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New rivals drive down personal loan rates

BORROWERS could pay as little as 3.8% in interest for a personal loan in the coming weeks, as rates continue to improve.

Last week Sainsbury’s bank announced a new deal of 3.9% APR over three years for those borrowing between £7,500 and £15,000. This followed HSBC’s launch the previous week of a 3.9% deal for its existing bank customers.

The Sainsbury’s loan marks the first time a sub-4% rate has been made widely available, although you will need a Nectar loyalty card, which you have used within the last six months, to take it out. The bank has launched the rate as part of a two-week sale until July 22. Other lenders are expected to follow suit and launch sub-4% APR loans in the coming weeks.

Kevin Mountford of the comparison site moneysupermarket.com said: “It will be interesting to see how the rest of the market reacts . . . it is likely that we will see rates falling to 3.8% or even lower over the next few weeks.”

Rachel Springall of the data firm Moneyfacts said: “The lowest that loan rates can fall to entirely depends on the lenders’ own benchmarks. Rates could fall if competition heats up further, but there will always be a stopping point before the market evens out.”

Loans of £10,000 have an average rate of 5.3% today — a record low, down from 7.75% a decade ago and from 17.55% in 1995, according to data from the Bank of England.

Sainsbury’s also launched lower rates for loans between £5,000 and £7,499, with a 5.3% APR for three years, down from 5.6%, and 5.4% for five years, down from 5.7%.

Challenger banks such as Sainsbury’s and Tesco, which has a 4.1% rate for £7,500 loans taken out over five years, and new entrants to the market such as Hitachi, TSB and Cahoot, have been driving competition.

However, the low rates are available only for larger loans, usually over £7,000. Anyone who wishes to borrow a smaller amount is usually stuck with paying a high APR. The average for £1,000 loans is 21.1%, and it is 16.7% for £3,000 loans, according to figures produced for The Sunday Times by Moneyfacts. It costs 20.4% on average to borrow £2,000, and the cheapest rate is from Metro bank (7.9%), although you need to apply for this in a branch. The next-best deal is 14.9% from the Post Office.

Springall said: “On smaller borrowing amounts, customers could opt for an interest-free credit card instead and set themselves a repayment plan to clear the debt before the deal ends.”

Borrowers should also be aware there is a strong chance they will not get the advertised rate on a personal loan. Lenders tend to apply tough criteria and demand spotless credit scores for their cheapest deals — and many customers are offered a higher APR once they apply. Industry rules mean that just 51% of applicants must be granted the headline rate.

A survey by Amigo Loans to be published tomorrow shows one in four people believes the APR on a three-year £2,500 loan is between 6% and 10%, and one in ten thinks it is below 6%. In reality many large lenders, including Santander and Royal Bank of Scotland, do not offer rates below 20%. First Direct has the lowest APR of 10 big lenders surveyed by Amigo Loans, at 13.9% for a £2,500 loan. The research also suggests that many consumers are not aware of early-repayment penalties; Halifax, for example, charges £59 for this.

All consumers should make sure they research any bank offer in detail and look at the charges. The market-leading deal is not always the right choice for everyone.

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