FOUR of Britain’s biggest financial institutions have shrugged off the gloom surrounding Britain’s economic prospects by slashing the rates on personal loans amid high inflation.

With inflation hitting 3.7 per cent, and some City fund managers predicting three rate rises next year, it seems an unlikely moment for what moneysupermarket.com calls “a loan rate war”.

But that is exactly what is happening, the website says, in a move that has sent rates to their lowest level since November 2008.

The latest round of rate cuts began on December 30, with Sainsbury’s Finance quoting a lead-in 7.4 per cent on loans of £7,500 to £14,999.

Applicants need a Nectar card and are promised the added benefit of double Nectar points on Sainsbury’s shopping and fuel for two years. Anyone spending £50 a week in store could get Nectar points worth an extra £52 a year.

Within days, M&S Money trimmed its personal loan rate by nearly a quarter – down from 9.9 per cent to 7.5 per cent. Someone borrowing £12,500 over 60 months would pay £249.01 a month – a total of £14,940 over five years.

Also, M&S borrowers can make no repayments for the first three months of the loan if they are struggling to balance other bills.

Santander then unveiled the “cheapest loan rate on the market in two years” – 7.3 per cent on loans of more than £7,500 and a competitive 8.5 per cent for loans over £5,000.

The offer is available to new customers who open a Santander current account, with a £100 incentive to switch and the promise of a five per cent rate paid on credit balances in the new account.

Finally, Nationwide joined the fray, promising a typical 7.2 per cent rate on £7,000 to £14,999 advances, repayable up to five years. A £10,000 loan at 7.2 per cent over 60 months will cost £11,873 to repay.

Applicants need a Flex Account to get the lowest rate, but others can get a rate of 7.3 per cent on £7,000 to £14,999, for up to five years, by going through moneysupermarket.

com. One attraction of personal loans in an uncertain economic climate is the promise that monthly repayments will not change from the figure agreed when the loan is taken out.

With wage rises in many sectors likely to be small or non-existent for the next couple of years, it is crazy to take out a personal loan now without that guarantee in place.

For a £3,000 loan, Moneynet lists the Post Office (13.9 per cent) among its best buys, after Sainsbury’s Finance at 12.8 per cent.

When the Consumer Credit Directive (CCD), driven by the EU, takes effect next week, lenders will be legally obliged to offer the headline rate advertised on a loan to only 51 per cent of applicants, against the previous two-thirds. Others can be charged more, according to their risk profile.

Hagger also points out that when personal loan rates went this low before, many lenders were raking in huge profits by selling PPI (payment protection insurance) and using some of this money to subsidise the loan.

Now loan providers cannot sell PPI at the same time.