Why Are Larger Personal Loans Cheaper Than Smaller Ones?

If you have ever shopped around for a personal loan, you may have noticed an odd discrepancy in the rates of interest charges by banks or building societies.

Often, you will find that the larger loans attract the lower interest rates.  This seems counter intuitive, as you might expect the lower value loans to offer the lower interest rates.  However, there are compelling reasons why lenders can offer larger loans at rates which have now fallen to pre ‘credit crunch’ levels.

Personal loan rates fallen to 2006 levels

Despite the Bank of England keeping interest rates on hold since March 2009, banks and building societies have been cutting their personal loan rates over recent weeks as a price war develops.

The Financial Times reports that Nationwide is the latest lender to cut its personal loan rates.  The building society now offers loans of between £7,500 and £15,000 at 6.6 per cent.  The last time the rates were this low was in late 2006, before the ‘credit crunch’.

However, considering the UK’s inflation rate is higher now than it was in October 2006 (4.5 per cent compared to 3 per cent) the FT reports that borrowing is ‘cheaper than it has been for many years.’

The newspaper reports that ‘the spending power of cash is decreasing faster now – reducing the value of outstanding debt, assuming a borrower’s income rises alongside prices. At the same time, the lower rates of interest charged provide a further benefit to borrowers.’

Other lenders have been reducing their personal loan rates over recent weeks and Nationwide’s move was in response to Alliance and Leicester’s recent decision to cut their loan rate to 6.7 per cent.  Sainsbury’s offers loans at 6.8 per cent whilst Marks and Spencer charges 6.9 per cent.

Larger loans attract lower interest rates

Interestingly, these exceptionally low personal loan rates are generally only available for larger loans – typically £7,500 to £15,000.  For example, the FT reports that Sainsbury’s offers loans of £7,500 at a rate of 6.7 per cent – but for loans of £4,000 the rate of interest jumps to 12.8 per cent.

Part of the reason that these rates are so low is because loans of around £7,000 to £8,000 are the most popular and it pays to be the leading company in the ‘best buy’ tables.  However, there are other reasons as Kevin Mountford from Money Supermarket explains. “The cost of processing a loan tends to be the same however much is borrowed so it makes more financial sense for banks if customers borrow more.

“The larger the sum, the longer they will tend to take to pay it off. So the interest rate may be lower but the bank will be receiving more months of repayments plus interest.”

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