Taking out loan to Save

Adam173

OK...bare with me here!

Generally im very risk averse and dont do finance etc however with interest rates at a decent level and personal loans still relatively cheap i had a bit of a mad thought. 

Currently i can get a £20000 personal loan at 6.1% APR, this works out to a monthly payment of £386.06 and a total amount payable of £23,163.00 over 60 months 

If i put that £20000 into a high interest ISA at around 4.9% i could get a return of £25,540 over the same 5 year period 'netting me' £2,377 over that time. 

Now im not saying i will do it, and of course interest rates on savings will likely decrease over that time but am i missing something or are my maths a bit squiffy at why this isnt a good idea on the proviso that i am restrained enough to ensure i dont spend the £20000?

The_Unready

How can the ISA pay more when the interest rate is lower than the loan's interest rate?

Adam173

The_Unready said:

How can the ISA pay more when the interest rate is lower than the loan's interest rate?

Well thats what im confused about hence why i asked! I've used the MSE savings calculator here Savings Calculator - MoneySavingExpert - Calculate Interest On a £20000 initial investment it earns £1000 interest per year basically, so over 5 years compounded its circa £5500 interest. 

Used a loan calculator here Personal Loan Calculator (tescobank.com) and it works out at circa £23000 over the same 5 years even though its 6.1% APR meaning the interest paid is circa £3000 

Is this just a case of compounding interest on savings being more powerful than simple interest on a loan despite the loan being a higher interest rate?

MorningcoffeeIV

You're not factoring in the repayments.  Effectively, you'll be withdrawing funds from the savings to repay the loan. 

Cheaper and easier to just set fire to a pile of bank notes.

Adam173

MorningcoffeeIV said:

You're not factoring in the repayments.  Effectively, you'll be withdrawing funds from the savings to repay the loan. 

Cheaper and easier to just set fire to a pile of bank notes.

repayments aren't an issue i can afford to keep the £20000 locked away in high interest savings earning money and pay the monthly repayment out of my normal income.

technically if i started from zero and saved that £386 a month for 5 years id be at £26,200 with the same interest rate so more than the £25,540 by £660 however i wouldnt get as good a rate drip feeding money in so in reality would need to ensure the interest rate stayed about 3.8% to make it work that way. 

Anyway, just musing and working out the maths etc. 

retiredbanker1

If you forget about getting the card  and just put the monies into savings your return will be 100% profit with no monthly repayments to be made.
That's a no brainer to me.

darkcloudi

Adam173 said:

Currently i can get a £20000 personal loan at 6.1% APR, this works out to a monthly payment of £386.06 and a total amount payable of £23,163.00 over 60 months 

If i put that £20000 into a high interest ISA at around 4.9% i could get a return of £25,540 over the same 5 year period 'netting me' £2,377 over that time. 

If this is 6.1% annual rate and the ISA is paying 4.9% annual rate then aren't you worse off? Plus can you guarantee you will be getting 4.9% per year over the next 5 years, as savings rates can go up or down unless its fixed for that length of time.

MorningcoffeeIV

Adam173 said:

MorningcoffeeIV said:

You're not factoring in the repayments.  Effectively, you'll be withdrawing funds from the savings to repay the loan. 

Cheaper and easier to just set fire to a pile of bank notes.

repayments aren't an issue i can afford to keep the £20000 locked away in high interest savings earning money and pay the monthly repayment out of my normal income.

That's money that you should be putting into savings, instead of paying off a high interest loan, which is where the loss making aspect comes from.

Just save your own funds and make a profit, rather than turning a loss for no reason.

Adam173

darkcloudi said:

Adam173 said:

Currently i can get a £20000 personal loan at 6.1% APR, this works out to a monthly payment of £386.06 and a total amount payable of £23,163.00 over 60 months 

If i put that £20000 into a high interest ISA at around 4.9% i could get a return of £25,540 over the same 5 year period 'netting me' £2,377 over that time. 

If this is 6.1% annual rate and the ISA is paying 4.9% annual rate then aren't you worse off? Plus can you guarantee you will be getting 4.9% per year over the next 5 years, as savings rates can go up or down unless its fixed for that length of time.

yes 

i explained that above.....im just talking hypothetically of course just comparing the 2 calculators...lots of ifs and buts

Nasqueron

If you could afford the repayments, why not open a regular saver like the Nationwide one that is (was?) paying 8% on £200 a month or NatWest doing 6.17% on £150 a month and you'd earn pure profit rather than losing money to interest

Adam173

Nasqueron said:

If you could afford the repayments, why not open a regular saver like the Nationwide one that is (was?) paying 8% on £200 a month or NatWest doing 6.17% on £150 a month and you'd earn pure profit rather than losing money to interest

again, just talking hypothetically above trying to work out why on the 2 calculators worked out positively for taking out the loan