Bigger Loans Could Work Out Cheaper

It is common practice for loans companies and other money lenders to have a tier system in place which sets the rate for which they charge interest on any loans taken out with them.

What does it mean?

Strange as it sounds, it means that by borrowing more, you may be better off and end up paying less interest which means paying less overall on the total amount of the loan.

With any loan you should always calculate the Total Amount Repayable (TAR). This is the full amount you will pay over the lifetime of the loan, inclusive of interest. This is the figure that you should compare when researching which are the best loans for you to apply for, as it is the easiest and most accurate way to figure out which loan will be the most economical.

Why do loan companies charge more for smaller loans?

It usually comes down to profit. As a rule, lenders find smaller loans have smaller profits, but for the same amount of work involved in setting them up. They can also prove to be riskier, as many small loans will be unsecured, so higher interest rates make up for these factors.

It is worth pointing out however that not all lenders operate this tiered interest rate system. So make sure you investigate the actual rates before assuming otherwise.

An example:

A loan of £9000 over a 15 year repayment term could be set at a 8.7% APR (Annual Percentage Rate) and cost a total of £15,831 to repay in full.

However borrowing £10,000, an extra £1000, over a 15 year period could have an interest rate of 6.6% which would cost a total of £15,589 to repay in full.

You could save yourself £1242 and get to lend an extra bit for whatever purpose you so require.

Are other factors involved in getting a cheaper interest rate?

Yes. Many lenders will offer a more competitive loan quote and rate of interest if you are willing to take out a longer term loan. Repayment periods can start from a 28 day payday loan and extend to a 25 year repayment secured loan. In some cases now you could have the opportunity to repay back over a 30 year period.

If you are looking into repaying your loan back over a 10-25 year period, you will need to be a homeowner looking into taking out a secured loan, so you use your property as collateral. This is favourable with lenders as the loan will be less of a risk for them. If you default on repayments, they are able to repossess your home to sell it and recoup their losses.

Often you will find consolidating smaller loans into one debt consolidation loan, even if it is a sizeable one, could actually work out the better and cheaper option.

Funny as it seems, having a larger the loan and a longer repayment period, can act in your favour and enable lenders to offer a better loan deal for you.

So borrowers, take heed. With a bit of research and a couple of calculations, you could save yourself a pretty penny by borrowing more. Strange but true!