Interest rates have never been cheaper if you want a five figure personal loan from your bank, but if you only need borrow a smaller sum it’s far more expensive.
The battle for personal loan business has seen lenders cherry picking and concentrating on the higher value end of the market.
Rates are at rock bottom if you want to borrow £10,000 for example, with lenders currently battling it out at the top of the best buys enticing customers with interest rates as low as 3.6% APR from Sainsbury’s Bank, M&S Bank and Nationwide Building Society.
For lower value loans it’s a very different picture, with many lenders charging double digit rates on a £3,000 advance with Barclays and Halifax amongst the most expensive at 22.9% APR and 18.9% APR respectively.
There are cheaper options available, but research shows you’ do well to steer clear of the established providers if you want get the best deals.
There are a handful of borrowing options that stand out, if you want to borrow a smaller sum of money, as follows:
Zopa, the biggest peer to peer lender (P2P) in the UK and RateSetter one of the fastest growing lenders in the same market offer some of the best value deals at 5.8% APR and 8.8% APR respectively for a £3,000 loan over 3 years whilst Lending Works a relatively new P2P player is charging just 5.7% APR.
Just because you’re not familiar with the names, it doesn’t mean you should discount them – the peer to peer sector is now regulated and has established itself as a credible alternative to the big banks – and the low interest rates are much better than you’ll find on the high street.
Another option to consider is the Low Rate Credit card from MBNA, although this isn’t strictly a personal loan, there’s nothing to stop you using this credit card in the same way you would a loan.
If you make your purchase with the card and set up a monthly standing order from your current account, it works exactly the same as a personal loan.
The interest rate is 6.6% APR and unlike many deals there’s no balance transfer fee to pay. It remains one of the cheapest ways to borrow a smaller sum over 3 or 5 years.
The potential cost savings on a loan of £3,000 at 6.6% APR is £742 over a three year term when compared with the personal loan with Barclays, charging 22.9% APR.
The golden rule with personal loans is don’t automatically sign up with you own bank without checking out some of the less obvious alternatives, as there’s a good chance that you’ll be paying over the odds.
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