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Jie Bie

Personal Loans

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One of the banks with which I hold an account, through their online banking service, allows you to find out what interest rate they would charge you on a personal loan, based on your history with them, how much you'd like to borrow, and what term you would like to pay it over. This piqued my curiosity so I've had a look to see what they had to offer.

What I've noticed is slightly odd. Lets say I want to borrow £10,000 and pay it back over four years. The interest rate I could expect to be charged would appear to be in the region of 8%. I'd say that's pretty reasonable. Not great, but not that much more than current mortgage rates for 90% mortgages. In fact its probably less than the annual inflation rate for certain commodities!

However if I only want to borrow £6000, and pay it back over the same four year term, the rate nearly doubles to 15%. At first I thought that this might be because they want to discourage low value loans over relatively long repayment terms, so I changed the repayment period to three years, and then to two years, and then even to one year. It made no difference, they still wanted to charge me a higher interest rate for borrowing less money, regardless of the timespan I would pay it back. I played about with this for a while, and it seems that for any loans under £8000 they charge a rather hefty premium.

In fact, there's actually a tipping point where it makes sense to borrow slightly more as your overall repayments will decrease!

Why do banks do this? Is it to encourage us to borrow more so they can make more money via interest?

There is a logic to that, however if a customer walks into a branch, and is undecided between borrowing £5k over two years or £10k over four years then surely it is the first option that presents less risk to the institution?

Edited by Jie Bie

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It's the fixed costs of providing the loan which are folded up in the overall interest rate (most folks who are looking to borrow money would not be able to stump up an application fee, so the cost of providing the loan forms part of the borrowings, albeit undetailed)

In the extreme you end up with the very short-term loans with APR's in 4 figures so beloved of politicians looking for a soundbite.

Edited by cheeznbreed

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John's money sits in a savings account at ~1% APR, whilst that same money gets lent out to Alice at ~15%.

If you are going to borrow relatively small amounts of cash, and have 'credibility' avoid the big banks, and of course stay away from the vulture lenders, or perhaps go to an Islamic bank.

What a mixed up country Britain is.

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...only a guess, one of the reasons could be......people that only want to borrow a small amount at a high rate of interest are likely to be people with little savings, otherwise they would use their own money, so they would tend to be a higher risk of non payment....think of credit cards, the interest rate is always higher for small amounts. ;)

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...only a guess, one of the reasons could be......people that only want to borrow a small amount at a high rate of interest are likely to be people with little savings, otherwise they would use their own money, so they would tend to be a higher risk of non payment....think of credit cards, the interest rate is always higher for small amounts. ;)

That would make sense. Except in this case the interest rates offered via their online banking are tailored to my history with the bank and what they know about me.

They know details of most of incomings/outgoings. They have an idea about my savings.

Yet if I want to borrow < £8000 they will charge me a higher rate of interest than if I wanted borrow £14k.

That makes no sense. Although cheeznbreed might be onto something with the fixed costs thing.

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That would make sense. Except in this case the interest rates offered via their online banking are tailored to my history with the bank and what they know about me.

They know details of most of incomings/outgoings. They have an idea about my savings.

Yet if I want to borrow < £8000 they will charge me a higher rate of interest than if I wanted borrow £14k.

That makes no sense. Although cheeznbreed might be onto something with the fixed costs thing.

So why not use your savings?......what is known about you maybe only the tip of the iceberg...people often have more than one account spread over different places.....one banks best customer, another banks worst. ;)

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That would make sense. Except in this case the interest rates offered via their online banking are tailored to my history with the bank and what they know about me.

They know details of most of incomings/outgoings. They have an idea about my savings.

Yet if I want to borrow < £8000 they will charge me a higher rate of interest than if I wanted borrow £14k.

That makes no sense. Although cheeznbreed might be onto something with the fixed costs thing.

Look at the 'total amount payable' in each case of amount and term. You're quite right that the risk is obviously lower with a smaller amount, but the man gotta get paid...

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There is some new rule out isn't there saying they have to give the headline rate they advertise to a certain percentage of people.

Maybe those who go for lower amounts e.g. <7.5k are the "subprime" types so they can be shafted a little and the rates they quote

for £7.5k-£15k can be advertised at lower APRs, the thinking being the subbies would be too afraid to apply for more than 7.5k

for fear of knockback?

That's my take on it anyway.

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  • 311 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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