Worth borrowing more than you need for a cheaper interest rate?

P1dge_Svr

Hi All

An MSE Newbie here.

I'm looking to borrow £5,000 for much needed decking replacement.  All the interest rates for borrowing this amount are astronomical and I need cash to pay the gardener (they don't accept credit card). 

I've found a loan offered by RateSetter offering 4.8% interest if £15,000 is borrowed for a small arrangement fee but no early repayment fees apply and overpayments are allowed without extra charge.

Would it be an idea to borrow £15,000 to secure this interest rate and (subject to me interrogating the terms and conditions more thoroughly) repaying £10,000 within a day or so of the loan landing in my account?  I'd then (in theory) just have to repay the rest of the loan at the lower interest rate.  Has anyone tried this before?

Many thanks.

CliveOfIndia

In theory yes, this can work.  Martin Lewis himself makes reference to it here: https://www.moneysavingexpert.com/loans/cheap-personal-loans/

Obviously, be absolutely sure that there will be no overpayment charges or limits.

Do be aware that 4.8% will be the "representative" rate, not necessarily the rate you'll be offered.

An alternative approach may be a money-transfer credit card.  This deposits money into your bank account and puts a corresponding debit onto the card, which you repay over a set amount of time (12 or 18 months, for example).  If you're accepted and are offered a high enough limit, it's possible to get a very low rate of interest (sometimes even zero), though there is usually a one-off fee to pay.  Might be worth considering.

The one major caveat with doing this - you must ensure you'll be able to repay the card in full by the time the promotional rate expires.  Otherwise you'll start getting charged interest at the card's standard APR, with no guarantee that you'd be able to transfer any remaining balance to another card.

But it's an option to consider.

Herzlos

With my bank, there seems to be a threshold at £7500 where you get a much better rate, so I've borrowed the full £7500 a couple of times and then overpaid what I didn't need. But there were no overpayment fees and the term went down whilst the payment amount stayed the same.

Some loans will let you overpay and reduce the payment amount, or the term, so you'd want to check on that before doing it because the repayments on a £15000 loan will be about 3x higher than on a £5000 loan.

P1dge_Svr

Many thanks, Clive and Herzlos.  

I'll have a look into the money transfer credit card.  Clive, re your comments about there being no guarantee in balance transferring to another card, are you just mentioning that as we don't know what products will be available 12-14 months from now?  I've balance transferred to 0% cards a few times from other credit cards with no issue in getting approved or finding cards to transfer to (I have a very good credit rating).

Herzlos - thanks for sharing your experience and that's really helpful to know about just the term shortening rather than the monthly amounts.  I'll definitely be mindful to check that.

CliveOfIndia

P1dge_Svr said:

Clive, re your comments about there being no guarantee in balance transferring to another card, are you just mentioning that as we don't know what products will be available 12-14 months from now?

Exactly that.  Hopefully, you would be able to transfer any remaining balance - but it's a dangerous gamble to just assume that will be the case.  If you find yourself with a substantial balance remaining which is now attracting 30% interest and no transfer offers available, you're in a bit of a pickle.

When Covid first hit we saw lenders tightening their belts in a big way, and credit became much harder to obtain.  In 18 months or 2 years time, who knows what the financial landscape will look like?  Maybe everything will be rosy and credit will be cheap and plentiful.  Maybe there will be another Covid type event coupled with escalating conflict between Russia, Ukraine and someone else, and credit may well be near-impossible to obtain.

Obviously, I sincerely hope that it's the first scenario that actually plays out!  But it's prudent to plan for the worst-case scenario, depressing as that may be.