Banks relent on personal loans - but mainly for their existing customers

HSBC is to overhaul the way it pays bonuses to UK staff (David Sandison )

A thaw is on in the personal loan market. After three years of uncompetitive rates, lenders have finally loosened the purse strings and are competing for customers once again.

Leading the charge last week, HSBC said it would charge 6.4 per cent for loans ranging from £7,000 to £15,000, the sort of rate that has not been available since the onset of the credit crunch. This has been matched by HSBC subsidiary M&S Money and beaten by Nationwide at 6.3 per cent. "It's good to see a big-name bank like HSBC entering the fray as people often look to their banks to get a loan even if they could get a lower rate with a smaller name," said Michelle Slade from the financial information service Moneyfacts.

But there is a major catch: both Nationwide and HSBC are offering these low rates only to their current account holders. "We're a conservative lender. We don't sell to non-customers because we want a clear idea of what our customers can repay," said James Thorpe from HSBC.

Nevertheless, competition is hotting up. Chris Griffiths from price comparison site Confused .com says this reflects the wider financial climate. "With the Bank of England base rate and savings rates remaining historically low, the cost of funding to the banks is very low at present, despite the eurozone crisis," he says. "This is helping them price their deals far more keenly."

But a personal loan may not be the cheapest way to borrow small sums. "For a loan of £2,000 the cheapest rate you can get is 10 per cent with Metro Bank, and the Post Office starts at 14.9 per cent," said Ms Slade. "That's quite expensive."

The advertised headline rate is available only to those who pass all the credit checks. "You have to have a current account with HSBC to get a loan or a credit card; however this rate of 6.4 per cent is not available to those with a poor credit rating," said Mr Thorpe. Instead of getting a personal loan you could go for a 0 per cent credit card or an interest-free overdraft.

"Zero per cent credit cards are only for lesser amounts and for a shorter term," said David Black, banking analyst at Defaqto. The current best 0 per cent credit card is Barclaycard at 22 months, after which you'll pay 17.5 per cent. Santander offers a 12-month interest-free overdraft when you open a current account.