Let the 2011 personal loan rate war begin

A rate war has broken out in the personal loan market, which is great news for anyone looking to borrow this January. The average rate on the top 10 unsecured personal loans at £7,500 has fallen to 7.89 per cent - the lowest level since November 2008.

However, analysis by moneysupermarket.com shows anyone looking to borrow a smaller amount is set to pay through the nose. The average rate on the top 10 loans at £3,000 has increased by 2.19 per cent to 15.12 per cent since November 2008, whilst the average cost of a £5,000 loan has increased by 1.6 per cent over the same period.

The most competitive deals are available on loans between £7,500 and £15,000 and since December eight providers have reduced their rates. This week alone we have seen Santander cut its rate from 7.8 per cent to 7.3 per cent. Sainsbury's Finance reduced its rate to 7.4 per cent, and today Marks & Spencer Money has launched a new loan at 7.5 per cent.

Tim Moss, head of loans and debt at moneysupermarket.com, said: "With many consumers reviewing their finances in the New Year, it is great to see providers creating some healthy competition in the unsecured loans market after a period of relative inactivity.

"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.

"As well as the amount you are looking to borrow, the other key thing that affects the cost of a loan is your credit score. These low rates are only available to those with excellent credit histories. Those without excellent credit histories continue to be charged significantly higher rates of interest."