Overpay car loan or invest in ISA?

pete96

Hopefully this is a no brainer for someone, but for me I simply cant work out the best way to go....

I took out a car loan 16 months ago
Loan amount = £7000
I've currently paid 16 payments of £150 with 44 payment remaining.
Balance is at £5314.18 with a settlement figure of £5396.65
Loan is a fixed 8.9% APR
Intrest is front loaded but is calculated daily on outstanding balance.
I can make £100 overpayments each month without charge.

I also have a cash ISA
Interest is at 4.8% APR upto £10K (but i doubt it will ever reach that)

Both products are with Nationwide.

I'm currently saving a deposit for a house (£250pm), but would also like to help clear the loan as quick as possible and in the cheapest way possible. I think i should have a surplus £100 a month to either make overpayments, or put into the ISA until the balance can be cleared.

Which way should i go? Many thanks in advanced

peb

If interest is frontloaded you may as well add to your ISA. You won't save much by overpaying. Check out the snowball to be sure.

pete96

peb wrote: »

If interest is frontloaded you may as well add to your ISA. You won't save much by overpaying. Check out the snowball to be sure.

What is the snowball and how do i check?

pete96

Right, i've just discovered that snowball calculator thing. I've imput all the loan figures, i.e remaining balance, minimum payment, and run through two scenarios

1. Making the minimum payment
2. Increasing payments to £250

I've made two observations...

1. When making the minimum payment, it tells me it will take 41 months left to pay of the debt.... when im pretty sure i have 44!! Why is this??

2. When increasing payments by £100pm, the amount i pay in overall interest reduces from £818 to £443... quite a substantial saving no? Would i gain more then £375 if i took the route of ISA investment?

Cheers

CLAPTON

pete96 wrote: »

Hopefully this is a no brainer for someone, but for me I simply cant work out the best way to go....

I took out a car loan 16 months ago
Loan amount = £7000
I've currently paid 16 payments of £150 with 44 payment remaining.
Balance is at £5314.18 with a settlement figure of £5396.65
Loan is a fixed 8.9% APR
Intrest is front loaded but is calculated daily on outstanding balance.
I can make £100 overpayments each month without charge.

I also have a cash ISA
Interest is at 4.8% APR upto £10K (but i doubt it will ever reach that)

Both products are with Nationwide.

I'm currently saving a deposit for a house (£250pm), but would also like to help clear the loan as quick as possible and in the cheapest way possible. I think i should have a surplus £100 a month to either make overpayments, or put into the ISA until the balance can be cleared.

Which way should i go? Many thanks in advanced

why do you say the interest is 'front loaded' and what do you think that means?

pete96

peb wrote: »

If interest is frontloaded you may as well add to your ISA. You won't save much by overpaying. Check out the snowball to be sure.

One other question i have... from what i understand a mortgage is heavilly frontloaded with interest, but i hear/read everywhere that overpaying as much as you can whenever you can is THE thing to do to minimise the mortgage interest/term. So this sounds like a contradiction to me?? Sorry if im wrong and missing something though...

CLAPTON

Let me explain how it works

you borrow 7,000 at 8.9% interest

in the first month you owe 7,000 and so the interest is calculated on a daily basis

i.e. interest is 7000 x 8.9% x 30/365 (say 30 days in the month) so interest charged is £51.21
as your monthly payment is 150 in means that during the month 2 you owe only
7000+51.21-150 = 6901.21

so they charge you interest on a daily basis of
6901.21 x 8.9% x 30/365 = 50.48

so each month the amount of interest reduces because the capital you owe decreases

so in the last month you will pay less than a single pound in interest.

If you call this front loaded then so beit but it simply reflects the fact that if you owe a lot you pay a lot of interest and when you owe only a little then you only pay a little interest.

In fact just like a mortgage... and yes repaying the mortage off early will reuce the interest charged.

If nationwide allow 100 a month overpayments then go for it.

pete96

Thanks for that explaination, it has helped understand a bit more You say to go for the overpayments, but i still dont know whether this will be cheaper then saving in an ISA and settling later?

CLAPTON wrote: »

why do you say the interest is 'front loaded' and what do you think that means?

I understand front loaded means that the majority of the interest is paid at the start and gradually reduce (as per your explaination) as apposed to being a fixed amount every month which doesn't change... am i on the right lines?:o

CLAPTON

for every 100 you pay back on the load you save at the rate of 8.9%
for every 100 you save you get interest at the rate of 4.8%

so its a no brainer to over pay the loan

also by the way 4.8% on a ISA is a rubbish rate

pete96

Really? i just got it with nationwide because it was easy, able to do all my banking on one internet site. No point changing it untill i receive the first load of interest is there?