Focus on: Smaller loans get cheaper at Sainsbury’s

The interest rates on personal loans are falling and, although the best rates on unsecured loans are still reserved for borrowing between £7,500 and £15,000, Sainsbury’s is helping those looking to borrow lower sums by cutting its rates on the £5,000 to £7,499 tier to as low as 7.1%.

Here we take a closer look at what’s on offer…

What’s the deal?

Sainsbury’s Bank is offering loans with a representative annual percentage rate (APR) of just 7.1% to borrowers who take out between £5,000 and £7,499 and pay it back over a period of one to three years.

For anyone wanting to spread the repayments over four or five years Sainsbury’s is offering a loan with a slightly higher interest rate of 7.2%.

The reason that a lower rate is offered to borrowers who pay back the loan over a shorter period of time is because they are seen as a lower risk customer than those who take longer to repay.

These rates are only available to registered Nectar card holders, but if you don’t have one you can apply, free of charge, at your nearest Sainsbury’s or Homebase store or at your local BP station and then register it online.

To apply you must also be aged 18 or over and have a good credit history with no previous bad credit arrears, defaults, County Court Judgements (CCJs) or a previous bankruptcy.

M&S is also there or thereabouts in the £5,000 to £7,499 band with a representative APR of 7.3%.

However, if you’re looking to borrow £7,000, then HSBC is offering an interest rate of just 6.2% (representative APR). It’s charging this rate on all loans between £7,000 and £15,000 with a repayment periods of between one and five years.

If you want to borrow less than £7,000 though, look at Savvi which has just lowered the rate on loans between £5,000 and £6,999 to a market leading 7%.

Things change again when you get to borrowing of between £7,500 and £15,000, with Derbyshire building society charging a a top-of-the-tables 5.8% on loans with terms up to five years. Sainsbury's and Tesco are also under the 6% barrier with 5.8% deals on loans in the £7,500 to £15,000 band.

Verdict

Right now is a great time to take out a personal loan with rates at very competitive levels, and for loans between £5,000 and £6,999 the Sainsbury’s rate is currently very competitive.

However, if you are looking to take out a loan of between £7,000 and £7,499 then the 6.2% representative APR offered by HSBC must come into consideration.

And the difference in the amount of interest you’ll pay is significant. If, for example, you take out a £7,000 loan over three years then you’ll pay £767 in interest on the Sainsbury’s loan and just £670 on the HSBC loan.

An M&S loan taken out over the same period would set you back £789 in interest charges.

Any catches?

The main catch with the Sainsbury’s loan is that you need to be a Nectar card holder to apply but this shouldn’t stand in your way as you can get one completely free of charge.

Another catch, and this applies to Sainsbury’s, M&S and HSBC loans, is that these rates are only available to people with the best credit ratings and so you will most likely be rejected if you have anything less than an excellent credit score.

And before applying you should bear in mind that getting rejected for credit, be it a loan or credit card application, can have a negative effect on your credit rating which can affect your chances of obtaining credit in the future.

So it could be a good idea to use MoneySupermarket’s smart search tool before applying for credit as this will give you an indication of the likelihood of acceptance and will not leave a footprint on your credit file.

In addition, you can apply for a free copy of your credit report by using MoneySupermarket’s credit monitoring channel.

Top tip

Sainsbury’s offers a better rate of interest to those who can pay off their loan sooner, but you must make sure that you do your sums and work out what you can afford to pay back each month before committing to a repayment period.

For instance, if you pay back a £7,000 Sainsbury’s loan over three years at 7.1% representative APR then you will be charged £767 in interest and repayments will be £215.75 per month.

Pay the same loan back over five years at 7.2% representative APR then you will pay £1,311 in interest, but your monthly repayments will drop to just £138.52.

Take out a £7,000 HSBC loan over three years and you’ll pay back £213.05 per month and a total of £670 in interest. Take out the same loan over five years and, although the amount of interest you pay rises to £1,126, you’ll only be paying back £135.43 per month.

So you need to work out if you can afford higher monthly repayments and pay less in interest over the period of the loan or, if this would leave you short each month, whether lower monthly repayments would suit you better, leaving you to take the hit on overall interest charges.

Using MoneySupermarket’s loan calculator can help you to establish a monthly cost that will not only clear the loan as soon as possible but also remain affordable throughout your preferred term.

Follow Les on Twitter at @LesRobertsMSM

Please note: Any rates or deals mentioned in this article were available at the time of writing. We’re free, independent and compare all UK loans, as well as offering exclusive deals you can’t get anywhere else. Contact MoneySupermarket.com at Moneysupermarket House, St David’s Park, Ewloe, Flintshire, CH5 3UZ. © Moneysupermarket.com Ltd 2011.

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