Borrowing a little more money can save £1,000s in interest
In some cases, borrowing just £100 more can result in a big drop in the interest rate charged meaning a reduction in the overall cost of the loan.
Banks aren’t allowed to tell borrowers about this ‘interest rate paradox’ as they can’t encourage people to increase their debt. While consumers should always borrow sensibly, research has uncovered the ‘sweet spots’ where the cost of borrowing can be much cheaper.
Analysis from Defaqto has revealed the ‘sweet spots’ are typically at around £3,000, £5,000 and £7,500:
As an example, borrowing £5,000 as opposed to £4,900 can mean big savings. A £4,900 loan from TSB with an APR of 23.6% across 48 monthly payments would cost £2,435.84 in interest, making a total repayment of £7,335.84.
However, if that same person were to increase their borrowing by just £100 to £5,000, TSB would charge an APR of 9.9% and the borrower would pay just £1,031.68 in interest, making a total repayment of £6,031.68. That’s £1,404.16 less interest than if they’d borrowed £4,900.
Looking at Lloyds Bank, a loan of £7,100 with an APR of 14.5% across 48 monthly payments would cost the borrower approximately the same as a loan of £8,500 with an APR of 3.9% – a total repayment of just over £9,180, giving a saving of £1,466.24 compared to if they’d borrowed £7,100.
For customers looking to borrow smaller amounts, a loan from Admiral of £2,900 with an APR of 29.9% across 48 monthly repayments would cost almost £25 a month more than a loan for £3,100 with an APR of 6.7%. The higher loan amount would have a total repayment of just over £3,528, giving a saving of £1,399.52 compared to those borrowing £2,900.
Rather than spending the extra money borrowed, consumers could use it to help pay off the capital of the loan and even repay it early if the terms of their loan agreement allow this. Therefore, not only has the extra money cost less, but the loan can also be paid off quicker.
Brian Brown, head of insight, banking & general insurance at Defaqto, said: “Consumers looking to make home repairs, buy new furnishings, update their car or perhaps take their family on holiday may be considering a personal loan to cover the cost.
“With so many loan options on the market, we would urge consumers to do their research and not jump hastily into opting for the first loan offered to them. Work out a budget to establish how much you’re able to repay monthly and then shop around to find the best annual percentage rate (APR) to work out how much interest you will be paying in total.”