Small loans more expensive at big banks

Over half a million people who took out loans for less than £5,000 in the past year have, on average, been paying too much interest, according to uSwitch.com.

The best offer for a loan for under £5,000 is currently 5.9 per cent APR, but the 'big five' high street banks have been charging an exorbitant average of 15.4 per cent.

uSwitch's figures show that some people had been pay over three times the typical APR advertised by the same providers, and over four times the Bank of England's base rate.

This practice is known as using a 'tiered loan rate' system, where lenders offer lower interest rates for larger loans and higher ones for smaller sums and it is more expensive for small loans to be taken out over a longer period of time. Since one in six loans taken out over the last year was for less than £5,000, this is becoming a major headache for consumers.

Edwin White, head of personal finance at uSwitch.com commented: "Loans are undoubtedly the most cost effective option where a customer is looking to borrow large sums of money. However, with only a few exceptions the rates remain highly uncompetitive on small loan amounts. People really need to shop around when they’re looking to borrow less than £5k and make sure they are not enticed by headline grabbing rates that are only available on larger loans."

The most popular reasons for taking out these small loans are for car purchases, 36 per cent, debt consolidation, 30 per cent, and home improvements, ten per cent.

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