The cheapest loans the banks have to offer!

Credit card interest rates have risen in the past few years, but the cheapest personal loan rates have hardly moved at all.

For those who want to borrow to buy something relatively small, there are credit cards charging 0% interest on purchases. Handle those cards right and they are truly free.

For those with smaller debts and good credit records, a balance transfer card with a good, long 0% deal might do the trick. While these do come with fees of around 3%, they can still be much cheaper than the cheapest personal loans.

Many people with larger debts have still benefited from using balance transfer cards. These cards have have reduced the interest borrowers have paid, who therefore have been able to pay off their debts faster, by moving from one 0% deal to the next, until the debt is paid off. This will probably still be possible in the future too, although naturally there is a risk to that strategy.

For the rest of us, unsecured loans are almost always better than secured loans, mostly because they are usually cheaper and come with fixed rates of interest, but additionally because it takes more effort for a lender to repossess your home if you default on these loans. (Although unsecured loans and credit cards are not secured against your home, it's still easy for the lender to change them into secured loans if you go into arrears. Read more about it in Will you be forced to sell your home to repay a £600 debt?)

Without further ado, here are the cheapest loans at the moment:

Top unsecured loans

(based on a £7,500 loan repaid over four years)

Numbers are rounded and your monthly and total repayments may be slightly different to those shown above, depending on when your first payment arrives with the lender.

There is just £20 difference per year between these top five loans. The interest rates are annual percentage rates (APR). That expression just means that the amount has been calculated using methods stipulated by the government through legislation. While APR is not perfect, it makes the costs of loans easier to compare.

These rates are not guaranteed

The rates advertised by the lenders, as shown above, are merely representative rates, which means not everyone will get them. Lenders are only obliged to offer those rates to 51% of approved borrowers.

For starters, I expect that somewhat more than half of applicants will be rejected completely for these loans, as they'll have too many imperfections on their credit file.

I estimate that perhaps a quarter of all applicants will be accepted, but offered worse rates than those advertised. That leaves the best rates for the remaining quarter of applicants. Those lucky borrowers will be the ones with the very best credit records.

Loans with ethical benefits

With lovemoney.com's comparison centre you can also compare social loans – that's lending from other individuals to yourself, which cuts out the banks. Social loans appear to be most competitive right now for smaller loans of, say, £5,000 over three years.

A boost for borrowers

One extra advantage social loans have previously had, apart from the satisfaction of avoiding banks, is that borrowers have always been able to make full or partial early repayments without penalty. This advantage appears to have been effectively removed for all new loans taken out since February this year, due to the Consumer Credit (EU Directive) Regulations 2010 coming into effect.

Related how-to guide

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Under the new regulations, lenders should allow all borrowers taking out loans from 1 February 2011 to make full or partial early repayments. What's more, they shouldn't charge a penalty fee for this, except under unusual circumstances. You can read about those circumstances from page 60 onwards in guidance from the Department for Business, Innovation and Skills.

Some money and comparison websites have not updated this information in their results tables, and so they still state that you can be charged for exiting early. Don't let that confuse you.

Avoid this old lending ruse

Since you can now overpay, you can also now avoid a dastardly loan trick that can add hundreds of pounds to the costs you expect to pay.

Some lenders offer you a payment holiday at the start of your loan, and some even make it compulsory that your first repayment is not taken until two or three months after you start borrowing.

That may sound like a benefit but, during this time, interest racks up, and then you are charged interest on that interest, and that will compound all the way until you have paid off the loan.

With the new regulations, you should be able to make overpayments in the first and second months, counteracting that trick.

To make overpayments, the BIS's guidance says you must notify the lender on or before the day you make the payment, but not more than 28 days before making the payment.