Tesco cuts loan rate to 5.9%

Competition in the personal loan market is hotting up with six different lenders now offering loans at less than 6%.

If you’re looking for a market-leading personal loan, we have some good news. Tesco has cut the main rate on its personal loan to 5.9%. That means there is now a wide range of market-leading loans to choose from with interest rates of below 6%. Here are all the top loans:

Best personal loans - £10,000 over five years

Even better, if you only want to borrow £10,000 for three years instead of five, Sainsbury’s is offering loans at 5.8%.

Not for everyone

However, before you rush off to apply for a loan, I should flag up a big potential problem. You may not be offered the top interest rates that I’ve highlighted. Lenders are only obliged to offer their best rates to 51% of successful applicants.

In other words, lenders might refuse to lend to you, and even if they are willing to lend, they might offer you a higher rate. It all depends on the strength of your credit rating.

If you have a history of borrowing money and then paying off your debts on schedule,  there’s a good chance that you’ll be able to borrow at 5.9%. But if you’ve never borrowed money before or you’ve been late with repayments, you may not be able to get the best deals.

If you want to find out more about your credit rating and how it works, read What really damages your credit rating.

Alternatives

It’s also worth remembering that a personal loan isn’t the only way to borrow.

If you have a strong credit rating, you may be able to get a 0% new purchases credit card. The current market leader is the Tesco Clubcard Credit Card for Purchases which has a 16-month 0% period for purchases.

Let’s imagine  that you want to buy some new furniture for £1,500. If you use the Tesco card for these purchases, you won’t have to pay any interest on the resulting debt for 16 months. That’s as long as you make your minimum repayments each month. Just remember that the 0% period begins when you take out the card not when you make the purchases.

Another possible alternative is to borrow from other individuals via social lending websites.  The best known sites in this space are Ratesetter and Zopa.  Borrowers with strong credit ratings should be able to get an 8% rate on Zopa if they borrow £10,000 for five years.

Do you really need to borrow?

I’d also urge any prospective borrowers to consider carefully whether they need to borrow at all. 5.9% is an attractive rate but it’s considerably higher than inflation – currently at 2.4% - and it’s a lot higher than the Bank of England’s base rate at 0.5%.

If you’re able to hold back, spend less and not borrow, you’ll be doing yourself a financial favour in the long run. The less you borrow, the less interest you’ll pay, and the more money you’ll have to spend on yourself over the course of your life.

But if you just can’t wait and you need some money right now, you could do a hell of a lot worse than a personal loan at 5.9%.

More from lovemoney.com

Marks & Spencer cuts rate for medium-sized loans to 7.3%

Cheapest mortgage deals: are you better off with a big or small lender?

Why young people MUST opt in to auto enrolment