Damian Clarkson, MSN Money, 19/08/2009 00:00

Five ways to slash the cost of your loan

Personal loans are finally getter cheaper after more than a year of incessant rises.

Nationwide has cut its loan rate by 0.2% to 7.7%, making it one of the most competitive deals on the market and miles better than the 8-9% deals we'd become accustomed to since the recession began.

Analysts believe rival lenders will follow Nationwide's lead, meaning a wider range of competitive loans to choose from.

M&S Money has also announced plans to extend its 10% cashback offer on loans until September 7. The lender claims the offer will cut the rate on a £10,000, three year loan from 8.7% to 7.9%.

This is all great news for anyone needing to borrow money in the near future, but there are a number of steps you can take to dramatically reduce costs further.

Compare personal loan deals

1. Make sure your credit rating is up to scratch
Quite simply, if you want to qualify for the best loan deals, you'll need to ensure you have a great credit rating.

If your credit score is below par, you could be forced to accept a higher rate or possibly even be rejected outright, so this is the logical place to start in your search for a cheaper loan.

Learn more about achieving a five star credit rating here

2. Always shop around
Just because you have a longstanding relationship with your bank doesn't mean they'll offer you the best deal on the market (although they probably won't admit it).

So take the time to compare rival offerings, making sure you include the smaller players in your search, as they can often work out cheaper than the high street giants.

3. Don't just compare APRs
A common mistake people make when shopping around for loans is to use the headline rates as a point of comparison.

These can be misleading as banks all use different methods for calculating interest, meaning a loan with a lower APR could actually work out more expensive than a rival offering with a higher rate.

Make sure you use overall cost, which is a far more accurate way of comparing loans.

Similarly, be sure to read the terms and conditions of any loan deal you're considering to make sure there are no nasty surprises.

For example, the Nationwide deal mentioned earlier is only available up to a maximum loan size of £14,999, while the M&S cashback offer is only valid if your loan is spread out over a minimum of three years.

4. Beware the small loan
When you take out a smaller loan it's obviously far less profitable for banks as the debt is cleared far quicker and accrues less interest.

To help make these deals less attractive, banks dramatically hike the interest rates, sometimes as high as 25%. The specific point at which a bank stops offering its typical rate varies, but it generally tends to be on loans smaller than £7,000.

If you need to borrow a small amount, why not consider putting the expenditure on a 0% credit card for new purchases instead, then switch between 0% balance transfer offers until the debt is repaid.

If this isn't an option, it is more important than ever that you shop around for your loan, as the difference between providers on small amounts is huge.

Free debt counselling from the CCCS

4: Don't overpay on PPI
In these uncertain economic times, people are increasingly taking out payment protection insurance policies along with their debt in case they become unable to meet the repayments.

The problem is many of these policies are so extortionately expensive that you could undo all the hard work you've already put in finding a cheaper loan.

Generally speaking, automatically tacking your lender's PPI onto a loan is bad value.

Take the time to compare PPI policies, especially those offered by independent providers, and you could shave hundreds, if not thousands, off your total costs.

Vital protection everyone needs