The personal loan bursts into blossom

After a period of hibernation, the personal loans market has burst into life again with rates as low as 5.6 per cent.

Northern Rock slashed 0.2 percentage points off its best annual percentage rate (APR) last week to propel it to the top of the best buy tables at 5.6, beside Direct Line, which has the same rate.

Alliance & Leicester (A&L) also lowered its rate last week from 6.1 to 5.9 per cent while Lombard lopped half a percentage point off its best internet loan rate to give a new APR of 5.8.

This activity follows a relatively sluggish spell since a flurry of rate changes at the start of the year, when MoneyBack Bank - an internet subsidiary of A&L - hit the market with the lowest-ever personal loan rate (5.5 per cent), prompting a New Year price war.

The spring surge for borrowers is down to the Bank of England base rate, which has been on hold for eight months, allowing lenders to sharpen their competitive edge. As a result, APRs are at rock bottom - not much higher than the cheapest mortgages.

The price comparison service uSwitch.com reports 13 lenders now offering loans at 6 per cent or less, four times as many as this time last year.

"The loans market is the most competitive it's been for a long time as lenders continue to leap frog one another to remain at, or reach, the top of the best buy tables," says Nick White of uSwitch.

Northern Rock, AA, Cahoot and Moneyback Bank have offered the most consistently low rates, he adds.

While these changes will give consumers more choice, borrowers must be aware that only those with an excellent credit rating will benefit from the sub-6 per cent rates. Although lenders can advertise "typical" low loan rates only if at least two-thirds of applicants qualify, you may find that your credit risk disqualifies you from the very best deals, warns Stuart Glendinning of the Moneysupermarket.com price comparison service.

Most lenders operate a policy of risk-based pricing where the deal depends on your credit rating and how much you borrow. But some, such as Nationwide, offer a fixed rate for which you either do or don't qualify.

Think carefully, too, before signing up to payment protection insurance, which you will be offered when you apply for a loan. With rates below 6 per cent, providers are under pressure to make profits elsewhere. This cover is often expensive and can carry exclusions that make it of little or no value.