It's been a long time since things looked this rosy for borrowers as recent weeks have seen several lenders slash the cost of their loans. Borrowers looking for a loan between £
7,500 and £14,999 can now find the cheapest rates available since
November 2008.
The rate war commenced when Tesco Loans cut its typical annual percentage rate (APR) to an impressive 7.6% at the end of the year, making it one of the most competitive rates on offer. The only lender that matched it at that time was Nationwide, through a moneysupermarket.com exclusive.
Sainsbury's Finance retaliated immediately by cutting the typical APR on its personal loan offering to just 7.4%. At this rate, you could borrow £7,500 over five years for a monthly repayment of £149.08, meaning total interest over the term would cost £1,445.
But this deal didn't stay top of the tables for long. At the start of the New Year, both Alliance & Leicester and Santander - which are both owned by the Santander brand - cut their rates to a market-leading 7.3%. Bear in mind that you won't get that rate direct; you'll need to apply through a site like moneysupermarket.com.
At 7.3%, you'd pay total interest of £1,424 to borrow £7,500 over five years. That's £60 less than if you were paying 7.6% over the term.
Marks & Spencer Money has also entered the fray by launching a new loan at 7.5%, again for those wishing to borrow between £7,500 and £14,999.
But not everyone who wants to borrow this kind of amount will qualify for these market-leading rates, so how do you know if you will be eligible?
Who qualifies for the best loan rates?
To call a rate its 'typical APR', lenders must give them to at least two-thirds of its customers, although that changes to just 51% in February.
Some applicants will be rejected outright, perhaps because of their credit history or perhaps because they don't fit the lender's profile - potentially because they don't earn enough.
Of those people that are accepted, a third can be offered higher rates. You will be able to see the full scope of rate on the lender's site before you apply.
For example, Tesco Loans may offer you a loan at any rate from between 6.9% and 13.6%, depending on how risky it considers you. Too risky and you'll be rejected outright.
Increasing your chances of getting a loan
Before applying for any credit, it's worth getting hold of a copy of your credit file so that you can see whether lenders might identify any problems with your application.
Don't just make applications willy-nilly in the hope that at least one lender will accept you. If you apply for a loan and are rejected, the lender will have run a search on your credit file. Too many searches in a short period of time can harm your score, so the more rejections you have, the more likely you are to be rejected again.
If you have a chequered borrowing history then you're very unlikely to qualify for one of the leading rates and you may want to consider applying for a less competitive loan.
You may find your existing bank is more willing to lend to you, especially if you have been a responsible customer in the past.
There are also specialist lenders available through moneysupermarket.com.
For example, Ocean Finance is a loans broker that specialises in finding credit for homeowners. The loans it sources for applicants have a typical APR of 17.9%, meaning you'd pay £185.05 a month to borrow £7,500 over five years. That's total interest of £3,603 over the term.
Platinum Loans offers a typical APR of 15.4% on its homeowner loan, although at least 10% of successful applicants will be offered a headline rate of just 7.3%. However, you shouldn't expect to qualify for that cheapest rate unless your credit score is fantastic.
Finally, Blackhorse Personal Finance offers a homeowner loan with a typical APR of 11.9%, although at least 10% of successful applicants will be offered 8.6%.
To qualify for a Blackhorse loan, you must be a homeowner aged 25 or above, and have no unsettled County Court Judgements or defaults. You also can't have missed a mortgage payment in the last six months.
Bear in mind that, with homeowner loans, loan-to-value restrictions will apply. That means that you must have enough equity in your property to secure the debt against.
Boost your credit score
There are some steps you can take to spruce up your credit file and make it more likely that you will qualify for the top rates being offered. Read Clare Francis' article 'How to improve your credit score' for tips on boosting your credit rating.
Most importantly, get hold of a copy of your credit file and make sure all the information contained within it is correct and there are no mistakes stopping you from qualifying.
What if you want to borrow less?
The cheapest rates are only available to those wanting to borrow more than £7,500. If you want to borrow just £3,000 then the average rate of the top 10 loans is a much higher 15.12%.
So, if you only need around £7,000 then it's worth considering applying for £500 extra. Believe it or not, doing so can actually save you money over the term of the loan as you will pay a lower rate of interest.
Consider whether you have any other expensive debts, such as credit and store cards, which you may want to consolidate using a low rate loan.
If not, then it may be worth using a credit card to fund your purchase. There are a number of cards offering 0% interest for a fixed period, making them a cheaper option than the best loan, as long as you can pay off the balance within that interest-free time.
For example, the Tesco Clubcard Credit Card gives new customers a market-leading 13 months at 0% on purchases. However, after that you'll pay typical APR of 16.9%, so be confident you can clear the debt during the introductory period, before you apply.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.
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