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Borrowers could pay less for larger loans

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10/01/2008

A review of the personal loans market by Defaqto reveals that borrowers could end up paying less in repayments by taking out slightly larger loans with the same lender.

This anomaly arises due to the way most lenders structure their rates, which differ according to the ‘tier’ size the loan falls into. Generally, a higher interest rate is charged on the lowest tiers and rates then decrease as the amount borrowed increases, often then plateauing and remaining unchanged for the larger amounts.

The top end of the first tier for most lenders falls between £1,000 and £5,000, while others have 2 tiers in this range, and differences between the rates charged in 1 tier and those in the next tier up can be quite significant.

For example, if you borrow £4,999 from Lombard Direct, the loan rate is 15.9% typical APR and you would have to pay back £7,117.20 over 5 years. But if you borrowed an extra £1, the typical APR drops to 7.9% and the total repayments over 5 years would be only £6,034.80, a saving of £1,082.40.

Similarly, a loan of £4,999 arranged online with Direct Line Personal Loans, would cost you £7,117.20 over 5 years, whereas by borrowing £5,000 you would pay only £6,101.40 over the same period, a saving of £1,015.80.

David Black, principal consultant of banking at Defaqto, said: “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.

“Obviously choosing a longer period to repay a loan does exaggerate the differences and so the length of the loan is another factor to be considered. Large-tier rate differences do not necessarily equate to uncompetitive rates, so borrowers need to be on their toes when it comes to taking out a loan.”

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