1 in 10 adults in the UK have a personal loan with an average size of £10,000, lasting for four years. The number of unsecured loans in the UK is on the increase. According to UK Finance, they’re rising four times faster than wages. Personal Loans Now explores whether borrowing more can save you money.

Borrowing more can save money - Personal Loans Now

Learning Highlights
  • What the interest rates are for personal loans
  • Why bank customers don’t know about the tiered-interest structuring system
  • What to do before taking out a loan
  • Borrowing more than you need
  • What to be careful of with small personal loans
  • Conclusion – Borrowing more can save you money

In this article, we look at the way that the interest rates of personal loans are structured. In which circumstances would it make more sense to borrow more money than you need? We also offer handy tips if you’re planning to borrow and which factors to consider.

Interest Rates on Personal Loans

The APR on a personal loan depends on some factors. One of these is the amount you wish to borrow. Lenders apply a tiered system for the interest rates they charge their customers.

According to Moneyfacts, the average APR is as follows:
Up to £1,000 20.6% APR
£1,001 – £2,000 19.5% APR
£5,000 8.5% APR
£7,500 4.7% APR
£10,000 – £15,000 4.6% APR


As the figures show, the interest rates on more significant sums can be up to 5 times less than the APR on smaller loans. What does this mean regarding how much you pay overall? Let’s look at an example.

Imagine you were interested in taking out a flexible loan of £7,000 from Lloyds Bank over a period of 4 years. With an APR of 15.5%, you would have to make repayments of £193.03 a month. Over the loan period, you’d pay £2,265.44 in interest. However, if you took out a personal loan of £7,500, the APR would fall dramatically to 4.6%. This would mean that your instalments would be £171.05 a month. Over the 4-year loan term, you’d pay only £710.19 in interest, saving over £1,500.

This tiered system isn’t unique to Lloyds Bank. Both the Bank of Scotland and TSB also offer interest rates of nearly a third less on a loan of £7,500 compared to one of £6,000. Similarly, the Co-op charges an APR of 11.9% for loans of £6,000 but less than half of that (4.9%) for loans of £7,500.

Borrowing more can save money - Personal Loans Now

Why Don’t Bank Customers Know about the Tiered-Interest Structuring System?

Financial regulators are reluctant to let banks publicise the way they structure their interest charges. Their concern is that it could be unethical and encourage consumers to take on higher levels of debt. This could lead to irresponsible borrowing of sums they’d struggle to repay.

Another reason why banks don’t inform their customers is that smaller personal loans with their higher interest rates are a lucrative source of revenue. Although banks have always structured their APR in this way, cut-throat competition in the mid-price loan market nowadays has seen interest rates on these loans fall even more. The typical APR for a loan of £7,500 is often used in advertising, and so this is the rate that many prospective borrowers see first.

What to Do Before Taking out a Personal Loan

Knowing about the structuring of loan interest rates doesn’t mean that you should automatically borrow much more money than you need. Remember that the loan has to be affordable so that your debts don’t spiral out of all control. The other thing to bear in mind is that financial institutions only have to give the advertised APR to 51% of its customers. There’s no guarantee that this is the rate you’ll be offered.

Borrowing more can save money - Personal Loans Now

Your first step should be to research the market. Use a price comparison site to see what products are available and if you fit their lending criteria. Applying to financial institutions which won’t accept you will only damage your credit rating without reason. Don’t just concentrate on mainstream lenders. It’s quite possible that you’ll be eligible for a much better deal from a loan company or some of the newer platforms such as peer-to-peer lending.

Borrowing More than You Need

Many lenders have a calculator on their website. This allows you to fill in your personal information and the size and duration of loan you’re interested in. Once you have an idea of the estimated APR and how much you’ll repay in total, play around with the numbers a little. Increase the sum borrowed and the duration of the loan and see what happens to the figures. Is there a point where you can borrow a little more but get a much better deal?

Borrowing more can save you money when it works out alot cheaper for you to borrow a little more and save on interest charges, but don’t just spend this extra money as an unexpected windfall. Instead, put the surplus cash in a savings account and use it to repay the loan faster. Check that there are no penalties for early repayment though.

Borrowing more can save money - Personal Loans Now

Small Personal Loans: What to Watch for

If you only wish to borrow a few thousand pounds, you’re obviously not going to borrow £7,000 just to get a better APR. When you see an interest rate of 19-20% for smaller personal loans, are they worth it?

For sums under £2,000, using your credit card can work out a cheaper option than taking out a personal loan. This is especially true if you can pay it back within a year and you have a preferential interest rate on the card. However, you must treat the outstanding balance on the card as you would a personal loan. In other words, you should budget and make regular repayments on time.

Conclusion – Borrowing More can Save You Money?

The figures prove that borrowing more can save you money. However, this is only true for those who wish to borrow a sum of money which is near the threshold where interest rates go down. Using a loan calculator will show whether this is true of your situation. And don’t forget that other factors come into play when the lender decides on the APR they charge such as your credit rating. For someone wishing to borrow smaller sums of money, a personal loan isn’t the only solution. Look at other forms of credit before taking out a loan so you don’t end up paying money unnecessarily.

Borrowing more can save money - Personal Loans Now