Loan rates drop as competition hots up

M&S Money is reducing the interest it charges on its unsecured loans to 6.9 per cent from 7.5 per cent for people borrowing between £7,500 and £15,000.

Competition in the personal loan market has been intense since the beginning of the year, with rival providers repeatedly undercutting each other to have the best-buy rate.

More than a half a dozen major loan providers have slashed the rates they offer this year, and there are now eight lenders offering deals for less than 8 per cent.

January and February are traditionally busy months for the personal loan market, as people take stock of their finances and often decide to take out a loan to consolidate their credit card debt in a bid to reduce their monthly outgoings. But the battle for customers has been particularly intense this year as banks have reassessed their capital position and found they can now afford to offer unsecured borrowing again, boosting competition.

The personal loan market was hit hard by the credit crunch as providers struggled to raise funds for lending, while unsecured borrowing was considered riskier than secured debt. However, a number of providers who exited the market have re-entered it during the past year.

Competition has previously been limited to people borrowing larger amounts, but consumers looking to take on smaller sums of debt are now also benefiting from lower rates.

The average rate for the top 10 personal loans for people borrowing £3,000 is now 14.39 per cent, the lowest level since November 2009, while the average rate for £5,000 is now 10.02 per cent, a level last seen in June 2009, according to moneysupermarket.com

But despite the improvement, rates are still some way off their pre-credit crunch levels, with average interest of 10.6 per cent charged on loans of £3,000 in November 2007, while people borrowing £5,000 were typically charged 7.41 per cent.

Tim Moss, head of loans and debt at moneysupermarket.com, said: “Having an open and competitive loans market is vitally important as it provides another option for consumers who may have been forced to look at other, more expensive borrowing when banks tightened up their lending criteria.

“However, there is still a long way to go before we see the loans market return to normality.

“The recent trends with falling rates are encouraging, although it is unlikely we will see rates fall back to the pre-credit crunch levels.”