Taking out loan to Save

Nasqueron

I assume its based on the money being in the account for all 5 years, compounded with interest, while the interest on the loan goes down over time as it's paid off.

The main reason people wouldn't do it is because it's assumed the money you are earning interest on is normally used to pay the debt down so less return each month, doing it via a different account is just unusual. It's a similar principle of stoozing (with a MT credit card paying into the bank account and paying off the minimum every month leaving the repayment sum in the interest account)

Adam173

Nasqueron said:

I assume its based on the money being in the account for all 5 years, compounded with interest, while the interest on the loan goes down over time as it's paid off.

The main reason people wouldn't do it is because it's assumed the money you are earning interest on is normally used to pay the debt down so less return each month, doing it via a different account is just unusual. It's a similar principle of stoozing (with a MT credit card paying into the bank account and paying off the minimum every month leaving the repayment sum in the interest account)

Thankyou! Yes that is what I was getting at RE Stoozing. 

MEM62

The_Unready said:

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

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? 

£20k invested at 4.9% per year would give you £25,539.48 at the end of the term with compound interest.  Personally, I still do not think that it is a viable plan as the interest rate on the ISA will fall so you will not see the 4.9% for the whole of the term.  The OP would be better off taking their £386 per month and putting it into a S&S ISA or a savings account bearing the best available interest rate.  

molerat

One slight hiccup in the calculation is that the best 5 year ISA is 4.5%.  Taking anything shorter term runs the risk of falling interest rates which is the current scenario.  But so does putting the money into a RS, the rates only last for 1 year.

The_Unready said:

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

The effective annual interest on the whole £20K loan over 5 years is just over 3.1%, the 6.1% is on a reducing amount.

vacheron

As others have noted, the issue you have is that your ISA money is locked away for 5 years, so you will get interest on the whole amount each year.

With the loan however you will owe less and less each month as you make your capital repayments, so you only pay interest on the remaining balance, so naturally you will pay less interest in the later years than you would earn from the ISA. 

The Flaw in the plan is you need to use "New" money to make all the loan repayment before the ISA matures.

Had you not been using this "new" money to repay the loan, you could also have put this into savings at a higher percentage than the loan, which would then have worked out in your favour. 

...but you can't, because you have the loan to repay, and this is how the universe sorts itself out (and the reason why APR's are used to allow easy comparisons).
If savings are higher than loans, you can make money. If loans are higher than savings, you can't. (Shame though) 

Herzlos

There's also a likelihood that the ISA will have fees for withdrawals over a certain limit (usually 3 or 4 in a year), so you'd need to put all the money into the ISA and repay the loan from your current account.

doing that would get you more money than if you'd paid the loan repayment amount into the ISA every month though.

£20k is also a lot of money for a loan, so you'd need to be on at least £40k without any other debt, it'd likely hurt your credit 'score' and you may not even get a rate as low as 6.1%.

All for £40/month?