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Small loans more expensive as larger amounts become cheaper

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Written by: Paloma Kubiak
21/03/2017
Borrowers are paying higher rates of interest on smaller loans than recorded in 2016 while larger loans have become more affordable.

Unsecured personal loan rates are rising for smaller amounts – typically £3,000 over three years – with the average rate now breaching 15%.

According to Moneyfacts data, a £3,000 loan over three years has an average interest rate of 15.2% in March 2017, up from 14.9% recorded in January this year and 14.8% recorded in December 2016.

In contrast, Moneyfacts said that lenders are concentrating their efforts on repricing much larger loans, with particular attention given to the highest tier of up to £25,000 (though some lenders do offer larger loans).

A loan of this amount over five years now has an average rate of 4.9%, down from 5.5% at the end of 2016.

Over the last quarter, it found that all average rates on loan tiers of £7,500 and above have fallen below 5%, which is a clear sign that lenders are keen to attract new business on larger loans.

Rachel Springall, finance expert at Moneyfacts, said: “It’s not too surprising to see unsecured personal loan rates fall to new lows for most tiers, but at the same time, some lenders are compensating for larger loan rate cuts by raising interest rates on smaller loans.

“The rises could be disappointing news to borrowers who feel a small unsecured personal loan is the ideal solution to debt consolidation or making a large purchase, due to the fixed repayment plan that they provide, unlike credit cards where the temptation to adjust repayments could be too easy.”

Springall said that 10 years ago, the lowest rate on the up to £25,000 tier was 5.9% whereas today, lenders will now offer loans of up to £25,000 with rates as low as 3.0%, beneficial for borrowers in need of funds for home improvements or debt consolidation.

“The fall in loan rates for the higher tiers may well be a trend set to continue throughout 2017, particularly if lenders are attempting to leap-frog competition. However, as most loan rates presently sit at record lows, lenders may now price in cuts much less frequently, or may only be able to hold a market-leading position for a short period. Therefore, borrowers may be wise not to wait around too long if they are thinking about applying for a competitive unsecured personal loan,” Springall added.

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