Borrow More, Spend Less?

A review published this week by financial research company Defaqto has revealed that borrowing a little extra when you take out a personal loan could sometimes save you hundreds of pounds.

Defaqto’s research showed that in some instances and with some personal loan providers it’s possible to cut the rate of interest charged on your borrowing by as much as 8% simply by adding an extra pound to your debt.

Unfortunately this isn’t a cue to borrow thousands more than you had planned but instead a reference to the tiers that many lenders apply to their loan products. Being aware of what these are and what they mean can help you to choose the cheapest loan option possible.

Tiered interest rates are a practice used by lenders to structure the loan products they offer, it enables them to charge lower interest rates on larger loans and higher interest rates on smaller amounts. Typically its loans valued between £1,000 and £5,000 that attract the highest interest charges although some lenders extend their ‘higher interest rate bar’ to over £7000.

While this isn’t a problem for individuals borrowing large sums, it can be an issue for those looking to spread the repayments for a small loan over a number of years as huge amounts of interest can add up.

In a practical sense Defaqto’s research emphasizes the need for borrowers to research their options when looking to take out a personal loan. For those only looking to take on a small commitment it can be worth investigating which lenders offer standard interest rates (those that apply consistently regardless of how much you borrow) as depending on the rate this could be a better option. Alternatively, in some instances, providing its not a great deal more than you initially planned to borrow, committing to that little bit extra could save you a whole lot more.