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Tiered Interest Rates

Tiered Interest Rates

Category: Loans

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

When looking for a cheap personal loan it is important not just to go with the provider that has the attractive headline advertised rate. This rate will apply for a certain amount of borrowing and most lenders charge different interest rates depending on how much you want to borrow. These are known as tiered interest rates.

Typically, the more you borrow the lower the interest rate you will get. In many cases the difference between the highest and lowest rate can be double and in some cases over three times as much. This doesn't mean it is a good idea to borrow more to get a cheap personal loan. Ultimately you can end up getting yourself in trouble by borrowing more than you can comfortably repay.

Lenders consider a number of factors when pricing their personal loans. This includes the amount of loan business, risk criteria and overall position of their balance sheet. It is difficult to see why the rates offered vary so greatly purely on the size of the loan. One factor is the cost of administering and setting up the loan is proportionately higher on smaller amounts. Also, it may be that there is higher risk and increased bad debt problems with smaller amounts or the fact that competition in the market is squeezing profit margins.

If you are thinking of borrowing smaller amounts such as £1,000, some providers are charging over 20% on their personal loans. In these circumstances you may be better off using a credit card with a cheap or 0% introductory rate. Many new lenders are coming into the personal loan market with minimum loan amounts of £3,000-£5,000, indicating that lower loan amounts are not profitable for them.

Whatever the reason for this tiered pricing, it shows that you must shop around and ensure you check the interest rate you are getting when looking for a cheap personal loan. If you are borrowing a larger amount it is also worthwhile considering Payment Protection Insurance (PPI) (see article on this).

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.