Why the high street banks are the worst place for your money

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Finding a half decent savings rate or a credit card worth opening can be tough, especially when lack of competition on the high street means the banks rarely launch competitive deals.

But if you look away from the traditional banks and building societies there are often some attractive deals being offered in places you might not expect.


Supermarkets, for example, are rife with good-value financial products, while peer-to-peer lenders are easily undercutting the banks. Here's a round-up of the best places to put your money if you're fed up with the high street.

Personal loans
There has been a lot of action in the personal loan market this year with the high street banks and building societies caught in a fierce competition to be at the top of the table.

But undercutting them all is a loan from peer-to-peer lender Zopa at 4.8%. It's the cheapest on the market for loans of between £7,500 and £15,000 and it needs to be paid back over a period of two to
five years.

Hitachi is offering 4.8% for loans of the same amount, but only to existing customers. However, new customers can borrow at 4.8%, putting it in second. In joint third spot you'll find M&S Bank, Clydesdale and Derbyshire Building Society with the slightly higher rate of 5%, although the M&S rate is only available to existing M&S Bank customers.

Sainsbury's and Tesco are next offering the loan for 5.1%. Our comparison tables show the full picture but here I've picked out the top five for borrowing £8,000 over five years.

Loan

Representative APR

Total amount repayable

Monthly repayment

Zopa Personal Loan

4.8%

£8,991.60

£149.86

Hitachi Personal Finance Loan

4.9%

£9,012.60

£150.21

M&S Bank Personal Loan*

5.0%

£9,033.60

£150.56

Clydesdale Bank Online Personal Loan

5.0%

£9,033.60

£150.56

Derbyshire BS Personal Loan

5.0%

£9,033.60

£150.56


*Only available to existing M&S Bank customers

Savings
The savings market has hit rock bottom, with the top rates available currently sailing around the 3% mark. Even if you go for these 'market-leading' rates, you're going to have to lock your money away for at least five years.

Missing from the top of the savings tables is any sign of the high street banks. This is largely because of the Government's Funding for Lending Scheme (FLS) which has given these banks access to cheap loans. This means they no longer require customer deposits and therefore have no reason to launch competitive accounts.

Instead some smaller players have started appearing which normally wouldn't have got a look in. Top of the easy-access accounts is BM Savings with a 1.70% account which has a bonus of 1.20% for the first 12 months. Next in line is an account from AA at 1.60%, followed by three at 1.50% from Tesco, Skipton and Post Office.

Islamic Bank of Britain dominates short fixed-term market with an 18-month bond paying 2.02% and a two-year account at 2.32%. For accounts with a longer term, Skipton has the market-leader at 3.50%, but this requires you to lock your money away for seven years.

The West Brom pays 3.15% on its five-year fixed-rate bond while Secure Trust pays 3.11% and there's not a high street bank in sight anywhere around the top of these tables.

Compare savings deals with the AOL Compare comparison centre

Credit cards
Barclaycard is a big dog in the credit card market and with the longest 0% deal on balance transfer cards of 28 months, it's hard to beat.

However, the supermarkets are doing a pretty good job at competing and have several attractive offers. The Tesco Clubcard Credit Card for balance transfers, for example, has a 27-month 0% period and a fee of 3.15%.

Purchase and reward cards also feature heavily in supermarket card offerings. The Tesco Clubcard Credit Card for purchases has a 0% 18-month balance transfer period and a 2.9% fee. It pays out one Clubcard point for every £4 spent. The Sainsbury's Nectar credit card offers a similar range of rewards. It pays out ten Nectar points per £1 spent in Sainsbury's (up to £1,000 each month) in the first three months and one Nectar point per £5 spent elsewhere.

The Sainsbury's Low Rate Cashback card pays out 5% cashback on shopping at Sainsbury's for the first three months to a maximum of £50 a month. It also then pays out £5 cashback for every £250 spent in Sainsbury's and £250 spent elsewhere. It has an impressively low rate of 7.8%, which matches Tesco's Clubcard Credit Card with Low APR.

It's not the best cashback card on the market, but if you shop regularly at Sainsbury's it's a good option.

Find the right credit card for you at the AOL Compare credit card comparison centre

The death of the high street
The banking sector is in dire need of some healthy competition. Recent events, such as Funding for Lending, now mean smaller players are starting to emerge. While the big banks refuse to bring out any savings account worth opening, smaller providers are popping their heads up and starting to get noticed.

Peer-to-peer lenders, for example, will soon be regulated, which means any money lent through the sites is protected under the Financial Services Compensation Scheme (FSCS) to a limit of £85,000 per banking licence. This is great news as it means savers and borrowers have a better option than relying on their normal bank for market-leading interest rates and cheaper loans.

Funding for Lending is a double-edged sword, helping borrowers get onto the property ladder on one hand and sending interest rates plummeting on savings account on the other. As someone with very little savings, I'm in favour of it for pushing up the mortgage market but as long as it exists, there will be little or nothing on offer from the high street banks.

Therefore this is a good opportunity for people to look further afield and get a better deal from a smaller player or even a supermarket. If this happened en masse it would give the big banks something to worry about and just might persuade them to start launching products worth opening.