Get a bigger loan and pay less

Thu, 04 Mar 2010

The way personal loans are priced at the moment, borrowing more and paying less actually makes good sense.

How it works is that small loans have higher interest rates than bigger loans . Also the difference between the amounts borrowed has grown so that by taking out a bigger loan you end up paying less in repayments .

An example of how this works is if a loan for less than £3,000 has an average rate of 19.6 per cent whereas those borrowing between £3,001 and £4,999 pay 16.9 per cent.

For loans between £5,000 to £7,499 have a rate of 12.4 per cent and over this amount the percentage rate averages 10 per cent.

Those seeking to borrow £7,500 at 10 per cent over three years pay back £9,561 in total. This works out to be the same for someone who borrows £7,100 at 12.4 per cent.

However by borrowing any more at the higher rate, you end up repaying more than if you borrowed a larger amount.

Similarly borrowing £3,000 at 16.9 per cent means repaying a total of £3,845 and repays the same if you’d borrowed £110 less with a higher rate of 19.6 per cent

Michelle Slade, from Moneyfacts, said, "When you take a loan, it's worth considering what the next rate up will be and seeing if it doesn't pay to take a little bit more. In some cases, you may actually be a little bit better off to borrow that bit extra."
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