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.ukReuse content