It costs more to borrow £5,000 or less, research shows

News - Banking

Written by Ray Clancy

Friday, 13 August 2010 08:24

Personal loan rates under £5,000 in the UK have reached a ten year high while loans over that figure are starting to fall, research reveals.

The situation means that higher loans cost less with borrowing over £5,000 can cost nearly £500 less in interest, says comparison site moneysupermarket.com.

Personal loan rates have been on the rise since early 2006, however in recent months rates for loans of over £5,000 have become more competitive with the average top 10 rates at 10.46% compared to 10.68% at the beginning of the year.

However the same cannot be said for loans less than £5,000 as rates continue to increase. Borrowers are now paying up to 135 per cent more for their loan compared to four years ago.
It is now more cost efficient for borrowers to consider increasing the sum they wish to borrow. A borrower looking at £4,500 over five years would pay back £1,643 in interest from the current best buy provider, however increasing this amount to £5,000 over the same term, a borrower would pay back just £1,150, saving £493 in interest plus they would have an additional £500 to spend for the same monthly repayments.

‘The credit crunch has really impacted borrowers who are looking for smaller loans. Not only is it more difficult to get a loan, with many lenders tightening their approval criteria, those that do manage to get one will undoubtedly pay through the nose. Previously lenders kept their rates consistent with the Bank of England Base Rate, but since it dropped to a record low, banks have used this as an excuse to release the reins and increase the cost of lending massively,’ said Tim Moss, head of loans and debt at moneysupermarket.com.

‘If you are financially stretched and in need of a loan, now is the time to play the banks at their own game and really use current provider rates to your advantage. By borrowing a bit more you can actually save yourself money without increasing the term or monthly repayments, which shows just how much the market has changed. As with all products it is vital to shop around to make sure you get the best deal and don't be tempted to borrow more than you can really afford to pay back,’ he added.

Meanwhile, research from NS&I Savings shows Britain’s savings levels are at two year high, the first increase in amounts set aside each month by savers for 12 months with 50% of the British population now committed to a monthly saving habit.

The survey shows that although the economic environment remains challenging, the proportion of income that people are setting aside has returned to levels not seen since before the start of the economic downturn.

The research also shows a significant change in the population’s financial behaviour with people increasing the amount they are setting aside for the first time in a year. On average, Britons are now saving £85.21 each month, up from £81.94 last quarter.

‘It is encouraging news that many of us are managing to put a few more pounds away each month. However, our latest Savings Survey showed that nearly a third of us still don't feel confident we have enough money to get by in an emergency, and it is only by maintaining our commitment to savings that we will achieve this peace of mind,’ said Tim Mack, savings spokesman at NS&I.