Choose the wrong personal loan and you'll be well out of pocket. Interest rates are at an all-time low if you're in the market for a five-figure loan from your bank, but if you need to borrow a smaller amount it's far more expensive.
The battle for the personal loan business is as intense as it's ever been, but lenders are concentrating on the higher value end of the market.
Rates are at rock bottom if you want to borrow £10,000 for example, with lenders enticing customers with interest rates as low as 4.4 per cent APR from Sainsbury's Bank.
For lower value loans it's a very different picture, with many lenders charging double digit rates on a £3,000 advance, with Barclays and Halifax among the most expensive at 19.9 per cent and 18.9 per cent APR respectively.
There are cheaper options, but my research shows you'd do well to steer clear of the established providers if you want get the best deals. There are a handful of borrowing options that stand out: Zopa, the biggest peer to peer lender in the UK, and RateSetter offer some of the best deals, at 7.2 per cent and 9.7 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 is regulated and has established itself as a credible alternative to the big banks. Zopa has already lent over £500m, but just be aware you'll need a good credit record if you want to borrow from these firms.
Another option 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 in exactly the same way 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's no balance transfer fee to pay. It remains one of the cheapest ways to borrow a smaller sum for a few years. There is a similar deal on offer from AA with its Transfer Plus Credit Card (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 at 6.9 per cent APR is £601 over a three-year term when compared with the personal loan with Barclays, charging 19.9 per cent APR. If you stretch the term to five years, the cost saving increases to a staggering £1,060.
The golden rule with personal loans is don't automatically sign up with you own bank without checking out some of the less obvious alternatives, as you might be paying over the odds.
Shop around for the lowest rate you can get; simply by 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 from www.moneycomms.co.uk