Borrow more – it can cost less!

Borrowers could end up paying less in repayments for larger loans than for smaller ones with the same lender according to Find.co.uk.

This anomaly in the personal loans market arises due to the way most lenders structure their rates, which differ according to the ‘tier’ the size of the loan falls into. Generally, the highest rates are charged on the lowest tiers.

The top end of the lowest tier for most lenders falls between £1,000 and £5,000 and differences between the rates charged in this tier and those in the next can be quite significant.

For example, if you borrow £4,950 from Co-operative Bank, the loan rate is 16.9 per cent APR and you would have to pay back £7,178 over five years. But if you borrowed an extra £50, the APR drops to 6.9 per cent and the total repayments over five years would be only £5,897, a saving of £1,281.

Similarly, a loan of £4,950 arranged online with Direct Line Personal Loans, would cost you £6,911 over five years, whereas by borrowing £5,000 you would pay only £5,836 over the same period, a saving of £1,075.

If you take out personal payment protection insurance with the loan, the disparity in payments is even more pronounced. For instance, the difference in total repayment between a Co-operative loan of £5,000 with no PPI is £3,053 less when compared to a Co-operative loan of £4,950 with PPI. The difference between similar loans with Direct Line is £3,277.

Kate Marsden, Marketing Director of Find.co.uk, says: “Borrowers should take care when choosing the size of loan they want, as a little effort in researching the interest rates charged on different tier levels could save them a considerable amount of money.

“Borrowers who are not able to research what’s on offer, could go for the safe option of choosing one of the providers who charge a standard interest rate across their borrowing range, provided that their rates are competitive.”

Lenders offering a standard APR on at least one of their loan products include Abbey, First Direct, MBNA Europe, Melton Mowbray building society, Moneyback Bank, Northern Rock, Scarborough building society, Virgin Money and WH Smith.