Smaller personal loans can have higher interest

Fri, 21 Apr 2006

A financial expert warns borrowers that taking out small loans can often result in being charged higher interest rates.

Lisa Taylor from the website moneyfacts says that many personal loan providers work according to a tier-based pricing structure. She says there can often be stark differences between the interest rates applied to varying sizes of personal loans.

She gives the example of a personal loan provided by the personal loan provider Marks and Spencer Money.

A personal loan of £1,000 to £2,999 can see consumers being charged a rate of 19.9 per cent, yet a personal loan of over £10,000 can see rates drop to 6.4 per cent.

She says that for some personal loan borrowers it might be worth opting for a slightly larger personal loan than needed in order to reap the benefits of lower interest rates.

"As you would expect with such large rate variations, the difference between the individual loan tiers is also very visible, more noticeably around the £5,000 mark," she explains.

"Depending on the lender's exact loan amount requirements it may be worth some consumers borrowing just that little bit extra to push them into the next tier," she adds.

A responsible borrower could then potentially save an average of £540 a year in interest on their personal loan.

For example if a consumer opted to take out a personal loan of £4,999 which charged 14.90 per cent APR, over a 36-month period they would be paying back £170.78 a month.

If they just opted to borrow one pound more, they could see their personal loan interest rate drop to 7.90 per cent and their monthly personal loan payments similarly falling to £155.82.

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