When you should say no to a best buy loan

If you need to borrow some money, you may be thinking about applying for a best buy loan. But here's why that may not always be your best option.

The market for personal loans isn't looking too hot right now. Typical APRs are getting increasingly expensive, while the number of lenders willing to lend at all is on a downward spiral. On top of that, the ban on peddling payment protection insurance at the point of sale has most likely pushed rates up as lenders try to recoup their lost profits.

Worse still, while the Bank of England base rate is at a record low of 0.5%, this is having absolutely no effect on loan rates. In fact, a typical loan available today charges a rate of 12.27% APR*. This is far higher than the typical rate five years ago of just 8.71%*.

Squeaky clean

So, if you want to take out a loan, you'll no doubt be scouring the best buys for the cheapest deal you can find. But do you have a realistic chance of getting a market-leading rate? Or are they reserved for the squeakiest of squeaky clean borrowers with perfect credit histories?

Thankfully, it's a legal requirement that at least two-thirds of applicants must be offered a loan at the typical rate the lender advertises. So if it says 'typical APR of 10%', then 66% of people must be offered a loan at 10% APR.

That's all well and good, but it's not such great news for the one-third who could legally be charged a far higher rate than the one they hoped they would get.

This legal ruling also excludes anyone who is declined for a loan altogether, which could mean the majority of borrowers don't actually end up with the typical APR you'll see the lender advertising. Instead, the majority may simply be declined, rather than offered a higher rate.

So, let's take a look at today's best buy rates alongside the restrictions which could make you ineligible:

Top four best buy loans

Note a number of loans are on offer from other lenders at a rate of 8.9%.

The best buy personal loans charge rates of between 7.9% and 8.9%, mostly on medium-sized loan amounts. But how easy is it to get these typical APRs? I spoke to some of the lenders to find out.

Unfortunately, I couldn't get a response from Asda despite several attempts. Meanwhile, Tesco weren't prepared to disclose anything other than the decision for accepting a loan is based on the individual applicant's circumstances, financial behaviour and the amount they want to borrow.

Alliance & Leicester told me there are no specific criteria which would improve a borrower's chances of getting accepted for the best rates. However, like all loan companies, they will take personal financial circumstances and credit history into account before offering a loan. That said, potential applicants will need to be 21 or over with no history of bad credit such as county court judgements (CCJs) against them.

Meanwhile, at yourpersonalloan.co.uk (provided by Co-op Bank) the criteria is a little more specific. To qualify for a market-leading loan, you'll need to be at least 23, a homeowner and earning £15,000 or more.

But sadly none of this really tells us with any great certainty whether you would be in with a good chance of getting accepted for the best advertised rate or a more costly one. After all, while A&L charge a best buy typical rate of 8.9%, they could feasibly charge up to a whopping 16.9% if they assess you as a greater credit risk.

To muddy the waters even more, each lender adopts its own lending policy and way of rating applicants' ability to manage credit. That could mean, while one loan provider may decline to lend to you, you may find your application is successful at another.

But you will have no way of knowing that in advance! Frustrating, isn't it?

Exclusive loans

So far I've only looked at rates which are open to everyone (as long as the restrictions don't bar you from applying). But there are also a whole collection of loans which offer even better rates. The trouble is, these are only available exclusively, as shown in the table below:

Top four best buy exclusive loans

Nationwide offers the most competitive rate of 7.7%, but the loan can only be taken out by current account customers who have a Nationwide FlexAccount.

Meanwhile at Alliance & Leicester and Tesco, the top rates are only available to existing loan customers who are looking to top up their borrowing, or apply for a second loan.

It's a shame the very best rates are open to so few borrowers. But there is a chink of light in the form of Sainsbury's Personal Loan. All you need to do is apply for a Nectar Card - if you don't already have one - to be in with a chance of qualifying for the 7.9% best buy rate. This can easily be done by picking up a registration form at a Sainsbury's store or applying at the Nectar website.

But what makes a perfect Sainsbury's borrower? Well, you must 18 or over with a good credit history. This means if you have been declined for credit in the past month, or your credit record shows up any of the following: account arrears, payment default, CCJs or bankruptcy, you're unlikely to be accepted.

So if you really want to be savvy, it therefore could be worth applying for a Sainsbury's Personal Loan first. That way, your credit record won't show any other declined applications in the past month.

Are loans a good way to borrow?

Not always. If you know problems are likely to surface when a lender credit scores you, then it's probably a good idea to hold off applying for any type of credit for a while. After all, the more times you're declined, the worse your credit record will look.

Instead focus on improving your credit rating. Take a look at Improve your credit score: the quick dos and don'ts for some easy tips.

If you're reasonably confident you won't be declined and you only want to borrow a relatively small amount - say less than £5,000 - over the short term, it may be better to choose a 0% on purchases credit card instead. This is because loan rates on smaller amounts tend to shoot up, making them an expensive way to borrow.

The best choice at the moment is the Tesco Clubcard Credit Card which gives you 12 months to clear your spending without paying any interest.

If you need to get hold of some cash rather than borrowing to make purchases, an alternative would be to transfer the money you need into your current account from the Virgin Money card. That way, you won't pay any interest on your debt for 16 months, although you will have to fork out a 4% transfer fee. After 16 months, the APR jumps to a whopping 16.6% APR, so make sure you can pay your debt off before the rate increases if you choose this method.

All that said, if you're pretty sure you've had no credit problems (if you don't know, you can check out your own credit report for free), then you could be one of the lucky few who does get accepted for a best buy loan.

Compares loans at lovemoney.com

*Research by Moneynet.

More: Three reasons not to borrow a loan today | Seven simple steps to shopping for a personal loan