The top five personal loans

There's a new market-leader in the personal loans market...

If you’re really strapped for cash, taking out a personal loan could be a good option. However, loans shouldn’t be regarded as a great way to pay for that last minute trip to Australia or the latest laptop model that you don’t really need.

But if you do genuinely need to borrow between £7,500 and £15,000 for something important, taking out a personal loan may be the answer.

The best deal in town

Last week, Nationwide introduced a new personal loan rate of 7.7% APR for loans of up to five years between £7,500 and £14,999. This is now the lowest loan rate you will find on the market.

Based on a loan amount of £10,000 over five years, this means you’d pay a £200.10 a month, and the total interest you’d have to pay on the debt would come to £2,006.*

However, there’s just one drawback to this loan. And that’s the fact that to qualify you will need to be a Nationwide FlexAccount customer.  

So if you’re not a Nationwide FlexAccount customer, does this mean you won't be able to find a good deal elsewhere? Well, the short answer is no. You don’t need to completely miss out if you don’t qualify for the Nationwide loan because there are plenty of other decent rates out there – as I’m now going to prove.

The next best

The table below highlights four more of the cheapest personal loans around. To keep things simple, these calculations are based on a loan of £10,000 over five years.

So as you can see, there are some very competitive deals out there. What’s more, aside from the Sainsbury’s Finance Nectar Cardholder Personal Loan which requires you to have a Nectar card, you don’t have to be an existing customer for any of these loans. And signing up for a Nectar card is really easy to do anyway.

So although you will need to be an existing Nationwide customer to qualify for the very best deal on the market, you can be reassured that you’re not going to lose out significantly if you don’t qualify for the Nationwide loan.

In fact, using the examples above, you can see that it’s only a difference of £200.10 a month, versus £200.54 a month – so a matter of pence only.

In terms of overall interest paid on the £10,000 loan, you will only be paying a total of £26.54 more if you take out either the Alliance & Leicester Personal Loan or the Sainsbury’s Finance Nectar Cardholder Personal Loan instead of the Nationwide loan. So again, it’s not a huge difference.

There is another way

Of course, if you’re borrowing less than £5,000 and have a good credit record, you may prefer to consider other options rather than taking out a loan.

Related how-to guide

Build up your savings

Here's how to get into the savings habit, find forgotten money, work out the real value of a savings rate and build up that emergency savings pot.

See the guide

If you know that’s not going to be possible, you could consider a 0% on new purchases credit card instead. For example, both the Tesco Bank Clubcard Credit Card Mastercard and the Sainsbury’s  Finance MasterCard for Nectar Card Holders offer 12 months interest-free on all purchases you make – so this can be a far cheaper way to borrow.

Just make sure you pay off the balance in full before the end of the 12-month period, otherwise you’ll be hit with an interest rate of 16.9% for the Tesco card, or 15.9% for the Sainsbury’s card.

Top tips

If you decide that taking out a personal loan really is the best option – perhaps because the amount you need to borrow is much larger than your credit card limit will allow – make sure you avoid secured loans and only opt for an unsecured loan.

Although secured loans might look more attractive because you can usually borrow more than you can with an unsecured loan, a secured loan requires you to put up an asset, such as your house or car, as security for your debt.

This means that if you find that you can’t afford to make your repayments on time, you could end up losing your car or home – and I don’t think that’s a risk worth taking.

Recent question on this topic

• gedhawes asks:

  Is it realistic that with a fair credit score I can get a loan with lower apr than credit cards?

  • 
    MikeGG1 answered "I would very much doubt that you would get any more than £15,000 loan these days. Applying..."
  • 
    gedhawes answered "Thanks. I only have one loan (on 5.5%) and it's due to end in August but I do have a considerable..."
  • Read more answers

Unsecured loans won’t require you to provide your lender with collateral against your loan. So this means you're less likely to lose your car or home if you can't keep up with your repayments. Unsecured loans generally have fixed interest rates – unlike secured loans which are variable – so you’ll always know how much you have to pay out each month.

It’s also best to keep the term of your loan as short as possible and don’t borrow more than you need to. By choosing the lowest term you think you can manage, you'll pay far less in interest and therefore keep costs to a minimum.

Finally, try to avoid taking a repayment holiday. Although the idea of having a short break from paying off your loan might sound tempting, it will actually mean you end up paying more interest. That’s because you'll incur interest charges while you're taking your holiday.

Once your holiday is over, you'll either have to increase your remaining monthly installments to pay off your loan within the original term, or you'll have to pay it off over a longer period. So steer clear!

*Figures don’t take into account any interest incurred during optional payment holidays or deferral periods.

More: 10 ways to beat your bank | Now is the time to get a 0% credit card