On a £7,500 loan for instance, the average rate offered by the big four high street banks – Barclays, Lloyds TSB, Bank of Scotland/NatWest and HSBC – is 8.5%.

But with average loan rates dropping to the 6.0% mark on January 5, borrowing that amount with your own bank over five years could cost you as much as £499.50 more in interest than if you went for the lowest rate option.

Rate wars

The good news is loan providers have been slashing their rates in recent weeks in a bid to compete for your business.Tesco andMarks & Spencer Money  kicked off the rate wars by cutting interest on their loans down to 6.1% and 6.0% respectively – and more lenders could follow suit.

However, these cheap deals might not be around for long. Economic turmoil in Europe is expected to make it more expensive for banks and building societies to borrow, which means they are likely to pass these higher costs onto customers in the form of more expensive loan and mortgage rates.

In this case, if you are considering taking out a personal loan, now could be the right time to apply.

Where can I find the best deals?

As a result of the recent rate flurry, Marks & Spencer Money is now market-leading in the loan stakes with its typical rate offering of 6.0% (down from 6.4%) for loans between £7,500 and £14,999.

This means that if you were to borrow £7,500 over five years (the maximum period available on the loan) the total interest payable would be £1,199.76. Based on the average loan rate of the big four high street banks, that same loan could cost as much as £532.68 more.

Tesco comes in a close second with its typical rate of 6.1%, followed by Alliance & Leicester at 6.3% and Sainsbury’s Finance at 6.4% - again, all on loans of between £7,500 and £14,999.

The meaning of ‘typical’

You’ll notice that lenders advertise an APR which they call ‘typical’. But bear in mind that, in order to call a rate typical, it must only be offered to 51% of successful loan applicants. The other 49% of the successful applicants could be offered a higher rate than the one advertised.

The lowest rates are awarded to those with the best credit ratings and histories, so it’s important to check your credit report before applying for a loan or else risk rejection, which can potentially be damaging to your credit rating.

Checking your credit report

When you apply for any sort of credit the lender will run a check of your credit report to see how you’ve handled your borrowings in the past.

This helps them to gauge how reliable you’ve been at paying back what you borrowed so that they can decide whether or not to give you credit.

Missing credit card, mortgage or loan repayments have a negative effect on your credit rating and will show up on your credit report.

It’s worth getting hold of a copy of your credit report to check everything is in order and up to date. If there are any errors you can issue a notice of correction and get it rectified, improving your credit rating.

You can obtain copy of your credit report online for a small fee from credit agencies like Experian and Equifax.

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.