Loan rates - how low will they go?
The personal loans market is hotting up - fast.
17:35 27 January 2013
Less than two weeks after Tesco Bank unveiled the lowest loan ratein a decade, at a representative Annual Percentage Rate (APR) of 5.2%, Clydesdale (and Yorkshire) banks have hit back with an even lower rate of 5.1%.
The rate has been reduced from Clydesdale and Yorkshire's previous offering of 5.6% APR.
Personal loan rates have been slipping over the last couple of months. But this latest move lays down the gauntlet for other loan providers to slash costs further to ensure they are the most competitive.
What's on offer?
Knocking Tesco Bank firmly off the number one spot, Clydesdale and Yorkshire's rate cut has now edged them up to the top of the tables.
But as with all the best personal loan rates on the market, the 5.1% rate is only available for 'medium-sized' borrowing of between £7,500 and £15,000.
You'll also need to repay the loan over a period of between one and five years.
There's no guarantee you'll actually receive the rate of 5.1% either as lenders only have to offer the advertised loan rate to 51% of successful applicants. So even though the rate looks attractive, it may not be the one you actually receive.
The very best rates are also only reserved for applicants with an excellent credit rating. If your credit rating isn't up to scratch, you may be offered a slightly higher rate or you may not be offered a loan at all.
It's therefore a good idea to check your credit rating before applying as if you're turned down this could damage it further.
In order to qualify for the loan you'll need to be at least 23 years old and you'll need to have a minimum income of £15,000.
What about smaller loans?
If the amount you want to borrow is less than £7,500, the bad news is interest rates aren't quite as competitive. But the good news is rates are coming down too.
On January 10, M&S Bank cut the representative APR for loan amounts of between £5,000 and £7,500 from 7.3% to 7%. Loans can be arranged for repayment over a period of one and five years.
As an added incentive, existing M&S credit card and current account customers who take out a personal loan with the bank will receive 5,000 loyalty points, worth £50 to spend in M&S stores. But note this is a limited offer only.
However, before you apply for a smaller loan amount, it's worth doing your sums as it can make more sense to borrow slightly more in order to pay less interest. For example, if you were to borrow £7,000 with M&S at 7%, over a five-year period, the amount of interest you would pay out would come to £1,274. But if you borrowed £500 more (£7,500) with Clydesdale Bank at 5.1%, the amount of interest you would pay would be £285 less at £989.
Even if you were to borrow £7,000 over five years with HSBC, which offers a lower representative APR of 5.9% to existing customers, you would still save £82 by opting for Clydesdale's offer.
Now's the time to borrow
No matter how much money you are looking to borrow, whether you need to make home improvements, buy a new car or even get married, there really couldn't be a better time to do it.
Interest rates on personal loans are currently at the lowest levels since records began and are only likely to drop further over the coming weeks.
Following the latest move by Clydesdale and Yorkshire, it's likely that several lenders will be unwilling to be notched further down the best-buy tables and will have to retaliate in order to climb back up.
Loan providers in the running behind Clydesdale and Tesco, include Sainsbury's Bank (currently offering a representative APR of 5.5%) and Derbyshire Building Society (currently 5.4%). M&S has already lowered its loan rate for medium-sized borrowing from 6% to 5.6% APR representative.
So just how low will personal loan rates go? Only time will tell. But one thing's for sure, now is a great time to be a borrower.
Please note: Any rates or deals mentioned in this article were available at the time of writing.