Borrowing more 'can cost less'
Posted on 9 January 2008 by
Borrowers are being advised to look carefully at the rate of interest on their loans, as new research highlights cases where borrowing slightly larger amounts with the same lender could actually cost less.
The study by financial researchers Dafaqto points out that the way most lenders structure their rates is based on tiers. A loan made at the high end of one tier may cost more in repayments than a larger amount at the lower end of the next tier.
The survey shows that many lenders drop the rate of interest very sharply on loans of over £4,999.
One example given by Defaqto illustrates how borrowing £4,999 from one mainstream lender at a rate of 15.9% APR would cost £7,117.20 over five years. However, borrowing an extra pound from the same lender would drop the interest rate to 7.9%, with repayments totalling £6,034.80 over the same period.
"Borrowers should take care when choosing the size of loan they want, as a little effort in researching the interest rates charged on different tier levels could save them a considerable amount of money," commented Defaqto's David Black.
"Obviously choosing a longer period to repay a loan does exaggerate the differences and so the length of the loan is another factor to be considered. Large tier rate differences do not necessarily equate to uncompetitive rates, so borrowers need to be on their toes when it comes to taking out a loan."
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