The low headline rates might appear attractive, but most lenders apply a tier based pricing structure which means the lowest rates are normally reserved for people borrowing over £5,000. While some banks and building societies impose rates that are three times more expensive on those borrowing small amounts.
For instance Alliance & Leicester will apply a rate of 6.9% if customers want to borrow £5,000. However, anything less than that and the customer will pay 13.9%.
According to lenders, the disparity in rates is because of their claim that higher risk borrowers often want to borrow small amounts and the rates for small amounts are set higher to take account of the greater risk.
However there a few lenders, such as Northern Rock, who have a policy of charging a standard rate across all loan amounts.
If you're thinking of borrowing an amount which is just below a rate threshold, it might be worth borrowing a little extra to push you into the next tier. It may be that borrowing just one pound extra could save you hundreds of pounds in interest.
Example based on borrowing £5K loan over 36 months (3 years)
|Loan amount||APR||Cost per month||Total amount repaid||Interest charges|
The example above demonstrates that borrowing an extra £1 would save £539.67 in interest charges.