Why borrowing that little bit extra may end up costing you less money in the long run

The cheapest personal loan deals have just become cheaper, following launches in recent days from Nationwide Building Society and M&S Money. Both offer a rate of 6.7 per cent APR for loans of £7,500 plus.

But it's not always about the interest rate. If you're seeking finance to help with the cost of home improvements, to pay off a holiday or perhaps to change the family car, then this is welcome news, as a personal loan from your bank or building society is often the cheapest unsecured option.

Most loan providers stagger or tier their interest rates according to the amount borrowed, with the general rule being the larger the loan, the lower the interest rate. However, the way that some lenders structure the pricing of their loans means there are circumstances where you can actually save yourself a bit of money by borrowing slightly more.

This may sound a little contrary, but if the amount you're looking to borrow is close to the crossover point for the next tier, it can sometimes be more cost-effective to borrow that little bit extra.

Here are a couple of examples that prove my point. Currently, a 7,000 loan over a five-year term from M&S Money is advertised at a rate of 12.9 per cent APR, meaning repayments are 156.39 a month.

But if you were to borrow an extra 500 the advertised rate drops to 6.7 per cent APR and the repayments are almost 10 a month lower at 146.75. As a result, borrowing an additional 500 will save you 578 over the full 60-month term of the loan.

Similarly the rate on a 7,500 loan with AA Financial Services is 4 per cent APR cheaper than a 7,000 loan. Consequently it's actually 129 cheaper to borrow 500 more over five years.

It's also worth bearing in mind that the tier structure will vary between lenders, so you should check out competitor rates as you might be able to cut your interest charges by borrowing elsewhere.

If you're looking to borrow a smaller sum, you're likely to be put off by the high interest rates. For example the average rate for a 3,000 loan is now a staggering 19.1 per cent APR.

A cheaper alternative for amounts between 1,000 and 3,000 is to be smart with your plastic and perhaps opt for a 0 per cent promotional deal on purchases such as the 15-month promotion with the Clubcard from Tesco Bank.

Alternatively, you could make your purchase by credit card and then switch it to a 0 per cent balance transfer deal.In this market there are even longer-term deals to be found, with MBNA just this week launching its longest ever interest free balance transfer card, giving you 0 per cent for 19 months (subject to a one off transfer fee of 2.5 per cent).

With a growing choice of long-term interest free promotional offers currently available, there's a good opportunity for you to fully repay your borrowing before the 0 per cent offer runs out.

• Andrew Hagger is head of communications at Moneynet.co.uk