Loans: Why borrowing more can see you pay less

By JAMES CONEY FOR THE DAILY MAIL
Updated: 05:08 EST, 3 March 2010

Borrow more, pay less. It seems like an unusual concept, but the pricing of personal loans at the moment means it can actually be worth taking more.

Smaller loans have a higher interest rate than larger ones. And the gulf between the different amounts you borrow has grown so great that at some levels you would actually repay less if you took a bigger loan.

According to financial data provider Moneyfacts, a loan of less than £3,000 has an average rate of 19.6 per cent, while those borrowing between £3,001 and £4,999 would pay 16.9 per cent.

Price hike: Smaller loans have a higher rate of interest than large ones

From £5,000 to £7,499 costs 12.4 per cent, and above this you could pay an average 10 per cent.

Someone wanting to borrow £7,500 at 10 per cent over three years would pay back a total of £9,561 - the same as someone who took a loan for £7,100 at 12.4 per cent.

So if you borrow any more than this at the higher rate, you would end up repaying more than if you borrowed a greater amount.

Likewise, you could borrow £3,000 at 16.9 per cent, and have total repayments of £3,845 and repay the same as if you borrowed £110 less at the higher rate of 19.6 per cent.

Michelle Slade, from Moneyfacts, says: 'When you take a loan, it's worth considering what the next rate up will be and seeing if it doesn't pay to take a little bit more. In some cases, you may actually be a little bit better off to borrow that bit extra.'

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