Cheapest personal loan near 5%

The AA has continued the ongoing price war in personal loans by dropping its price for the third time in four months.

For about two years, a battle between a handful of lenders has been chipping fractions of a percent from the cheapest personal loan rates every few weeks.

Back in 2010, rates were 7%+, but at a speed of around 0.1 percentage points at a time, they've now been chipped down to close to 5%.

The main competitors have been the AA (loans provided by the Co-op), Clydesdale Bank, Co-operative Bank, Derbyshire (part of Nationwide), Sainsbury's and Tesco Bank. There's little in the way of big bank brands there, which goes to show how much trouble the big boys are still in.

Each of the main competitors have cut their prices many times over. Derbyshire even lowered its rate three times over October and November.

M&S Bank, which is owned by HSBC, has also been competing hard, although recently some of its loans got more expensive.

Big loans

All the following rates are available for loans between £7,500 and £15,000. These are usually called mid-size loans but, let's be honest, this is a lot of money to be in hock for, with lots of risk. Make sure you have a fantastic reason to borrow:

Top loans for £7,500

As you can see, the lowest rate is now 5.4%, just a few fractions of a percent away from the big 5-0.

Overpayments and payment holidays

I've done the painful part for you and scoured the small print of the above loans.

Peer-to-peer lender Zopa keeps stating it's the only lender to offer overpayments, but the AA and Co-operative bank specify that you can do so in their small print. Plus, although none of the other lenders make it easy, you're still allowed to make overpayments by law, provided you follow the legal route correctly. In addition, the lender is not normally allowed to charge you. Read all about it in Overpay your loan without penalty.

None of the above loans have compulsory payment “holidays”, a friendly-sounding booby trap that takes place at the start of your loan. If you wait three months to make your first payment instead of the usual one month, it can easily add £100-£200 to the interest you pay in the long run. If offered the choice, say No!

If only you could get 5.4%!

The above rates sound great, but only half of accepted applicants will get them – and many won't be accepted at all.

The other half of accepted applicants can expect to be offered much higher rates. If that's what you're offered, you don't need a loan, you need debt advice. 15%+ might not sound like much to you, but this is not simply a case of paying double or triple the interest of the cheapest loans; it comes with a greatly multiplied risk of unaffordable money pains some time in the future, proven many times over by debtors' real-life experiences.

You probably have a better solution, which a debt adviser can help you with. It won't harm you to go through your money situation with National Debtline, so what are you afraid of?

Smaller loans – £5,000

Before coming to some tips on the best loan deals, I just have time and space to squeeze in another table for smaller loans, this time for £5,000:

Getting a better loan deal

If you are unsure you'll get the top rate, apply to Derbyshire and Zopa first, because you can get a “soft” quote, which means it won't impact your credit rating. You could also look up credit unions for a more friendly loan service.

If you don't get a top rate or are turned down for a loan, write to the company explaining why you think it should reconsider. I've seen quite a few stories about decisions being overturned.

Consider a credit card instead of a loan. If you avoid all the nasty small print, these are usually the cheapest way to borrow. Read How to use credit cards for transfers and new purchases.

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