Borrowers 'Should Research' Personal Loan Options

Those looking to apply for a loan should first consider doing some research into how much they are going to borrow.

Such is the assertion of Defaqto, who claim that those who take a personal loan at a marginally-higher value than they had originally intended may find that they pay a lower rate of interest. According to the financial services firm, this "anomaly" is a result of the ways that many loan lenders structure their rates, as the tier in which the value of their borrowing falls in impacts upon the amount of interest which is charged. Overall, it was put forward that a higher amount of interest is generally charged on lower loan values, with rates tending to decrease as the amount borrowed goes up. Consumers may also find that for larger loans interest rates often plateau and then remain unchanged.

The firm went on to suggest that the top end of the first tier for the majority of financial providers is between 1,000 pounds and 5,000 pounds, although some lenders can have two groups between these amounts of money. However, Defaqto pointed out that the difference in interest rates between various tiers of loans "can be quite significant".

According to the company, those who borrow 4,999 pounds from Lombard Direct will find that they are charged a typical annual percentage rate (APR) of 15.9 per cent. Such consumers would then have to pay back some 7,117 pounds 20 pence over a five-year period. However, by borrowing just an extra 1 pound people will see that their APR drop to 7.9 per cent. This means that their total repayments would amount to 6,034 pounds 80 pence, saving them more than 1,000 pounds.

It was also suggested that a difference of 1 pound on a loan from Halifax could result in Britons saving some 646 pounds. In addition, the study pointed out that a 4,999 pounds personal loan from Lloyds TSB would result in borrowers paying back a total of 7,531 pounds 20 pence on an APR of 18.9 per cent. Yet in taking out an even 5,000 pounds, customers' repayments will come to just 6,573 pounds 60 pence as they are charged 11.9 per cent in interest. Overall, people could save more than 957 pounds.

Not only could such sums help people make their UK loan repayments with greater ease, it may also free up more money to meet other demands on their spending such as credit cards, utility bills and mortgages.

Commenting on the figures, David Black, principal consultant of banking 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."

Mr Black advised that those borrowers who are unable to conduct in-depth research into what personal loans are available should opt for a provider that charges a standard rate of interest across their entire borrowing range. Given that such a lender offers a "competitive" rate on their loan, the banking consultant suggested that doing so could be a "safe option" for many people.

In taking out the most competitively-priced loan possible, consumers may be able to get to better grips with their spending. And taking out a cheap loan could be a useful step for many consumers in terms of getting their money management back on track. A recent study by Abbey indicated that only one out of 100 Britons are in a peak financial state in regards to the various monetary schemes that they have. Research from the firm also suggested that 43 per cent of people are "overweight" in a fiscal sense as they have uncompetitive loans, savings accounts, mortgages and other products.

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