Overdraft over Loan, have I got these calculations correct?

FeistyFidget

Hi all.

I need to borrow approximately 4k and I've been looking at the pros and cons of extending my overdraft to this limit (shouldn't be an issue) over a conventional loan.

To extend my overdraft to 4k, there would be an annual fee of £50 plus 5.5% EAR. To pay this off over the course of 4 years would see fees of £1155.65 (£955.65 EAR fees plus £200 4 x annual borrowing fees)

To take a loan out over 4 years would be a 9.9% interest rate PA plus an arrangement fee of £100. The total interest and fees payable would be £960.48

On paper I know that the loan looks like the obvious choice as cheaper by £195.17 BUT the over-draft allows me the flexibility to easily pay it off quicker or reduce payments one month. Plus this is a current account so money is constantly being paid in which should reduce the interest paid (marginally). Also if I don't need the full 4k, I am not stuck paying interest on the total amount like I would be with a loan.

Maths is not exactly my strong point so I'm hoping one of you lovely lot could double check my sums and offer any input on the two choices. Thanking you in advance!

MallyGirl

FeistyFidget wrote: »

Hi all.

I need to borrow approximately 4k and I've been looking at the pros and cons of extending my overdraft to this limit (shouldn't be an issue) over a conventional loan.

To extend my overdraft to 4k, there would be an annual fee of £50 plus 5.5% EAR. To pay this off over the course of 4 years would see fees of £1155.65 (£955.65 EAR fees plus £200 4 x annual borrowing fees)

To take a loan out over 4 years would be a 9.9% interest rate PA plus an arrangement fee of £100. The total interest and fees payable would be £960.48

On paper I know that the loan looks like the obvious choice as cheaper by £195.17 BUT the over-draft allows me the flexibility to easily pay it off quicker or reduce payments one month. Plus this is a current account so money is constantly being paid in which should reduce the interest paid (marginally). Also if I don't need the full 4k, I am not stuck paying interest on the total amount like I would be with a loan.

Maths is not exactly my strong point so I'm hoping one of you lovely lot could double check my sums and offer any input on the two choices. Thanking you in advance!

Doesn't sound like there is much in it but remember that the bank can choose to ask for repayment of an overdraft at any point

ViolaLass

Have you checked whether the loan you might get allows overpayments and whether it charges for doing so?

FeistyFidget

MallyGirl wrote: »

Doesn't sound like there is much in it but remember that the bank can choose to ask for repayment of an overdraft at any point

Yes, I do worry about this and in this circumstance I would probably need to go down the loan route to pay it off. However I am confident that Santander will allow me to pay it off at my own rate as it's a business account that I've had with them since 2010 and they keep suggesting extended borrowing I should add I am a sole trader and the money would be used for business purposes.

ViolaLass wrote: »

Have you checked whether the loan you might get allows overpayments and whether it charges for doing so?

It does, but with financial penalties and there isn't the flexibility with regards to payment amounts that a over draft has.

enthusiasticsaver

The loan may allow you to make overpayments or repay early without penalty. Will you be disciplined enough to repay the overdraft or will you be tempted to keep it at or below £4k so that it is not repaid within the 4 years? Personally if you had to borrow I would look for a 0% money transfer card which would be cheaper than both those options.

FeistyFidget

enthusiasticsaver wrote: »

The loan may allow you to make overpayments or repay early without penalty. Will you be disciplined enough to repay the overdraft or will you be tempted to keep it at or below £4k so that it is not repaid within the 4 years? Personally if you had to borrow I would look for a 0% money transfer card which would be cheaper than both those options.

I HATE being in debt and I would be disciplined enough to aim to pay it off ASAP. That said I am solely self employed, the only income earner and currently about to start back at work after maternity leave so there is always that fear of not earning enough to pay it off as soon as I would like. Once cleared the overdraft would be bought back down to 1k only (for cash flow ease).

The 0% card is a very good option that I have done previously, I will look in to it again, thank you!