When borrowing £1 costs £600.

Loans have more pitfalls than disused colliery. The latest bizarre trick, sent to me by MoneySaver Nigel Durbridge, isn’t close to the most despicable piece of financial manipulation but it certainly makes you think…

The cost of a pound

The interest rate on Tesco’s loan bizarrely jumps if you borrow £20,000 or more; it’s rather bizarre as normally loans get cheaper the more you borrow, but not Tesco, which makes it quite peculiar. And it has some interesting consequences:

  • Borrow £20,000 at 7.8% over 5 years and the total repayment is £24,080
  • Borrow £19,999 at 6.6% over 5 years and the total repayment is £23,419

In other words you pay £661 more for the sake of borrowing a quid more. Quite ridiculous.

Sometimes borrowing more is cheaper

Nigel’s email made me think that it was worth setting out again that the logics even more powerful the other way round; when tiers get cheaper the more you borrow. In the past I’ve railed against bank’s irresponsible cries of “borrow more it’s cheaper”, as what they mean is borrow more and you get a lower interest rate; but it still costs a lot more.

Yet there are perverse times when it is actually genuinely cheaper. Barclaycard’s loan costs 13.8% under £4,000 and 6.8% above that:

  • Borrow £3,900 at 13.8%, and the total repayment is £5,330
  • Borrow £4,500 at 6.8% and the total repayment is £5,300

This means it’s much cheaper to borrow a few hundred pounds more. Therefore the correct strategy is even if you only need to borrow £3,900 you should borrow £4,000 and put the extra £100 towards the first repayment.

Obviously there’s more info on the current cheapest loans, including the tiers in the Cheap Loans article

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