Make money from a bank loan........

mrgiii

I might have to take out a loan soon, just to get me over the next few months (cashflow problems). Whilst looking at the total cost for different loan amounts from Lloyds TSB, which is who I bank with, I started to wonder if it's actually possible to make money, or at least reduce the cost of your loan by taking out a loan for more than you actually need.

For example, I'll only need £3000, which over 12mths would cost me £262.00 in interest charges. If I was to take out a loan for £8500 it would only cost me an extra £50 in interest charges, and that's for an exta £5500 in my account. I'm sure if I was to take that extra £5500 and put it in a high interest account, over the 12mths I'd earn more than £50.00 in interest.

To me, it's a bit like a regular savings account, where you agree to pay 'x' amount in the account each month, but the difference is, you start with a lump some first, and therfore earn more interest over the year.

I know there must a downside to it, otherwise it would have been tried before, but all I can think of are the higher monthly repayments, other than that, can you tell me what's so wrong with this idea.....

mrcow

So you are saying that you have found a savings a/c with a higher interest rate than the loan you are considering?

Who is this savings account with?

PBA

Just got some figures from the LTSB website:

£3k loan over 12 months is 18.9%, total interest charged £291.48
£7.5k loan over 12 months is 6.9%, total interest charged £276.48

So borrowing more actually means you pay less interest, and get the extra benefit that the excess would be in a savings account earning you more. Even letter tho, from Alliance & Leicester:

£7.5k loan over 12 months is 7.1%, total interest charged £283.92, and you get £42.50 back for applying through Quidco, so total you actually pay is £241.42.

Of course, these quotes are only correct if you're able to be accepted at the typical rate. If you get offered a higher rate it would then probably be more worthwhile to just borrow the £3k you need.

mrgiii

Thank's for the replies.

With the way the credit market is at the moment, I'm reluctant to appy for a loan away from my own bank. I've never had a loan declined by my own bank, but I have been turned down by providers and having recently paid of a £8500 loan over 12mths, an unused o/d limit in excess of this, I'm cetain I'd be accepted once again by my own bank.

mrcow, you've missed the point completley.

By taking out an extra £5500 (£8500 total) I'd only be charged an extra £50.00 on a loan for £3000 (the amount I need). Putting this extra £5500 in a saving account would earn me more than the £50 it cost to borrow it.

The bit of advice I was after, is whether it's really a good option to take the extra cash, place it in a high interest account and earn interest on it. So far nobody's come back with anything negative, so it must have some merit.

UK007BullDog

Your mixing things up and your figures do not stack up.

If what you say would work I and a lot of others would be down to my bank and get myself loan after loan and put it in high rate savings accounts. But it does not work like that. As you also have to pay tax on the savings interest you make.

Sorry mate but its a no-go.

However if you wanted to do something like that look at the stoozing forum http://forums.moneysavingexpert.com/forumdisplay.html?f=95

mrgiii

UK007BullDog wrote: »

Your mixing things up and your figures do not stack up.

If what you say would work I and a lot of others would be down to my bank and get myself loan after loan and put it in high rate savings accounts. But it does not work like that. As you also have to pay tax on the savings interest you make.

Sorry mate but its a no-go.

However if you wanted to do something like that look at the stoozing forum http://forums.moneysavingexpert.com/forumdisplay.html?f=95

Call me dumb, but I just can't see why not, just saying it's a no-go doesn't explain why not.

I've had the following quotes,

A £3000 loan would cost me £262.00 in interest charges, that's at 16.9%
A £8500 loan would cost me £313.00 in interest charges, that's at 6.9%
The difference between the two just £51.00.

Sure you pay tax on your saving but you could put £3000 of it into a ISA tax free and still earn more than the £51.00 it cost to borrow.

keeperbear

mrgiii wrote: »

Call me dumb, but I just can't see why not, just saying it's a no-go doesn't explain why not.

I've had the following quotes,

A £3000 loan would cost me £262.00 in interest charges, that's at 16.9%
A £8500 loan would cost me £313.00 in interest charges, that's at 6.9%
The difference between the two just £51.00.

Sure you pay tax on your saving but you could put £3000 of it into a ISA tax free and still earn more than the £51.00 it cost to borrow.

How are you going to fund the monthly repayments of principal on the extra £5,500? If you borrow more, your interest will go up but so so will your monthly repayments. This will mean that your "savings" pot will diminish much quicker than you assume.

Also, exactly where can you get an instant access ISA with a tax free rate of more than 6.9%? Impossible.

mrgiii

keeperbear wrote: »

How are you going to fund the monthly repayments of principal on the extra £5,500? If you borrow more, your interest will go up but so so will your monthly repayments. This will mean that your "savings" pot will diminish much quicker than you assume.

Also, exactly where can you get an instant access ISA with a tax free rate of more than 6.9%? Impossible.

Like I said earlier, look at as a regular saving account where you've got the cash up front first. If you can't afford the increased monthly repayments then you wouldn't look at something like this.

I've not done the calculations fully, I just looked at how much interest I've been paid on some of my other accounts. I don't think you'd need to be earning 6.9% interest to recieve more than £51.00 back from a £5500 investment. If you do then that's where it falls down.

I'll try and find a calculator and see what interest rate you'd need to make £51.00 on £5500.

jonesMUFCforever

Nobody's mentioned so far - you have to make monthly repayments on a loan - where is the money for this coming from??

mrgiii

ejones999 wrote: »

Nobody's mentioned so far - you have to make monthly repayments on a loan - where is the money for this coming from??

Errrr...... If you can't meet the monthly repayments then you wouldn't apply for a loan in the first place. I can easily afford the repayments.

I'm self-employed and I know the next couple of month are going to be a bit tough, especially after the tax bill I've just had to pay. I could use my o/d facility, but as an alternative I was looking at the cost of taking out a loan when I saw how much you get charged for loans of diffrent amounts.

By taking out a bigger loan than I actually need, it also guarantees that I'll have a big part of next years tax bill ready.

UK007BullDog

Yeah, look at the calculator.

You are still mixing up the interest differences. Are both loans on the same repayment terms?

I can see where you are going, but it wont work as you still have to PAY interest on the loan and you will not make £50. Tax is also deducted and you need a very high interest rate account which does not exist for your purposes of profit margin.

But go for it and tell us how it works.