How making a tweak to borrowing could reduce loan repayments

People taking out a personal loan could save thousands of pounds by borrowing an extra £100, new research has discovered.

Analysis by Defaqto has identified ‘sweet spots’ in the personal loans market where a product could be cheaper if more was borrowed. These points tended to be around £3,000, £5,000 and £7,500.

Now Defaqto is urging anyone considering a personal loan to look carefully at annual percentage rates (APR) on offer, as the amount of interest goes up and down as the amount borrowed increases.

It described how the adjustment in borrowing could result in an interest rate drop and massively reduce the overall cost of the loan.

For example, someone taking out a loan with TSB for £4,900 with an APR of 23.6% and making 48 monthly repayments would pay back £7,335.84 overall.

But, by increasing their borrowing by £100 and taking out a loan for £5,000, they would repay £6,031.68 overall – making a saving of £1,404.

Brian Brown, head of insight for banking and general insurance at Defaqto, said there were many loan options on the market and encouraged people to do their research and not jump hastily into opting for the first loan offered.

He added: “Our advice would be to 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.

“As our analysis of the market shows, for many lenders the amount of interest charged (the APR) goes up and down as the amount you borrow increases.

“Therefore it may be more cost effective to borrow a slightly larger amount to achieve a smaller APR, which will result in the borrower paying less interest overall.”

Defaqto said banks did not promote the fact some consumers could pay less interest by borrowing a little more because they were not allowed to encourage people to increase their debt – even if it would save them money.

It advised consumers they should only borrow what they could afford to pay back.

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