Loans: Save £500 by borrowing more

The cost of a small personal loan has hit a 10-year high while rates on bigger loans have started to fall, so you could end up paying more for borrowing less. We explain how to make loan rates work to your advantage…

The bad news for borrowers is that, after four years of rising loan rates, it’s now more expensive than it’s been in a decade to borrow less than £5,000.

But it’s not all doom and gloom - the good news is that the cost of loans over £5,000 peaked in May and has now started to fall.

The unbelievable truth

Crazily, that means that some people could save money by borrowing a little bit more, meaning a bigger loan might make more sense financially. If you think that sounds unbelievable then check out these sums:

If you were a borrower taking out a £4,500 loan over five years with the best rate available (13.8%), you’d pay £1,643 in interest over the term.

However, increasing the amount you want to borrow by £500 means you could qualify for the far more competitive rate of 8.8% - meaning you’d pay just £1,150 in interest over the life of the loan.

Incredibly, that means you’d have saved £493 in interest, plus you’d have had £500 more to spend for the same monthly repayments.

Borrow more, pay less

This pricing difference means it’s important to carefully look at how much you’re borrowing and, if it’s less than £5,000, see if you could make a saving by borrowing more.

Loans manager at, Tim Moss, said: “You can play the banks at their own game and really use rates to your advantage. By borrowing more you can actually save yourself money without increasing the term or monthly repayments, which shows how much the market has changed.

“As with all products, it is vital to shop around to make sure you get the best deal but don’t be tempted to borrow more than you can really afford.”

Cheaper ways to borrow less

If you want to borrow less than £5,000, you’ll probably find it’s much cheaper to use a credit card.

There are a number of market-leading cards that give customers a lengthy 0% period on purchases. As long as you can pay off your borrowing within that time, you won’t pay a penny in interest, plus you can be more flexible about the amount you pay each month.

For example, the market-leading deal just now is the Tesco Clubcard Credit Card, which gives 13 months interest-free on purchases, after which you pay a typical annual percentage rate (APR) of 16.9%.

You also earn Clubcard points as you spend and get nine months interest-free on balance transfers for a 2.9% fee.

Next best is the Sainsbury’s Credit Card, with 12 months at 0% and a better APR of 15.9%. This also gives cardholders 12 months interest-free on balance transfers, meaning the right person can save a fortune in interest payments.

Bear in mind that to qualify for this deal you need to have an active Nectar card. These can simply be picked up in Sainsbury’s, used once and then you’re ready to apply.

There’s a similarly good deal with the Barclaycard Platinum with Purchase, giving 12 months at 0% on both purchases and balance transfers, and charging a slightly higher APR of 16.9%.

You also get to use the Barclaycard Freedom reward scheme. It allows you to earn reward ‘money’ at certain retailers, which can then be redeemed against other shopping.

The best personal loans

If you don’t think you could repay the full amount during the 0% introductory period, or you prefer the structured repayments of a loan compared to a credit card, there are some competitive deals available for people with an excellent credit score.

For example, if you wanted to borrow £5,000 over three years, Alliance & Leicester, Santander and Sainsbury’s all offer a typical APR of 8.8%, meaning you’d pay £157.75 a month and total interest of £679.

Alternatively, a personal loan from Tesco Loans has a typical APR of 8.9%, so you’d pay a fraction more interest over the term at £687.

But the best rates are on larger loans, so it might even be worth considering consolidating some debt alongside whatever you need the loan for – you could shave money off any other borrowing.

For example, Nationwide FlexAccount customers can qualify for a market-leading personal loan rate of 7.7%. So, if you have an existing FlexAccount current account with the building society, you could potentially borrow £7,500 over three years and pay just £233.09 a month.

That means you’d fork out total interest of £891 over the life of the loan.

If you’re not an existing customer, there are still some great deals. Alliance & Leicester, Santander and Sainsbury’s all offer a typical APR of 7.8%, while Tesco Loans typically charges 7.9%.

Finding the right loan for you

Realistically, not everyone is going to qualify for a market-leading rate like 7.8%. Providers have to give 66% of the customers they accept their typical APR and can charge riskier customers more.

However, they could also simply refuse to lend to you at all. Remember that every time a prospective lender searches your credit file, it leaves a ‘footprint’. Making too many applications in too short a time can harm your credit score and prevent you qualifying for the best loan or credit card available to you.

That means it’s important to be realistic about what you apply for. Check your credit score yourself before choosing a loan. If you want a credit card instead, our ‘Find the right card for you’ service matches you up with deals you’re more likely to qualify for.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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