The rise and rise of small tiered loans

Average rates for the top ten personal loans under £5,000 have hit a ten year high, while loans over £5,000 are starting to fall after reaching a peak in May, according to research by moneysupermarket.com. People looking for a personal loan of less than £5,000 should now consider borrowing a little bit more as it may cost them less over the full term and give them extra dosh in their pocket.

Personal loan rates have been on the rise since early 2006, however in recent months rates for loans of over £5,00 0 have become more competitive with the average top 10 rates at 10.46 per cent, compared to 10.68 per cent at the beginning of the year. However the same cannot be said for loans less than £5,000 as rates continue to increase. Borrowers are now paying up to 135 per cent more for their loan compared to four years ago.

It is now more cost efficient for borrowers to consider increasing the sum they wish to borrow; a borrower looking at £4,500 over five years would pay back £1,643 in interest from the current best buy provider, however increasing this amount to £5,000 over the same term, a borrower would pay back just £1,150, - saving £493 in interest plus they would have an additional £500 to spend for the same monthly repayments.

Tim Moss, head of loans and debt at moneysupermarket.com said: "The credit crunch has really impacted borrowers who are looking for smaller loans. Not only is it more difficult to get a loan, with many lenders tightening their approval criteria, those that do manage to get one will undoubtedly pay through the nose. Previously lenders kept their rates consistent with the Bank of England Base Rate, but since it dropped to a record low, banks have used this as an excuse to release the reins and increase the cost of lending massively.

"If you are financially stretched and in need of a loan, now is the time to play the banks at their own game and really use current provider rates to your advantage. By borrowing a bit more you can actually save yourself money without increasing the term or monthly repayments, which shows just how much the market has changed. As with all products it is vital to shop around to make sure you get the best deal and don't be tempted to borrow more than you can really afford to pay back."