The ongoing war in the unsecured loan market is continuing, as a number of loan companies compete to be able to offer the best deal on a cheap loan, with interest rates and offers changing on an almost daily basis.

Just last week, six loan companies lowered the interest rates charged on their unsecured loan deals, with M&S Money now offering the cheapest loan rate for many years, at a rate of just 6.0 per cent for a £10,000 unsecured loan over a five year term.

This week, Sainsbury’s Finance has announced changes to its own loan deals, by increasing the incentive schemes available when someone takes out a loan with the lender.

Anyone who takes out a personal loan with Sainsbury’s for an amount of between £7,500 and £15,000, the most competitive unsecured loan amount, will receive a Sainsbury’s gift card worth £100 and double Nectar point rewards for the next two years on all their shopping.

Apart from the additional incentives to choose Sainsbury’s for a new loan, the deal also offers a competitive interest rate of just 6.9 per cent. Sainsbury’s Finance have calculated that, for someone who does their regular shopping at Sainsbury’s supermarket, this is now the best loan deal on the market at the moment.

When the benefits of the gift card and double Nectar points are combined, a typical borrower who spends £50 per week in the supermarket, could reduce their loan repayment by £152 over the term of the loan, or by £204 for someone who spends £100 per week.

Steven Baillie of Sainsbury’s said “In time for the New Year when many people look to consolidate existing loan debt, plan home improvements, or think about new cars, we’re pleased to be able to offer what we think is the best loan package on the market.”

Over the course of the past few months, a number of lenders in the unsecured loan market have been cutting the rates they charge for personal loans, particularly in the band between £7,500 and £15,000, where rates have been at their most competitive.

Last year, the main competition to be able to offer the best cheap loan deal was between Sainsbury’s, Tesco, M&S Money and the Nationwide building society. But even though we are only still in the first week of the New Year, seven lenders have already reduced their interest rates on their unsecured loan products.

The news comes from a new report from Moneyfacts.co.uk, who now say that personal loan rates in the unsecured loan sector are at their lowest level for the past four years. Santander, M&S Money, Tesco bank, The Co-Operative bank, AA, Smile and Barclays bank have all reduced their loan rates within the first five days of the year.

M&S Money have made the biggest reduction, by dropping the interest rate on a £10,000 unsecured loan by 0.4 per cent to just 6.0 per cent for a five year term. This is now the lowest recorded rate for this size and type of loan within the past four years.

Only twelve months ago, a similar loan would have charged a rate of 8.4 per cent and many experts believe that this is now the start of a personal loan price war, which could lead to some particularly low loan rates in the coming months for those borrowers with a good credit rating.

With such good loan rates on offer, now could be an ideal time for those people who overspent at Christmas to find a good deal on a debt consolidation loan. But with rates changing on an almost daily basis at the moment it is important to shop around to get the best deal available on a cheap loan.

There has been a huge increase in peer to peer loan arrangements through organisations such as Zopa over the course of recent years, largely due to the fact that many individuals are able to get a cheap loan through such an arrangement, whilst investors can get a better return on their savings than they would in a traditional bank.

Peer to peer lending has become more popular, particularly since banks and other traditional loan companies have become extremely reluctant to offer personal loans to anyone and have increased interest rates on the majority of unsecured loan products.

However, the Financial Services Compensation Scheme (FSCS) has issued a warning to individuals who invest their savings into peer to peer loan arrangements, that their investment is not protected under the FSCS rules, as other forms of investment and savings accounts would be.

Over the course of the past eighteen months alone, savers have switched a total of £192 million from traditional deposit and savings accounts, into “money exchange” schemes, where their funds are then used to offer other individuals cheap loans.

The FSCS has raised the issue following the collapse of one peer to peer loan company, Quackle, leaving investors to chase loan customers for their loan repayments directly, rather than through the loan company.

As this type of lending is not protected and has no compensation option from the FSCS, many investors face the possibility of losing their funds if they are unable to obtain the loan repayments from the borrower.

Mark Neale of the FSCS said “It is understandable that consumers want the best rate of interest for their savings in the current climate and peer to peer lending may be the right choice for some people who are looking for a return on their savings, or want a competitive loan rate. It is important to remember that the FSCS does not protect money invested through peer to peer loan companies.”

There has been a lot of publicity in recent months about the potential dangers of taking out short term loans, known as pay day loans, which often charge extremely high levels of interest on small unsecured loans which are intended for terms of less than a month to see someone through to their next pay day.

But consumers have also been warned against taking out short term loans which claim not to be the same as a Pay Day loans, yet still seem to have many similarities to pay day loan practices, even if their interest rates are slightly cheaper.

Pay day loans are intended for terms of less than a month and can be useful if they are fully paid off within this time. However, many borrowers do not manage to do this and can easily end up paying interest rates of over 4000 per cent APR on their loan.

Other loan companies are now offering sort term unsecured loans for terms of a couple of months, which they claim are not pay day loans. Whilst these may work out cheaper than a pay day loan, APR is still charged at a rate of 2,866 per cent, which is not exactly a cheap loan option!

The Money Shop has also launched a pre paid credit card with a monthly fee of just £4.95. However, this card also offers a “debit protect” loan option which in effect turns the pre paid card into a more traditional credit card, but with an APR of around 455 per cent.

When someone is desperate to get some money quickly for things like car repairs, or particularly at this time of year, for their Christmas shopping, very often they fail to shop around for a suitably cheap loan, taking the first option which is presented to them.

Consumers should be extremely careful about taking any form of short term loan or credit and ensuring they are able to repay this debt within the time scale.

With the current state of the economy in the UK often leaving individuals in the position whereby they are short of cash before their next pay day, a growing number of people are turning to expensive pay day loans as a method of bridging the gap in their finances.

Whilst pay day loans offer a quick and easily accessible loan over a short term, the cost of this type of borrowing can be extremely expensive, particularly if the loan is not fully repaid within the original term, usually less than one month, leaving many borrowers in an uncontrollable spiral of loan debt.

For someone who has a slightly adverse credit history, such as a couple of missed loan repayments, or historical arrears on a loan or card, it may be difficult to be accepted for a loan from their bank to cover emergency costs, such as a car repair, for example.

But instead of applying for a pay day loan to cover this sort of emergency cost, it has been suggested that it may be wise to consider a short term loan from a credit union as a cheaper alternative.

Earlier this year, the government said that it would provide £73 million to help fund and modernise credit unions, in order to bring them up to date and make them more accessible for people looking for an alternative home for their savings, or a personal loan.

There are already 465 credit unions across the UK, with over 870,000 members and loans with a value of around £475 million and this I set to expand, with access to credit unions being introduced through the Post Office network.

Mark Lyonette of the Association of British Credit Unions said “Credit Unions have shown that they can provide the financial products and services that people on lower incomes need and want but often struggle to get elsewhere.”