent comparison using your own figures.

• I’ve focused on fixed rate loans that are available to new and existing customers.

• My figures don’t include any interest incurred during optional payment holidays or deferral periods. Payment holidays aren’t as nice as they sound, because during your ‘break’ the loan interest will continue to rack up. That’s why you should avoid them if at all possible.

• Finally, just remember that to advertise a ‘typical’ APR, a lender needs to offer that rate to just two-thirds of accepted customers. Your credit history and other personal circumstances will help determine the rate you’re offered, so you can’t assume you’ll be offered the typical APR.

So, here are my best buy recommendations:

The nitty-gritty

My top choice is the Alliance & Leicester personal loan. It offers a market-leading low rate of 7.8%, and comes with no ‘existing customer only’ catches.

However, bear in mind that it does charge a fee (equivalent to one month’s interest) if you choose to repay the loan early. This is lower than the equivalent fees charged by some of its competitors, but should still be avoided if at all possible.

In second place comes the Sainsbury’s Finance Nectar Cardholder personal loan. This offers the same low rate as Alliance & Leicester’s offering, but is slightly less attractive for two reasons.

First, you’ll need an active Nectar card to get the 7.8% rate. This isn’t a major problem for most people, as the card is free and simple to apply for. And on the upside, loan holders will get double Nectar points on their Sainsbury’s shopping and fuel for two years.

The other snag is the large early repayment charge, equivalent to almost two months’ interest.

My bronze medal goes to the personal loan from Tesco bank. Although offering a decent rate, at 7.9% it is a smidge higher than that of my first two picks. And again, you’re looking at a large early repayment fee (equivalent to two months’ interest) if you decide to clear your debt early.

Finally, my ‘highly commended’ award goes to the personal loan offered by Yorkshire Bank/Clydesale Bank (both part of the same institution).

There are actually several personal loans offering the same typical APR (8.9%). However, I’ve chosen this one because - unlike most of the competition - the Yorkshire/Clydesdale loan doesn’t charge an early repayment fee.

Pitfalls to avoid

Personal loans can be tricky things to deal with, and some lenders will employ every trick in the book to increase their profit margins.

Before you apply for any of the loans featured here, I suggest you read 10 traps to avoid when taking out a personal loan. Forewarned is forearmed!

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