Borrow More To Pay Less On Loans

Taking out a bigger loan could cost you less in repayments. The finding comes from consumer finance portal 'Find' which has shown that some smaller loans could cost consumers more than larger loans. This is because most lenders structure their rates in tiers, with the highest interest rates charged on the lowest tiers.

For most lenders, the top end of the lowest tier is between £1,000 and £5,000 and there is quite a difference between what lenders charge in this tier and in the next. For a loan of £4,950, the difference in interest rates can mean that you pay more than £1,000 pounds more than if you borrow £50 more to move into the next tier. And adding payment protection insurance can make quite a difference. With one lender the difference between a loan of £5,000 without PPI and a loan of £4,950 with PPI is more than £3,000.

The Post Office has recently called for customers who are paying PPI to challenge their provider to compare the cost with that of a standalone provider and ask for a refund if their PPI is too costly. It says that a customer with a loan of £7,500 over 5 years could receive a refund of £15002 if they cancelled their loan protection, but kept the loan. The refund amount is a portion of the insurance premium, which is usually charged upfront and added to the loan amount.

So what's the answer to the loan dilemma? Find.co.uk's Kate Marsden says that borrowers should be careful when choosing the size of the loan they wish to have, pointing out that 'a little effort in researching the interest rates charged on different tier levels could save them a considerable amount of money.' She adds: '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.'

Meanwhile, another lender has put the cost of borrowing under the spotlight. Zopa, the lending and borrowing marketplace, has come out top of the charts on financial comparison sites for interest rates on borrowings. Zopa's 5.2 per cent rate on a three year loan of £3,000 is a winner and the marketplace site says there's no reason for anyone to pay more, advising people to avoid 'cross-subsidising others with poorer credit records borrowing from the same lender, or lining the already bulging pockets of their bank.'