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

PBA

Don't get why most posters don't understand this, you get a better interest rate on a larger loan. The 3rd post (mine) shows that you pay less interest if you borrow 7.5k for a year than if you borrow 3k. The only thing the OP has wrong is that he's thinking about borrowing 8.5k, the magic number when interest rates go down is 7.5k with almost every bank so borrowing the extra 1k is going to cost you more.

mrmajika

With LTSB you can make overpayments at any time to a loan.

Borrowing £7.5k and above gets the best rates. There is nothing to stop you borrowing £7.5k then overpaying it by £4.5k right away, then using the £3k you need as planned.

With LTSB, as interest is calculated daily, this means that the interest is only charged on the £3k, but at the better interest rate reserved for higher borrowing.

This would be much better than the savings account route.

mrsplinter

mrmajika wrote: »

With LTSB you can make overpayments at any time to a loan.

Borrowing £7.5k and above gets the best rates. There is nothing to stop you borrowing £7.5k then overpaying it by £4.5k right away, then using the £3k you need as planned.

With LTSB, as interest is calculated daily, this means that the interest is only charged on the £3k, but at the better interest rate reserved for higher borrowing.

This would be much better than the savings account route.

This is what I did last year with an egg loan. I only needed to borrow just over £4k. However the interest rate was something like 11.9%. As it was 7.9% for over 5k I checked that there were no repayment penalties and borrowed £5k. As soon as I got the loan I repaid the £1k and so got my £4k loan at a cheaper interest rate. I also considered the length of loan so I could afford the monthly payments. I went for 36 months, even though I anticipated paying it off within a year (which I did I paid the loan within 10 months).

If you borrowed £8.5k rather than £3k over 12 months your monthly payments would climb from roughly £250 pcm to £750pcm. Presumably the extra £500 a month would have to come from the loan amount you had put in the savings account. This would reduce the interest you would make. Even if you didn't save the money and paid off the loan you would still have fixed monthly payments of £750 unless you chose a longer term.

Rabiddog_2

I think some crazy accounts are paying interest @12% for a year .. so it might even be a money spinner to borrow more and put the excess in that account. Careful planning and budgeting required.+. No PPI added.

mrmajika

Rabiddog wrote: »

I think some crazy accounts are paying interest @12% for a year .. so it might even be a money spinner to borrow more and put the excess in that account. Careful planning and budgeting required.+. No PPI added.

Sadly it's not quite as simple as that. The 12% accounts (does the 12% one actually still exist!?) were / are regular savers, meaning that you can only drip feed the money into the account, usually at a maximum of £250 per month. Taking this into consideration along with tax on interest usually makes it not worthwhile.

Voyager2002

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.

Yes, your reasoning is sound.

The reason most other posters disagree is that they are confusing two concepts: the average cost of each thousand pounds borrowed, and the marginal cost of borrowing extra money, once you have already decided to borrow the three grand. What is very clear is that you will not be able to earn enough interest to cover the total cost of the entire loan. However, once you have decided to borrow the three grand, and to pay the interest charge that is involved, the extra cost (marginal cost) of borrowing another 5,500 is a lot less than the gross interest that you could earn on that 5,500. So either way the loan will end up costing you, but your bright idea will reduce the overall cost that you face at the end of the day.

Of course, your best option would be to borrow enough money to qualify for the lower interest rate and then immediately repay any money that you don't need, since each hundred pounds repaid at the beginning of the loan will save you a tax-free six pounds ninety each year, while your earnings on a good savings account will be an annual and taxable six pounds ten pence or thereabouts.

aqueoushumour01

sound advice above. borrow the 8.5k and then pay most of it back immediately so that you get your 3k loan at the lower borrowing cost. Remember that the extra cost if £51 per month so if you followed your original plan you'd have to earn £51x12 net in interest over the year for this to be the best option. This may be possible but you'd have to go into the figures fully and also take into account that interest rates on savings accounts are variable and therefore may go down.

mrgiii

It's good to see some people understand the point I was trying to make and it wasn't a complete crack pot idea.

Just to address a few of the points raised since my last post.

The extra £51.00 is how much extra it cost over the length of the loan, 12mths, not each month.

You've got to need the loan in the first place, I wasn't saying go out and get a loan and make money. If you need a loan, you know your going to be paying back more than you borrow with the interest charges. By borrowing more than you actually need, you can actually reduce the cost of the amount you do need.

I selected £8500 because I'd recently paid of a loan for this amount. If the interest rates change at £7500 then I can see the merit at sticking to this amount.

Of course you've got to be able to meet the higher repayments out of your monthly income and not the extra you borrow otherwise it's a completely pointless exercise.

I looked at loan rather than use my OD facility, because after 4/5 month the amount of interest chaged was close to the cost of a loan for £3000 over 12mths.

CannyJock

mrmajika wrote: »

Sadly it's not quite as simple as that. The 12% accounts (does the 12% one actually still exist!?) were / are regular savers.

Alliance & Leicester had the 12% one, think they started it up again. Like you say, maximum of £ 250 per month and you need a linked current account that you pay at least £ 500 into a month (SO from non-A&L account, £ 500 per month, £250 goes to 12% account, SO from A&L back to non-A&L account for £ 250, be sure to leave £1 in the account).

Just closed mine after it matured, £ 109.35 interest (after tax) for £ 250 a month a little bit of juggling.