Borrowing less will cost you more

The celebrity lifestyle is great if you can afford it. More and more people are copying their celeb idols by living it large. Every city has its fashionable bar known to the local glitterati where thousands are splashed out every weekend.

We don’t all have the money of R&B legend BeyoncÈ though. She can give anyone lessons in divadom if a recent night out is anything to go by. BeyoncÈ and her 30-strong entourage recently managed to spend $10,000 on ten magnums of Belvedere vodka, a $4,300 bottle of Hennesy cognac and Caribbean cocktails – in one night.

It sounds like an impressive night out – the problem is that of course few of the rest of us can afford to spend quite as much.

Living it up

However if you fancy living a little and need to borrow a bit of extra cash to tide you over, you could end up paying over the odds. New research from shows poorer people looking to borrow money are suffering as loan firms make their smaller loans more expensive while making their larger sums more competitive.

Loans of under £5,000 are used for a number of reasons, including:
– to consolidate debt to bring your finances under control
– to pay off debts on different credit cards
– to pay for a new car
– to make minor home improvements
– to pay for a family holiday

The less well-off suffer believes the less well-off are being penalised – around 60 per cent of searches on in the last three months for loans of under £5,000 were by people regarded as having "adverse credit records". That means that people who are already struggling to make ends meet are also in danger of paying more for their loan.

Average rates for personal loans of less than £5,000 have increased dramatically in the past six months while rates for £5,000 or more have fallen or barely moved.

The average interest rates on smaller loans are as follows:
– £1,000 loan 16.1%
– £2,500 loan 15.41%
– £3,000 loan 13.8%

The better-off are doing well

In the meantime, £5,000 personal loans have actually got cheaper with average rates dropping from to 8.62 per cent over the last six months. And that’s despite the Bank of England pushing through four base rate increases. That ought to mean borrowing becoming more expensive for everyone but that is not the case.

The message is clear – the less you borrow the more you will be charged by some banks. So should you borrow more?

Getting the best deal

The less well-off and those with poor credit records are those who will struggle most with higher charges for loans, and it really is the case that bigger is better when it comes to personal loans. The more you borrow the better the deal you get. The less you borrow the more the lenders cash in.

Fortunately there are still some very good deals to be had so the trick is to keep abreast of market developments and shop around.

For example, loan firms offering deals below seven per cent on sums of £2,500 include:

– Zopa
– Northern Rock
– Norwich & Peterborough Building Society

We’re not all the same

The problems come because not everybody qualifies for the rate advertised. If you have a poor credit record – maybe you’ve missed a few credit card payments – then you may well be charged a higher rate than the one the providers advertise.

The best way to avoid this is to test the water before you apply. offers a free credit profiling service which helps people to understand their likely credit profile by answering straightforward questions about their credit history. We can then recommend products from providers who lend to consumers with similar profiles, which lessens the likelihood of being rejected. Click here to learn more.

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