Take out 7k loan for cheaper rate then overpay?

edited 30 November -1 at 1:00AM in Loans
4 replies 1.3K views
bobfish12bobfish12 Forumite
2 Posts
edited 30 November -1 at 1:00AM in Loans
Since there should no longer be a charge when making overpayments with a personal loan, does the following make sense?:

£7000 @ 5yr = £1114 interest 6.1% APR
£6340 @ 5yr = £1481 interest 8.9% APR

Therefore whats to prevent me from taking out the £7k loan, making an immediate overpayment (giving notice first) of £660, then paying a reduced monthly payment (due to less interest) over the 5 year term at the lower APR rate?

Anyone given this a go?

Replies

  • stephane_2stephane_2 Forumite
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    As far as I know it's not because you will be making over payments that your monthly payments will reduce, those will stay the same it's just that the length of time for repaying the loan will reduce. Monthly repayment are fixed
  • CLAPTONCLAPTON Forumite
    41.9K Posts
    10,000 Posts Combo Breaker
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    the principle is correct; borrowing more a higher amount to get a lower APR can save you money

    the details however you may need to check
    - the loan company can charge you up to two months interest for an overpayment
    - the company may or may no reduce the monthly payment; some will simply continue witht he original payment but he loan will end earlier.
  • cpjacksocpjackso Forumite
    246 Posts
    100 Posts
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    Just to add to this conversation - the monthly repayment on the loans would be;

    £7000 = £135.66
    £6430 = £131.30

    Presuming the £7k loan gets an instant £660 overpayment and monthly payment stays at £135.66, this would reduce the term by 7 months.

    (All figures are approximate - and I havent taken account of the double interest that someone else was saying about, re: overpayment).
  • bobfish12bobfish12 Forumite
    2 Posts
    Thanks for the input! :) Reducing the term by approximately 7 months, with the (found it in the t&c's) 28 days interest of ~£35 for overpayment would still technically save 6 months of interest and be a shorter loan agreement. Looks like i'll simply borrow that little bit more, get a cheaper APR, overpay, then pay the slightly higher monthly payment for 53 months rather than 60 :)
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