Price war delivers cheaper loan deals

The cost of large personal loans tumbled in the first week of 2011, as a price war erupted among lenders after two years of rising rates.

The average rate on the top ten 7,500 loans has fallen to 7.89 per cent, the lowest level for more than two years, according to Moneysupermarket.com, after six lenders announced rate cuts.

M&S Money led the way by slashing its biggest personal loans by 2.4 percentage points, equating to an interest-charge reduction of 552 on a five-year loan of 7,500. HSBC, Sainsbury's Finance, Tesco Bank, First Direct and Barclays also slashed their rates, with more reductions expected over the coming weeks.

However, the price war will benefit only borrowers looking for loans of 7,000 or above, with little sign of lenders lowering the cost of loans of 5,000 or less. Unsecured loan rates are at their highest level since 2001, when the Bank of England base rate was 6 per cent, compared with the current record low of 0.5 per cent.

The average interest on the top ten 3,000 loans has jumped by 2.19 points to 15.12 per cent since November 2008. The average on the top ten 5,000 loans has risen by 1.6 points over the same period, reaching 10.1 per cent.

Tim Moss, head of loans and debt at moneysupermarket.com, said renewed competition in the large loan market had been timely news for some borrowers.

"For those looking to borrow over 7,500, there are some excellent deals and in some cases it pays to borrow slightly more as it would cost you less overall. Unfortunately, we have yet to see rates drop as rapidly for smaller loans.

"I hope providers will start to offer more competitive rates across the board for borrowers so we can see the loans market return to some normality," he said.

However, providers are continuing to look closely at credit histories and making their best deals available only to those with the cleanest credit records. "Those without excellent credit histories continue to be charged significantly higher rates of interest," Moss said.

Yet many borrowers will miss out on the best deals, according to new figures from Sainsbury's Finance. It found that more than half of people stick with their own current account provider when looking for a loan, with four in ten loan customers failing to shop around for a better deal. It estimated the difference between the best and worst rates at 18.3 percentage points, equating to interest of 1,404 on a 5,000 loan over three years.