Saving and investing news
Borrow more and pay back less
13 February, 2007
The way lenders structure their personal loan rates allows for a loophole which means that borrowers who take out larger loans, could actually end up paying smaller repayments than those borrowing less
The crux of this is the tiering of the rate structure, which sees the highest rates charged on the lowest tiers. For most lenders this falls between £1,000 and £5,000, where the differences between this first tier and the second one jumping by quite a bit.
One example given by a leading consumer finance portal is an individual, borrowing £4,950 from the Co-operative Bank where the loan rate is 16.9 per cent APR. In this scenario the borrower would have to pay back approximately £7,178 over five years, but borrowing an extra £50 reduced the APR to just 6.9 per cent, meaning the total repayment would be £5,897 over five years – saving a whopping £1,281 in interest.
An additional factor in how much extra a borrower will repay is to do with the Payment Protection Insurance. PPI has been all over the news recently as the OFT were conducting an investigation which they have been referred to the Competition Commission.
Shopping around is key to mitigating the PPI outgoings and, using the Co-operative Bank example again, the difference when repaying £5,000 over 60 months with no PPI is £3,053 less when compared to a loan of £4,950 with PPI.
Marketing director of Find.co.uk, Kate Marsden says: “Borrowers who are not able to research what’s on offer could go for the safe option of choosing one of the providers who charge a standard interest rate across their borrowing range, provided that their rates are competitive – although a little effort in researching the interest rates charged on different tier levels could save them a considerable amount of money.”
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