Borrow more, pay less?
The borrowers. For whatever reason, you need to take out a personal loan. Maybe it’s for a new car, home improvements or a villa in Barbados. Anyway, you’re looking at an unsecured (on your property) loan and have a vast array of products to choose from. But surely, when it comes to it, they’re all pretty much the same? So you settle for a £5,000 loan repayable over four years.
Check the deal. In fact, according to research by Defaqto (http://www.defaqto.com) you might be better off borrowing more - the total repayments might actually be less. How come? The basic rule is the more you borrow the better the rate the lender is prepared to offer. By way of example, a £5,000 loan over four years from one lender would cost £600 less to pay back than a loan for £4,950 (at £5,000 and above the cost of borrowing becomes cheaper - it’s called tiered pricing). Other lenders will offer more competitive rates the more you borrow. The trick is to borrow close to the threshold for the improved rate; otherwise the total cost of borrowing will be higher. For example, with another lender you’d be better off borrowing £5,000 than £4,400 over a four-year period. You’d save on the repayment costs and have £600 extra.
Tip. Don’t be swayed by interest rates alone - you need to look carefully at the amount you borrow.
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