Can you use loans for stoozing?

Alex9384

Typically stoozing is done with credit cards. However, with some loans still being around 5% APR, it seems like it's possible to borrow around 20k for 4-5 years and put those money in a 5 year fixed savings which also earn almost 5% now. The loan amount reduces over year, but saved amount is 20k all the time and it's earning interest from day 1.

If I was approved for a loan and got their representative APR let's say 5.4%, the total repayable amount would be £22,225 over 4 years, or £22,795 over 5 years. Total saved amount over 5 years at 4.9% interest would be £25404, so £5404 earned in interest, minus interest charged on loan (2225 or 2795).

Monthly loan repayments would be around £380-463, depending for how long I would take the loan. Is there anything else where you can put these money monthly and earn similar amount at, without much risk? The strategy described above seems pretty much risk-free to me. Even if something happens and you can't make any more repayments, you still have the loan money in the savings account. You haven't spent them on anything. Compared to stocks, this won't make you rich, but at least you're sure your "investment" can't go down. And you are investing/saving bank's money, not yours.

An additional benefit is building your credit history, showing to other banks that you can pay back even 20k loan reliably.

Is there anything I'm missing?

I've never had any loan before, always just credit cards. I read just yesterday that some providers also charge a fee on top of the interest? Does that only apply to some subprime lenders or payday loans, or to most loans?

MorningcoffeeIV

Alex9384 said:

If I was approved for a loan and got their representative APR let's say 5.4%, the total repayable amount would be £22,225 over 4 years, or £22,795 over 5 years. Total saved amount over 5 years at 4.9% interest would be £25404, so £5404 earned in interest, minus interest charged on loan (2225 or 2795).

You'll lose money doing that.

You need your savings rate to be higher than your borrowing rate, not lower.

Your calculations will have missed out the repayments that you need to make, so reducing your savings every month.

MattMattMattUK

Alex9384 said:

Typically stoozing is done with credit cards. However, with some loans still being around 5% APR, it seems like it's possible to borrow around 20k for 4-5 years and put those money in a 5 year fixed savings which also earn almost 5% now. The loan amount reduces over year, but saved amount is 20k all the time and it's earning interest from day 1.

If I was approved for a loan and got their representative APR let's say 5.4%, the total repayable amount would be £22,225 over 4 years, or £22,795 over 5 years. Total saved amount over 5 years at 4.9% interest would be £25404, so £5404 earned in interest, minus interest charged on loan (2225 or 2795).

Monthly loan repayments would be around £380-463, depending for how long I would take the loan. Is there anything else where you can put these money monthly and earn similar amount at, without much risk? The strategy described above seems pretty much risk-free to me. Even if something happens and you can't make any more repayments, you still have the loan money in the savings account. You haven't spent them on anything. Compared to stocks, this won't make you rich, but at least you're sure your "investment" can't go down. And you are investing/saving bank's money, not yours.

An additional benefit is building your credit history, showing to other banks that you can pay back even 20k loan reliably.

Is there anything I'm missing?

I've never had any loan before, always just credit cards. I read just yesterday that some providers also charge a fee on top of the interest? Does that only apply to some subprime lenders or payday loans, or to most loans?

In addition to Morning's post above.

 Inflation. You will be spending a pound worth more now in repayments to be left with a pound worth less in five years time, so whilst you you will have increased your net worth in cash terms it will have likely declined in purchasing power terms. You may also have issues with other finance if you have a £20k personal loan, if you need to remortgage you might be on a higher rate, able to borrow less due to that debt, struggle to get car finance or only be accepted at a higher rate etc. 

Herzlos

It sort of makes sense if you're putting the full loan amount into a savings account and locking it there for the term.

But then you're making the repayments from your income. So you'd need to factor in what you'd have if you put the repayments into a savings account instead.

Alex9384

MorningcoffeeIV said:

You'll lose money doing that.

You need your savings rate to be higher than your borrowing rate, not lower.

Your calculations will have missed out the repayments that you need to make, so reducing your savings every month.

But, I would make repayments from my monthly income, i.e. the money I don't have yet.

Full 20k would be earning 5% interest from the start, versus me building a 20k pot over 5 years, initially earning interest on just £500, then £1000, etc.

Even if savings and borrowing rates are same, the amount on which you pay interest is reducing over time, but the amount on which you earn interest is full 20k the whole time and it's growing annually.

Also, I'd like to lock in money for 5 years now while savings rates are this good. They may be peaking now. They will not last for the next 5 years.

Alex9384

Herzlos said:

It sort of makes sense if you're putting the full loan amount into a savings account and locking it there for the term.

But then you're making the repayments from your income. So you'd need to factor in what you'd have if you put the repayments into a savings account instead.

Thanks.

So, can anyone think of any better scenario with putting 380-460 aside every month? I really doubt that savings rates are going to stay where they are in the next 2, 3, 4 years...

BoE can't keep the base rate this high for so long. Global economy got addicted to super cheap credit and can't run properly without it anymore in a long term. Am I wrong?

Alex9384

MattMattMattUK said:

In addition to Morning's post above.

 Inflation. You will be spending a pound worth more now in repayments to be left with a pound worth less in five years time, so whilst you you will have increased your net worth in cash terms it will have likely declined in purchasing power terms. You may also have issues with other finance if you have a £20k personal loan, if you need to remortgage you might be on a higher rate, able to borrow less due to that debt, struggle to get car finance or only be accepted at a higher rate etc. 

Thanks.
I replied to Morning's post. And yes, I considered inflation too, but we can't beat 10% inflation anyway. The winner is whoever loses the least money.
I've seen some optimistic predictions about inflation going back to 2% by the end of 2024, but anyways, is there any better savings strategy, without taking on a significant risk? Even passive ETF investing is not going to work anymore, according to various fund managers, economists, etc. They say you'll need to actively manage your portfolio, buy and sell stocks, rather than just keep sitting on S&P500 fund for 20 years, if you want to make money.
Remember, I want to use money that I don't have yet. Lock-in 20k now while savings interest is still 5%. Does anyone think it will be this high a couple years from now? What outcome would you expect with a different strategy, such as putting aside my own money each month? You would need to know what the saving interest rate is going to be. So how to make a good plan?

MorningcoffeeIV

Alex9384 said:

MorningcoffeeIV said:

You'll lose money doing that.

You need your savings rate to be higher than your borrowing rate, not lower.

Your calculations will have missed out the repayments that you need to make, so reducing your savings every month.

But, I would make repayments from my monthly income, i.e. the money I don't have yet.

Full 20k would be earning 5% interest from the start, versus me building a 20k pot over 5 years, initially earning interest on just £500, then £1000, etc.

Even if savings and borrowing rates are same, the amount on which you pay interest is reducing over time, but the amount on which you earn interest is full 20k the whole time and it's growing annually.

Also, I'd like to lock in money for 5 years now while savings rates are this good. They may be peaking now. They will not last for the next 5 years.

That means you're then losing out on savings interest on that income to have to service the expensive debt.

Whichever way you cut it, you're paying 5.4p a year for every pound you borrow, to earn just 4.9p. 

Put your income directly into the savings account instead and you cut out the loss making part of the plan.

Alex9384

MorningcoffeeIV said:

That means you're then losing out on savings interest on that income to have to service the expensive debt.

Whichever way you cut it, you're paying 5.4p a year for every pound you borrow, to earn just 4.9p. 

Put your income directly into the savings account instead and you cut out the loss making part of the plan.

Well, not exactly. You are not paying 5.4p on every pound during the 5 year period. The debt is reducing over time, and so is the interest you are paying. You're paying for every pound only at the very beginning. In the year 4-5 you are only paying interest on 5k or so, but still earning in interest on the full 20k (plus whatever you earned in previous years). That's why you pay back in total £22,795 instead of £26,015 which would be the amount you'd pay back if you paid 5.4p per every pound for 5 years. If you pay it back in 4 years, you pay even less.

You didn't address the question where to send my monthly income instead. Instant saver? The rate is lower than fixed saver and it may (and will) go down at any time. That's pretty important thing. The main reason I'm considering this whole thing is the fixed 5-ish % interest for 5 years and having 20k earning that interest from day 1.

MorningcoffeeIV

Alex9384 said:

MorningcoffeeIV said:

That means you're then losing out on savings interest on that income to have to service the expensive debt.

Whichever way you cut it, you're paying 5.4p a year for every pound you borrow, to earn just 4.9p. 

Put your income directly into the savings account instead and you cut out the loss making part of the plan.

Well, not exactly. You are not paying 5.4p on every pound during the 5 year period. The debt is reducing over time, and so is the interest you are paying. You're paying for every pound only at the very beginning. In the year 4-5 you are only paying interest on 5k or so, but still earning in interest on the full 20k (plus whatever you earned in previous years). That's why you pay back in total £22,795 instead of £26,015 which would be the amount you'd pay back if you paid 5.4p per every pound for 5 years. If you pay it back in 4 years, you pay even less.

You didn't address the question where to send my monthly income instead. Instant saver? The rate is lower than fixed saver and it may (and will) go down at any time. That's pretty important thing. The main reason I'm considering this whole thing is the fixed 5-ish % interest for 5 years and having 20k earning that interest from day 1.

Every pound that matches one in your savings.  You are then stemming further loss from using your income to reduce the interest, rather than earning any.

Send your income to the highest rate account you can find. Whatever rate you get, it's all positive, rather than loss making, as you have no borrowing costs.

Alex9384

Also don't forget guys that high inflation is also eroding the cost of your borrowing, not just your savings.

It's much more acceptable to pay 5% interest on loan when inflation is 10%, compared to pay 5% interest when inflation is just 2%.