Money Insider: Avoid big banks for loans of less than £5,000

Interest rates on personal loans may be at record lows for those borrowing five-figure sums, but it's not all good news, with some lenders charging almost 30 per cent APR to customers who want a loan of £5,000 or less.

The battle for personal loan business is as fierce as it's ever been, but the problem is that many lenders are cherry-picking and concentrating on higher-value business.

Rates are very competitive if you want to borrow £7,500 or £10,000, with five lenders currently fighting to be top dog and advertising representative interest rates of between 5.1 per cent and 5.4 per cent.

For smaller loans it's a very different story, with the majority of lenders charging double-digit rates on a £3,000 advance, with NatWest and Halifax among the most expensive at 20.9 per cent and 29.9 per cent, respectively.

There are cheaper options available, but my research shows you would do well to steer clear of the established providers if you want the best deals.

There are a handful of borrowing options that stand out, if you want to borrow £5,000 or less, as follows:

Zopa, the first peer-to-peer lender in the UK, and RateSetter, one of the fastest-growing lenders in the peer-to-peer market, both offer some of the best-value deals at 8.2 per cent and 8.9 per cent, respectively, for a £3,000 loan over three years.

Just because you're not familiar with the names, it doesn't mean you should discount them – the peer-to-peer market has quickly established itself as a credible alternative to the big banks, and the low interest rates are much better than you'll find on the high street. Zopa has already lent more than £288m, and RateSetter has advanced more than £62m to personal customers since its launch.

Another option is the Rate for Life card from MBNA. Although this isn't strictly a personal loan, there's nothing to stop you using this long-term fixed-rate credit card in the same way as you would a loan.

If you transfer your balance to the card and set up a monthly standing order for your current account, it works exactly the same as a personal loan. The interest rate is 5.9 per cent APR for as long as it takes you to clear the balance, and even including the one-off 1.5 per cent balance transfer fee, it remains one of the cheapest ways to borrow a smaller sum over three or five years.

There is a similar deal on offer from the AA with its Transfer Plus Credit Card charging 6.9 per cent APR for life, subject to a one-off balance transfer fee of 2 per cent.

The potential cost savings on a loan of £3,000 with the low-rate options mentioned here could be as much as £29 a month or £1,055 over a three-year term when compared with the 29.9 per cent Halifax personal loan.

For £3,000 over five years the cost savings are even greater, at up to £32 per month and more than £1,920 over the course of the loan.

So if you are looking to borrow a smaller amount, don't just sign up with your own bank without checking out the alternatives. You could be paying way over the odds and end up out of pocket. Shop around for the lowest rate, as there are some cheaper options out there, and by avoiding the major providers or taking advantage of deals from new lenders you can save a packet in interest charges.

Useful free app if you want to take out a new mortgage

Choosing a new mortgage and finding out what the monthly repayments would be on a new home loan are the sort of tasks you'd normally entrust to your bank or a mortgage broker due to their knowledge and expertise.

However, it's possible to find out much of the information yourself by downloading a free app from Mortgage Brain. It's got some useful features, including calculating what your monthly repayments would be, how much extra it would cost if rates increased, how much your stamp duty will cost, and how much you'd save by making overpayments on your mortgage.

It also enables you to search for mortgages using your own specific criteria (amount and term) as well as finding details of brokers in your area.

It's not a substitute for independent professional advice before taking out a new home loan or remortgaging, but at least you can do a little number-crunching yourself to get a handle on the potential costs involved.

Andrew Hagger is an independent personal finance analyst with moneycomms.co.uk