Why does borrowing less cost so much more

Almost all personal loan providers have adopted a tier based pricing structure, offering lower interest rates for larger advances. In many cases the differential between the highest and lowest interest rate can be considerable, often double and in some cases over three times as much.

Depending on the lender's exact loan amount requirements it may be worth some consumers borrowing just that little bit extra to push them into the next tier. Which means it could actually make sense to go deeper into debt!

Lisa Taylor, analyst with moneyfacts.co.uk comments, "Take for example a loan available from Marks & Spencer Money. Borrowers requesting a loan of £1,000 to £2,999 will be charged a typical rate of 19.9%, whereas borrowers of over £10,000 will be charged a typical rate of only 6.4% - almost a two thirds discount.

"As you would expect with such large rate variations, the difference between the individual loan tiers is also very visible, more noticeably around the £5,000 mark - borrowing just one pound extra could potentially save the consumer almost £540 in interest. Even if the lender stipulates increments of say, £50 or £100, it may still prove a profitable exercise."

Only a handful of providers offer one rate across all loan amounts. Taylor adds, "Obviously there are a number of factors that lenders consider when pricing their lending products, including the amount of loan business, their risk criteria and the overall position of the banks balance sheet. But when looking at this through the eyes of a consumer, there seems to be no clear answer as to why the pricing should vary dramatically.

"With computerised systems, internet applications, centralised decision units and automated payment collection, the cost of administering loans should be relatively low. And it is difficult to understand why this should vary, purely on the size of the loan."

With the average rates on overdrafts at around 12.5% and competitive introductory deals within the card and overdraft area available, it may well be worth consumers shopping around in these areas for smaller advances.

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