At the back end of last year, Tesco Bank slashed the rate on its cheapest personal loan to an APR (annual percentage rate) of 5.2% (representative). The reduction made Tesco's offering the cheapest loan in a decade… for about two weeks.
On January 9, Clydesdale (and Yorkshire) banks struck back by cutting the APR on their cheapest personal loan to 5.1%. This catapulted the banks into the number one spot on the best-buy tables. Hot on their heels on January 18 however, was Sainsbury’s Bank, which also re-priced down to 5.1% (from a previous 5.5%) making the two providers joint market leaders in terms of rate alone.
As with all best personal loan rates on the market, these market-leading deals are only available for 'medium-sized' borrowing of between £7,500 and £15,000.
But you will also be restricted on the duration of the repayment term – and this varies between the ‘two at the top’.
With the Sainsbury’s loan you will need to repay the debt over between one and three years (if you need four or five years to repay the loan, the rate goes up to 5.2%). You will also need a Nectar card to qualify though these can be picked up in store for free.
Clydesdale Banks is a little more flexible allowing repayment terms over between one and five years, making it the ultimate market leader.
To give you an idea of just how much interest you'll pay with Clydesdale's rate of 5.1% and over the maximum permitted term of five years, we've crunched some numbers:
If you borrowed £7,500…
- Over a five-year period, you'd pay £989 in interest.
- Over a three-year period, you'd pay £590 in interest.
If you borrowed £10,000…
- Over a five-year period, you'd pay £1,318 in interest.
- Over a three-year period, you'd pay £787 in interest.
If you borrowed £15,000…
- Over five years, you'd pay £1,978 in interest.
- Over three years, you'd pay £1,181 in interest.
The best of the rest
It's likely that the recent move from Sainsbury's and Clydesdale and Yorkshire banks will encourage other providers to slash rates on personal loans, perhaps even to rates of sub-5%. This is something we’ll be keeping a very close eye on.
For the moment, for loans of between £7,500 and £15,000, Tesco Bank remains just behind Clydesdale and Sainsbury'swith its APR of 5.2%. This is closely followed by Derbyshire Building Society which is offering an APR of 5.4% while M&S Bank is bringing up the rear at 5.6% APR.
What if I want to borrow less?
Should you want to borrow less than £7,500, you'll find interest rates aren't quite as compelling. But don't let this put you off as costs are still falling in this camp too.
For example, on a sum of £5,000, the cheapest rate you can get is still a keen 6.7% APR with peer-to-peer lender Zopa. Over five years, you'd pay out £872 in interest.
It might seem odd but, in some cases, it can actually work out cheaper to increase the amount you want to borrow in order to pay less interest. For example, if you were borrowing £7,000 with Zopa at an APR 6.7%, over five years, it would cost you £1,213 in interest.
But if you borrowed £7,500 over the same timeframe with Clydesdale's leading loan, you'd pay £989 in interest – which counter-intuitively, is a saving of £224.
What if I want to borrow more?
Personal loans typically go up to £25,000 – but for larger amounts, again, the rates aren't quite as competitive. It’s still worth shopping around for the best deal though.
To borrow £20,000 from Derbyshire Building Society, which offers the cheapest catch-free loan at this level at an APR of 7.3%, would cost £3,799 in interest over five years.
If you have a current account with Barclays, you can bring down this cost to £2,952 as the bank offers an APR of 5.7% exclusively to its current account holders.
Improve your credit rating
While the APRs on offer are tempting, be aware that they are only representative. This means that, to advertise its cheapest rate, the lender must only be able to prove it is offered to 51% of successful applicants. As a result, there's no guarantee the rate you see advertised is the one you will actually receive.
Only those with top-notch credit ratings will be given the cheapest deals, so start by applying for a copy of your credit report and checking yours.
Don't miss out!
Loan rates this low won't be around forever, so if you have been contemplating applying for a loan, these deals are worth grabbing with both hands.
Be aware however, that you should only borrow what you can afford to pay back. If you miss payments, this will result in high fees and can also damage your credit rating.
But borrow sensibly and you’ll find now is the perfect time to bag a loan that’s so cheap it will go down in the history books.
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.