Personal loan rates have tumbled dramatically in the past five years and have now dipped below 3pc for the first time – making them cheaper than many mortgages.
Sainsbury’s Bank now charges customers 2.9pc to borrow between £7,500 and £19,999. Customers with Nectar cards will pay an even lower rate of 2.8pc if the term is more than three years.
This makes the loans cheaper than many mortgages. The average standard variable rate on a home loan is 4.62pc, and even the lowest standard variable rate, from Stafford Railway Building Society, is higher at 2.95pc.
Sainsbury’s personal loan is also cheaper than the best-buy two-year and five-year fixed-rate mortgages for borrowers with a 5pc deposit. Halifax’s Help to Buy mortgage will cost borrowers 3.34pc over two years and Saffron Building Society’s five-year fix costs 3.97pc.
While it is striking that unsecured personal loans can be cheaper than mortgages, which offer security to lenders in the event of default, borrowers may in practice struggle to use the loans to fund a property deposit or reduce mortgage debt.
For example, Sainsbury’s Bank said it would not lend to customers who wanted the funds to support a mortgage application. Nor will it allow customers to use the loan to purchase a UK or foreign property, repay negative equity or pay off any part of their mortgage.
Instead the personal loans are usually granted to those who want to consolidate debts or to improve their home.
The average personal loan rate has dropped by 3.9 percentage points in five years, from 7.9pc in December 2011 to 4pc this year, according to Andrew Hagger, founder of Moneycomms, a personal finance research service.
Five years ago a £10,000 loan charged at the market average rate would cost £202.29 a month over five years. Those who borrow the same amount over the same term with Sainsbury’s Bank today would expect monthly repayments of £179.07, meaning a total saving of £1,393 in interest.