Borrowing more 'costing less'

Opting for a larger personal loan could cut the overall cost of borrowing, new research reveals.

Most personal loan providers offer higher rates for smaller loans under £5,000 –with £780 on average saved by having a loan of £5,000 over one of £4,999, a study by Defaqto reveals.

The biggest gains were with Lombard Direct – where a £4,999 loan over 60 months at 15.9 per cent would cost £7,117.20 in total, while a £5,000 loan at 7.9 per cent costs £6,034.80 – a saving of £1,082.40.

Savings of over £1,000 on a £5,000 loan over 60 months were also possible at Mint, for new customers, and Direct Line.

David Black, principal banking consultant at Defaqto, said: "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.

"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."

However, not all lenders charge higher rates for small loans.

Abbey, Norwich & Peterborough, Northern Rock and Your Personal Loan.co.uk all have a single interest rate for loans of all sizes.

Banks and building societies charge more for lower rate loans for a number of reasons, partly because the profits on lower loans are smaller for the lenders and also because they consider them to be a higher risk.