Want a loan for Christmas? Don't go to your bankSupermarkets beat personal loan rates from banks

06 December 2010

Christmas piggy bank

If you're planning to take out an unsecured personal loan to pay for your Christmas shopping or to consolidate your debts ready for the new year, chances are you won't get a competitive deal from your high street bank. Head to the supermarket instead.

As Barclays hikes many of its personal loan rates by up to 2% today, the big banks are failing to match the best loan rates available from relative newcomers Tesco and Sainsbury's.

Big banks could charge you almost 22% interest

A £5,000 personal loan repaid over three years would cost you 8.7% APR with both Sainsbury's (if you hold a a Nectar card) and Tesco. The same loan would cost existing customers of Halifax or Bank of Scotland a hefty 19.9%, while HSBC charges 16.9%.

Barclays charges existing customers 16.4%, but this increases to 21.9% for non-customers. Even the 12.9% offered by NatWest, Royal Bank of Scotland, Marks and Spencer, Smile and Co-operative Bank are easily beaten by the deals from Tesco and Sainsbury's.

Santander and Post Office are the only high street exceptions. Both offer competitive personal loans at 8.9%, while London-based Metro Bank charges 10% across all loan values.

Cheaper loans the more you borrow

Interest rates on smaller amounts tend to be significantly higher. For example, borrowing £3,000 over three years would incur an APR of 20.9% with Lloyds TSB, compared with 13.9% for borrowing £5,000 over the same period. Neither rate is competitive.

Which? credit expert Martyn Saville explains: 'It seems perverse that consumers are offered a better rate the more debt they take on, but that unfortunately is the way the market works. If you're planning to borrow smaller amounts, it's worth considering the alternatives, including credit cards, in-store interest-free credit, credit unions or peer-to-peer lending sites such as Zopa.

'For example, if you're planning to make a big purchase using a personal loan to be repaid loan over a period of two years, you may be better off considering a credit card combination instead. The 0%-on-purchases credit card from Tesco gives you up to 13 months interest-free. 

'If you transfer any remaining balance to a leading 0% balance transfer credit card at the end of the promotional period, you could get up to another 16 months interest-free, subject to a balance transfer fee of around 3%. Of course, this method depends on being accepted for the balance transfer card in a year's time, but it could prove much cheaper than a personal loan and will give greater flexibility to make extra one-off repayments without early-redemption penalties.'

Get free cash on your credit card instead

To find out how you could pay spread the cost of Christmas interest-free, as well as earning money on your shopping, read our news story Pay no interest for a year on Christmas shopping.

To earn extra credit card rewards on your credit card spending over Christmas, read our news story Get up to 5% rewards on your Christmas shopping.

For details of the best personal loans currently available, read the Which? personal loan reviews.

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