Cheapest loans since 2007

24 price reductions in eight months have brought the cheapest loan prices down to pre credit-crunch levels.

When M&S Money announced it had reduced its personal loan rate last week to the lowest on the market, I thought it was time to write about the price war that's been going on.

But before I could put fingers to keyboard, Nationwide reduced its rate further in response to M&S. And yesterday, Sainsbury's Finance did the same.

Unlike mortgages, loans actually went up in price after the economy started tumbling a few years ago, but from December last year a handful of providers have broken the mould in their bid to win more customers. Those few have brought prices down to the pre-credit-crunch levels of summer 2007.

Nationwide offers the cheapest loan on the market at 6.3%, which matches the cheapest loan available just prior to banks and our economy collapsing. The building society's top rate is available to existing customers only, but it offers loans at 6.4% to everyone else, so just 0.1 percentage points extra. M&S Money's personal loan is also 6.4%.

At 6.4%, you can expect a £7,500 loan over five years to cost you £146 per month, and you'll pay £1,250 in interest.

24 price reductions in nine months

The four cheapest providers have reduced prices 24 times between them since December last year. These providers are: Nationwide, Alliance & Leicester, Sainsbury's Finance and M&S Money. HSBC and its subsidiary First Direct have also each reduced prices on two occasions to remain competitive. Incidentally, M&S Money is also part of the HSBC Group, but it continues to operate under the M&S brand.

The six cheapest loans on the market (£7,500 to £15,000)

Not everyone gets these rates

The most important point is that these interest rates are representative only, which means just 51% of successful applicants can expect to get them. All other successful applicants get offered higher rates.

Nationwide does soft quotes, which means it'll tell you if you'll be accepted and what rate it will offer you without putting a mark on your credit record.

As you see in my table, Sainsbury's Finance comes with a hidden cost warning and is in fourth place despite having seemingly the lowest APR of 6.3%. However, the lender makes you wait three months to make your first payment, rather than the more usual 30 days. This might be a nice benefit, but it comes with an extra hidden cost.

Since you build up a larger debt through interest charges in this period, this can add about £20 a year to the total cost of a £7,500 loan over five years. As unwelcome as this trick may be, that still leaves Sainsbury's loan in a creditable fourth place.

Some more tips

According to new legislation, you should be able to make partial early repayments to loans at no extra cost, which you could do to offset the delay to your first payment, but the banks are good at avoiding regulations and I've not yet seen if this works in practice. Furthermore, it requires a little extra effort, because you have to write to the lender to say you're making an overpayment.

Smaller loans below £7,500 have not come down in price. To borrow lower amounts, consider all your options, including peer-to-peer lenders like Zopa, or 0% credit-card deals.

What now for loan prices?

Provided nothing changes, loan rates should continue their journey downwards, but we can't expect that to happen so fast that it's worth waiting for before getting a loan. Furthermore, anything can happen in the next eight months that reduces rates faster – or makes them explode upwards again.

It's best to borrow if and when you need to only. Borrowing usually makes you poorer not just while you have the debt, but for your entire lifetime, with few exceptions, as I explained in How to spend less and have more.

More: compare personal loans through lovemoney.com | 10 top tips for personal loans | The best purchase you'll ever make