Borrow more than I need then repay some to reduce interest?

timmys

Hi,

Sorry if this is a very stupid question but I am considering a loan from First Direct.

I would be looking to borrow £5000 over 72 months for which they quote £82.80 a month (6.1%).

Would it be better to borrow £7000 (which qualifies for a lower rate; 4.7%) and immediately pay back £2000? I can't see anything in the early repayment details to prevent this?

Would I be decreasing my monthly repayment or the length of the loan by this early payment?

My wife did ring First Direct and they seemed to be along the lines of "you can do that but we can't recommend it"

Thanks in advance for any help.

Roland_Sausage

It would indeed be a better idea to do this from a money saving perspective.

I would say that you will most likely reduce the length of the loan, rather than the monthly amount but check the lender's small print.

The reason the bank is not going to recommend it is because it is going to cost them revenue in interest charges.

timmys

Roland_Sausage wrote: »

I would say that you will most likely reduce the length of the loan, rather than the monthly amount but check the lender's small print.

Thanks for your help but I can't see details of that anywhere, this is all it says in the Terms and Conditions;

"Early Settlement

13 You are entitled to repay amounts due under this agreement partially or in full at any time by giving us
notice. You can give notice in writing to first direct, 40 Wakefield Road, Leeds LS98 1FD or by calling us on 08 456 100 100. It is necessary to pay all amounts owed under the Agreement if you wish
to terminate the Agreement. Where you make any early repayment, there may be a reduction in the amount of interest you will have to pay. We are entitled to defer the early repayment date by up to 28 days and to make a charge equivalent of one month interest on the amount of the early repayment."

firstdirect.com/content_static/pdf/loans_terms_conditions.pdf

iolanthe07

6.1% and 4.7% are both good rates, if they are APR. Be aware that the headline rate is only offered to 51% of successful applicants, so they may come back to you with a higher rate.