Finding the best loan rates is heavily dependent on the amount of money you borrow. Read our guide to learn how you can get one of the best low interest loans.
If you took out a personal loan of £4,500, would you expect the interest you pay back to be:
A. less than if you borrowed £5,000?
B. the same as if you borrowed £5,000?
C. more than if you borrowed £5,000?
You might be surprised to learn that the correct answer is C.
You’d be forgiven for thinking that if you were borrowing less money, you’d get a low rate loan, but more often than not this isn’t the case. Here, uSwitch explains how and why the best loan interest rates are affected by the amount you want to borrow.
Why you pay high interest rates for a smaller loan
Why? It’s not always clear, but generally speaking, the APR that a lender sets for a loan is an indication of the risk the company feels it is taking and of the likelihood they think they have of getting their money back. It could be that loan companies see the need to borrow smaller amounts as an indication that the borrower doesn’t have any savings to fall back on, and is therefore less responsible with their personal finances.
When you think about the wider borrowing market, it starts to fall into place – think about mortgages, which typically have a high loan amount and lower interest rates, while at the other end of the scale, payday loans are generally for very small amounts but have huge APRs.
How to get the best loan rates
When you’re looking for a loan, checking what APRs are available for a few different loan amounts. You might find that by borrowing more, you can reduce the amount you pay back in interest. If you’re worried about the temptation of borrowing more money than you really need, you could put the extra money into a savings account or, if there’s no penalty, pay the excess back straight away. Compare loans now.
Alternatively, if you’re looking to borrow a small amount of money, read our article on small loans to find out more and see what different options are open to you.