Borrow more than I need to get lower interest rate - good idea?

chubsta

I am looking to buy a second hand car for about £5000. I usually get loans etc with nationwide as I have my bank accounts and mortgage with them and get good rates usually. I have checked their loan calculator and the apr drops from 3.9% to 2.9% at £7500, which means if I borrow 5000 over 60 months at 3.9% it costs me £502 in interest over the period. If I borrow £7500 over 60 months it costs me £558 over the same period. So, would I be better off getting the loan for £7500 and a month down the line paying a lump sum of £2500 off the loan - I am guessing interest is not front-loaded so would that reduce the amount of interest I pay over the period? Also, I currently anticipate paying my mortgage off in 6 months and then all the money from overpayments and mortgage payment would go to pay the car loan off even earlier, I am only going for 60 months initially because it makes the payments on the car until the mortgage is finished lower.

Does this sound reasonable or am I completely missing something? (There is no way I would use the extra £2500 for anything as am very disciplined with money these days - have no other debt than the mortgage at all, not even phone contracts...)

Ebe_Scrooge

Perfectly reasonable - in fact, Martin himself advocates this approach in point 2 of this article : https://www.moneysavingexpert.com/loans/cheap-personal-loans/#steps

Front-loading of interest has been illegal for quite some time now, so no worries on that score.  There may be a limit to how much overpayment you can make without penalty - you'll need to check the T&Cs carefully.  But basically yes, it's a good plan.

onlyfoolsandparking

Your missing nothing from what I can see, It's a smart move to borrow at the cheapest rate possible and if that means borrowing more than you 'need' THEN overpaying to reduce interest cost even further then it's a no brainer. I recently borrowed 9k for my new car and the interest with overpaying is around £363.

Sncjw

Be aware the calculator isn't a garuntteed rate. It can go up or down based on your credit records and their criteria. 

chubsta

Thanks for the replies everyone - found a nice car for £6500 yesterday so am getting that but borrowing the £7500 to get the lower rate of 2.9% (all sorted so did get the lower rate...), Will use the extra £1000 to pay off straightaway, if all goes well should have the whole lot gone by the end of next year at the very latest

Thesaltmustflow

chubsta said:

Thanks for the replies everyone - found a nice car for £6500 yesterday so am getting that but borrowing the £7500 to get the lower rate of 2.9% (all sorted so did get the lower rate...), Will use the extra £1000 to pay off straightaway, if all goes well should have the whole lot gone by the end of next year at the very latest

That's great news, If it were me I wouldn't be in a rush to overpay the 'extra' £1000, the 'new' car you have just bought might just want something doing on it (hopefully not) and that money will come very much in handy then.

chubsta

Thesaltmustflow said:

chubsta said:

Thanks for the replies everyone - found a nice car for £6500 yesterday so am getting that but borrowing the £7500 to get the lower rate of 2.9% (all sorted so did get the lower rate...), Will use the extra £1000 to pay off straightaway, if all goes well should have the whole lot gone by the end of next year at the very latest

That's great news, If it were me I wouldn't be in a rush to overpay the 'extra' £1000, the 'new' car you have just bought might just want something doing on it (hopefully not) and that money will come very much in handy then.

I know what you mean - this is the first 2nd hand car I have bought since the late 90s as have been having new cars since then. It is a very traumatic time worrying about everything that could go wrong with it - even a great car when you buy it can go wrong down the line which was one of the reasons why I got new for my last few cars, at least everything should be covered by warranty in those cases, but not here. Having said that, the garage I have bought from have a great reputation and offer their own 'warranty' for six months which is far better than any of the commercial ones so hopefully all will be ok. At least I haven't spent a huge amount of money on it - I have gone from small city cars to a medium suv-style as need room for the dogs and daughter will hopefully start driving soon so she is having the existing car. I figured rather than buy her a car it made sense to spend the money on one more suitable for me and at least I know she will have a reliable one...