Money Insider: Steer clear of big banks' high rates on small loans

 

Interest rates are at rock bottom if you're in the market for a five-figure personal loan from your bank. But if you apply to borrow a smaller sum you'll be in for a nasty surprise.

The battle for personal loan business is as fierce as it's ever been, but the issue for consumers is that many lenders are cherry picking and concentrating on the higher value end of the market.

Rates are very attractive if you want to borrow £10,000, for example, with lenders currently battling it out at the top of the best buys, enticing customers with interest rates of 4.8 per cent APR from Sainsbury's Bank and 5 per cent APR from Yorkshire Bank and Derbyshire Building Society.

For lower value loans it is a very different story, with the majority of lenders charging double-digit rates on a £3,000 advance, with NatWest and Halifax among the most expensive at 19.9 per cent APR and 24.9 per cent APR, respectively.

There are cheaper options available, but my research shows you would do well to steer clear of the established providers if you want the best deals.

There are a handful of borrowing options that stand out, if you want to borrow a smaller sum of money, as follows:

Zopa, the biggest peer-to-peer lender in the UK, and RateSetter, one of the fastest-growing lenders in the same market, offer some of the best deals at 6.5 per cent APR and 8.2 per cent APR, respectively, for a £3,000 loan over three years.

Just because you're not familiar with the names, it doesn't mean you should discount them. The peer-to-peer sector has quickly established itself as a credible alternative to the big banks, and the low interest rates are much better than you'll find on the high street.

Zopa has already lent more than £375m and RateSetter more than £108m to personal customers since launch, but you'll need a good credit record if you want to borrow from these firms.

Another option to consider is the Rate for Life card from MBNA. Although this isn't strictly a personal loan, there's nothing to stop you using this long-term fixed-rate credit card in the same way you would a loan. If you make your purchase with the card and set up a monthly standing order from your current account, it works exactly the same as a personal loan.

The interest rate is 6.9 per cent APR for as long as it takes you to clear the balance, and unlike many deals there is no balance transfer fee to pay. It remains one of the cheapest ways to borrow a smaller sum over three or five years. There is a similar deal on offer from AA, with its Transfer Plus Credit Card charging 6.9 per cent APR for life, subject to a one-off balance transfer fee of 2 per cent.

The potential cost savings on a loan of £3,000 with the low-rate options mentioned here could be as much as £23 a month or £830 in total over a three-year term when compared with the personal loan with Halifax, charging 24.9 per cent APR

For £3,000 over five years the financial benefits are even greater at up to £25 a month and more than £1,478 over the full term.

Don't just sign up with your own bank without checking out some of the less obvious alternatives, as there's a good chance that you'll be paying over the odds.

You wouldn't buy a new car or a replacement kitchen without comparing prices from various retailers, so why take the shine off your cut-price deal by paying for it with expensive finance.

Shop around for the lowest rate you can get. By simply avoiding the major banks and taking advantage of deals from new lenders you can save a packet in interest charges.

Andrew Hagger is an independent personal finance analyst at moneycomms.co.uk

News
Actor Burt Reynolds last year
newsBurt Reynolds, once among the most bankable actors in Hollywood, is set to auction his memorabilia
News
Gordon and Tana Ramsay arrive at the High Court, London
newsTV chef gives evidence against his father-in-law in court case
News
people

Watch the spoof Thanksgiving segment filmed for Live!
News
The data shows that the number of “unlawfully” large infant classes has doubled in the last 12 months alone
i100Mike Stuchbery, a teacher in Great Yarmouth, said he received abuse
PROMOTED VIDEO
Arts and Entertainment
The starship in Star Wars: The Force Awakens
filmsThe first glimpse of JJ Abrams' new film has been released online
Arts and Entertainment
The cover of The Guest Cat – expect to see it everywhere
books'It's a simple, sweet and charming tale; it’s very heartfelt'
News
i100
Arts and Entertainment
One of the installations in the Reiner Ruthenbeck exhibition at the Serpentine Gallery
artCritics defend Reiner Ruthenbeck's 'Overturned Furniture'
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Austen Lloyd: Company Secretary

    Excellent Package: Austen Lloyd: EAST ANGLIA - SENIOR SOLICITOR LEVEL ROLE** -...

    Citifocus Ltd: German Speaking Client Specialist

    £Attractive Package: Citifocus Ltd: Prestigious asset management house seeks a...

    Citifocus Ltd: Performance & Risk Oversight

    £Negotiable: Citifocus Ltd: This is a varied role focusing on the firm's mutua...

    h2 Recruit Ltd: Sales Director - SaaS (SME/Channel) - £140,000 OTE

    £90000 - £140000 per annum + benefits: h2 Recruit Ltd: Are you a high achievin...

    Day In a Page

    Homeless Veterans Christmas Appeal: ‘We give them hope. They come to us when no one else can help’

    Christmas Appeal

    Meet the charity giving homeless veterans hope – and who they turn to when no one else can help
    Should doctors and patients learn to plan humane, happier endings rather than trying to prolong life?

    Is it always right to try to prolong life?

    Most of us would prefer to die in our own beds, with our families beside us. But, as a GP, Margaret McCartney sees too many end their days in a medicalised battle
    Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night - is that what it takes for women to get to the top?

    What does it take for women to get to the top?

    Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night and told women they had to do more if they wanted to get on
    Christmas jumper craze: Inside the UK factory behind this year's multicultural must-have

    Knitting pretty: British Christmas Jumpers

    Simmy Richman visits Jack Masters, the company behind this year's multicultural must-have
    French chefs have launched a campaign to end violence in kitchens - should British restaurants follow suit?

    French chefs campaign against bullying

    A group of top chefs signed a manifesto against violence in kitchens following the sacking of a chef at a Paris restaurant for scalding his kitchen assistant with a white-hot spoon
    Radio 4 to broadcast 10-hour War and Peace on New Year's Day as Controller warns of cuts

    Just what you need on a New Year hangover...

    Radio 4 to broadcast 10-hour adaptation of War and Peace on first day of 2015
    Cuba set to stage its first US musical in 50 years

    Cuba to stage first US musical in 50 years

    Claire Allfree finds out if the new production of Rent will hit the right note in Havana
    Christmas 2014: 10 best educational toys

    Learn and play: 10 best educational toys

    Of course you want them to have fun, but even better if they can learn at the same time
    Paul Scholes column: I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season

    Paul Scholes column

    I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
    Lewis Moody column: Stuart Lancaster has made all the right calls – now England must deliver

    Lewis Moody: Lancaster has made all the right calls – now England must deliver

    So what must the red-rose do differently? They have to take the points on offer 
    Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

    Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

    It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
    Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

    Sol Campbell cries foul at Labour's mansion tax

    The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
    Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

    Sarkozy returns

    The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
    Is the criticism of Ed Miliband a coded form of anti-Semitism?

    Is the criticism of Miliband anti-Semitic?

    Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
    Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

    Ouija boards are the must-have festive gift

    Simon Usborne explores the appeal - and mysteries - of a century-old parlour game