Personal loan towards car. Take out more to pay less interest?

Diego_Francis

I require to pay £3000 towards a car after deducting the value of a part exchange.

If I were to borrow that much in a loan I'm looking at £680 roughly to pay in interest over 5 years.

If however I were to borrow £5000, I only have to pay up to £460.

I could pay the £3k with £2k left over to pay off the loan and thus leaving me with a £3k loan paying £91 per month for five years, until I get the money saved up I can pay it all off sooner.

Would this work? Could I borrow more, even though 20% of the borrowed money will be given back almost straight away, without any penalties?

Could I reduce the term without the interest going up?

Additional info, I have savings I could use to pay the money but would rather lose £460 over 5 years than lose a good chunk of savings now that can go towards other things. :beer:

[Deleted User]

It could work, subject to any early repayment fees.

Check whether payments remain the same or if the term remains the same. Generally, it's the former.

enthusiasticsaver

Why 5 years? See what the interest would be over a shorter term?

Diego_Francis

I did. That's what I'm saying, to borrow £3k the interest paid during the term would cost me £680. Whereas if I borrow £5k it'll only cost me £460 in interest. That's what I find bizzare but it seems likely to work.

Diego_Francis

Thanks for your input. I'll make sure, whoever I borrow from, what charges apply and if the term could be reduced.

foxy-stoat

Diego_Francis wrote: »

I did. That's what I'm saying, to borrow £3k the interest paid during the term would cost me £680. Whereas if I borrow £5k it'll only cost me £460 in interest. That's what I find bizzare but it seems likely to work.

The interest rate is reduced if you borrow more money, if you repay the £2,000 you dont need you will probably get charged 58 days interest, which wont be very much. You will be able to reduce the term or reduce the monthly payments. Obviously the cost per month to borrow £5000 is more than £3000 - so why not just borrow £3000 but repay over a shorter term, that will reduce the interest you pay.

DrEskimo

foxy-stoat wrote: »

The interest rate is reduced if you borrow more money, if you repay the £2,000 you dont need you will probably get charged 58 days interest, which wont be very much. You will be able to reduce the term or reduce the monthly payments. Obviously the cost per month to borrow £5000 is more than £3000 - so why not just borrow £3000 but repay over a shorter term, that will reduce the interest you pay.

I work out that the interest rate is 8.7% for the £3k loan, and 3.7% on the £5k loan.

By taking the £3k loan at 8.7% over 3yrs they would reduce the interest to £402.
However, if they took the loan for £5k at 3.7% and overpaid it by £2k, they could use that to reduce the term to 3yrs and only pay about £170 in interest, with a cheaper monthly cost as well.

Obviously not counting any overpayment charges that might apply.

However, OP have you looked at selling the car privately rather than P/X? You could feasibly get around £1/2k more for it, thus needing to borrow only £1/2k to change car. You could pay this difference on a 0% credit card over say 24months, which will incur no interest and be less per month than any of these loans.