Loans: borrow a little extra and you could pay back less

19 April 2018
Image

Consumers taking out a loan could more than half the amount of interest they pay by borrowing just £100 extra, research reveals.

Analysis from Defaqto shows that borrowing more money could seriously reduce the amount of interest you pay on your loan. 

The financial information firm cites the example of a customer borrowing money from high street bank TSB. While a £4,900 loan for 48 months had an annual percentage rate (APR) of 23.6%. Monthly repayments on the loan were £152.83, making the total amount repaid after the period £7,335.84. Of that, £2,435.84 was interest.

However, if borrowers took out a £5,000 loan for the same length of time had an APR of just 9.9%, their monthly repayments were lower at £125.66 and the total repayment was £6,031.68. Of that, £1,031.68 was interest – less than half the amount paid on the smaller loan.

It means borrowers could save a whopping £1,314.16 in interest payments by borrowing just £100 more. 

Defaqto says there are three ‘sweet spots’ at which it makes sense to increase your borrowing to benefit from a lower interest rate. These are £3,000, £5,000 and £7,000. 

In another example, a borrower could save £1,399.52 in interest payments by borrowing £3,100 in an Admiral Personal Loan rather than £2,900. 

A £2,900 loan for 48 months would have an APR of 29.9%, making monthly repayments £98.51 and the total amount repaid £4,728.48. Of this, some £1,828.48 is interest.

But on a £3,100 loan the APR drops to 6.7%, making monthly repayments £73.52 and the total amount repaid £3,528.96. Just £428.96 of this is interest, making a saving of £1,399.52 in interest on a loan that is just £200 greater. 

Defaqto says banks often do not tell borrowers they would be able to save more if they increase their borrowing, as they are not allowed to encourage customers to take on more debt – even if it may be better to do so. 

Consumers should only borrow responsibly and never more than they can afford to repay, but it is always worth looking at whether increasing your debt slightly could get you a better deal overall. 

Defaqto’s analysis shows that borrowers could potentially save thousands in interest payments just by increasing their borrowing slightly – this could enable them to pay off the loan more easily and possibly ahead of schedule if their terms allow. 

Brian Brown, head of insight at Defaqto, says: “With so many loan options on the market, we would urge consumers to do their research and not jump hastily into opting for the first loan offering to them. 

 “Work out a budget to establish how much you’re able to repay monthly and then shop around to find the best APR to determine how much interest you will be paying in total.”

 

 

 

 

Add new comment