There is a growing divide between the rates offered by big-name lenders and the interest rates offered by the challenger banks.
A study by financial data site Moneyfacts found that, over the summer, high street banks and building societies were offering an average rate for a £5,000 loan of 8.5%.
This was over 2% higher than the average 6.2% interest rate offered by newer, challenger lender.
"Some consumers may prefer picking a high street brand for a loan because they have an existing relationship, but it is highly likely that a cheaper alternative can be found elsewhere," says Rachel Springall, finance analyst at Moneyfacts.
"Loyalty doesn't always pay, and the only real value that can be had from having a high street loan is the same as with any other loan, namely if it were to offer the most competitive rate."
At present, the cheapest interest rate offered on a £5,000 personal loan is 3.3%. The cheapest rate offered by a big-name bank is 4.5% from Santander.
Compare like for like
Be aware that interest rates change substantially depending on how much you want to borrow. So when you are shopping around for the best deal make sure you are looking for loans that match your needs.
"It remains the case that lower tier loans are charged more than the representative APR tiers from £7,500 upwards, so borrowers need to remember to compare loans on the exact amount they want to borrow," says Springall.
Lenders will often put their lowest loan rate on all their posters and leaflets, but that is for borrowing far more than you may need. So, before you commit, make sure you know exactly what rate you'll be getting.
Take a look at the best rate on a £7,500 personal loan in the table below.
Medium loans (£7,500-£15,000)
Here are some of the lowest rates when borrowing £10,000 over three years.
Total amount repayable
|Sainsbury's Bank Nectar Personal Loan*||2.7%||£289.35||£10,416.60|
|Clydesdale Bank Loan|
AA Personal Loan
*Nectar card holders only
Loyalty comes in many forms
Getting all your financial products from one bank may not do you any favours. When it comes to the high street most banks offer little reward for loyalty, but there are exceptions out there.
For example, if you are a member of the AA you can get a preferential loan rate that sits amongst the top on the best buy tables – 2.9% APR for a £7,500 loan.
Do your research before signing up
When it comes to shopping for a personal loan, don't make any assumptions about who might offer the best rates. Check a few comparison websites and you could save yourself hundreds of pounds over the length of your loan.
Put yourself in the equation
When shopping around for a loan remember that your personal circumstances will also affect the interest rate you are offered. Lenders reserve their lowest interest rates for the people they think are going to give them the least trouble.
If you have a poor credit rating you will probably be offered a higher interest rate.
Don't apply for the best possible rate if you know there is a chance you won't get it. A spate of failed credit applications can have a negative effect on your credit rating.
Some comparison sites will take some details from you and do a soft search on your credit report – this won't affect your credit rating – then they will show you the loans you are likely to be accepted for. This can give you a better idea of the rate you are likely to pay on a personal loan.