Spend A Pound To Save £540!
How can borrowing a single pound save you nearly £15 a month for three years? This could only happen in the bizarre world of borrowing!
How can a loan of £4,999 lead to an interest bill that is £540 higher than that charged by a loan of £5,000?This is madness, isn't it? Surely everyone would just borrow the extra pound in order to save themselves over £500, right? Sadly, when consumers go shopping around for a personal loan, most of them do it with their eyes firmly closed! Hence, they don't realise that borrowing less often costs so much more.This weird anomaly happens because almost all major lenders use tier-based pricing structures, which means that they charge different interest rates based on how much you borrow. The basic rule is: the more that you borrow, the lower the interest rate that you pay. So, in some cases, borrowing an extra, say, £1 to £100 can prevent you from paying hundreds of pounds in needless interest.In some cases, the highest interest rate charged by one lender can be two or even three times its rate for the largest loans. For example, Marks & Spencer Money charges a typical annual percentage rate of 19.9% (APR) on loans of £1,000 to £2,999. However, if you borrow £10,000 or more, you can look forward to a typical rate of just 6.4% APR - less than a third of the higher rate.As these lower rates kick in at nice, round numbers such as £5,000, £10,000, etc., it's easy to find some bizarre results close to these tier thresholds. This is especially the case for a loan of £5,000 over three years, which is the "benchmark" that many Best Buy tables and financial writers (including myself) rely on.Let me give you a prime example - courtesy of independent financial researcher, Moneyfacts, and its marvellous database - using two loans from the very same lender, each over three years, without rip-off payment protection insurance:Loan amountAPRMonthly repaymentTotal amount repayable£4,99914.9%£170.78£6,148.08£5,0007.9%£155.82£5,609.52Difference of £1 7%£14.96£538.56 Thus, borrowing £1 more means avoiding extra interest totalling £538.56, which is plainly bonkers! Therefore, if you're not borrowing a huge sum and don't wish to be caught out by this sneaky trick, the answer is to borrow from one of the few lenders which offers a single interest rate across all loans, regardless of their size. For example, Moneyback Bank is riding high at the top of the Best Buy tables, thanks to its single rate of 5.7% typical APR for all loans up to £25,000.So, if the likes of Moneyback Bank and Northern Rock can offer a single rate, why don't other lenders follow suit? From the consumer perspective, there seems to be no reason for tier-based interest rates, although banks might argue that this approach better suits their risk criteria, plus processing smaller loans is disproportionately expensive. Perhaps they have found that smaller loans are riskier because of higher bad debts? If so, how do several Best Buy lenders live happily with single pricing?What's more - in this age of computerised lending decisions, online applications, centralised decision units and automated payment collection - loan-administration costs must be significantly lower than they once were. So why should all borrowers be penalised because some banks' lending criteria and credit scoring processes aren't up to scratch? This smacks of profiteering to me!Finally, if you want to enjoy an interest-free period of up to a year on everything that you buy, get a Sainsbury's Bank Visa card, which offers 0% on all purchases for an initial twelve-month period. Now that's what I call a Best Buy!More: Pick your perfect loan in our Personal Loan centre | Check our deck of 0% credit cards!