Using a loan to have a saved lump sum

[Bailey93]

To most i assume this will sound utterly ridiculous...

If I was to take out a 10k loan for instance and put it into my savings account... and instead of putting money away each month I just pay back a portion of said loan, but at the same time knowing I have 10k sat in my account to use when needed (emergencies only etc not frivolous) am I being stupid

Tell me why it's a bad idea but also try and tell me why It could be a good idea.

It would be in a separate account strictly unavailable to just dip into unless seriously needed.

I like the idea of a lump sum being instantly available should a situation arise

[Wacky Racer]

Ridiculous idea.

You could always use a credit card for an emergency...Washing Machine packs up etc, and pay it back over two or three months if you are skint.

[xjay1337]

I take it from your username you are 22 or so?
It's OK, I am 24 so not about to lecture you on age. Just sounds like the kind of dumbass question I would have asked a few years ago :-)

No, it would not be good.
You would be paying interest on an emergency situation that may never happen.
Why would you want £10,000 sitting there? I can guarantee that you will eventually spend it, and as you haven't got it to buy something IE car / wicked holiday, what you do spend it on would be pointless.

If you want a few G there for a rainy day (maybe in the event of job loss or something) then you'd be much better off using a 0% credit card and setting up a DD each month for the minimum payment.
(I would also avoid credit cards unless you have a HUGE level of a self control, something which I do not).

Or, and here's this for a suggestion, if a situation arises that you need £10k for, why not , take the loan out then?

[eliot]

Credit card and agreed overdraft is the same thing, but costs you nothing if you never use them.

[PositronicRay]

Having a chunk of money gives you a nice secure feeling, having a loan does not.

[Silent1]

Bailey93 said:

To most i assume this will sound utterly ridiculous...

If I was to take out a 10k loan for instance and put it into my savings account... and instead of putting money away each month I just pay back a portion of said loan, but at the same time knowing I have 10k sat in my account to use when needed (emergencies only etc not frivolous) am I being stupid

Tell me why it's a bad idea but also try and tell me why It could be a good idea.

It would be in a separate account strictly unavailable to just dip into unless seriously needed.

I like the idea of a lump sum being instantly available should a situation arise

No, get an overdraft or a credit card, if you can't get them then get the loan when you need it and pay it off as quickly as possible, the interest you will earn is nothing and the interest you will pay will be huge, it could cost you £12,000 to have that £10,000 when an overdraft / credit cardonly charges you when you use it

[steveo3002]

yeah get a credit card and lock it away for emergency use only , that way if you dont touch it theres no fee's and if the car snaps in half or your cooker melts down then you can run out and buy one straight away

it should also have some coverage on it if you got scammed with the purchase which is handy

[AJS-]

What sort of £10,000 emergency have you got in mind?
It's a terrible idea. Unless you can borrow it at 0% on a balance transfer or something, and put it in a savings account with a half decent interest rate?

[DonkeyApple]

Bailey93 said:

To most i assume this will sound utterly ridiculous...

If I was to take out a 10k loan for instance and put it into my savings account... and instead of putting money away each month I just pay back a portion of said loan, but at the same time knowing I have 10k sat in my account to use when needed (emergencies only etc not frivolous) am I being stupid

Tell me why it's a bad idea but also try and tell me why It could be a good idea.

It would be in a separate account strictly unavailable to just dip into unless seriously needed.

I like the idea of a lump sum being instantly available should a situation arise

In general terms you are paying a monthly fee so as to feel more financially secure. That on its own has some form of arguable merit but very weak and with more negatives than positives. For starters, we know from statistics, that people who feel more financially secure will increase their spending. So statistically if your plan to make yourself feel more financially secure from having this rented savings account works then you are at extreme risk of increasing your spending habits thus actually making yourself even poorer and achieving the exact opposite of what you are setting out to achieve.

I suspect that the majority of people would have the initial response of telling you that it is a stupid idea and genuinely be shocked that you'd think of such a thing. However, it is exactly what most people are doing in the UK already and many of the people who would instantly think your idea foolish would, when they looked at their own finances, realise that they are already doing exactly this; using debt to purchase goods so as to keep their cash savings at a level that makes them feel secure.

If anything, your concept is more pure and honest than how most go about it.

It doesn't mean that it has any more true merit over how most people do it. The only sane way to achieve a cash cushion is to temporarily cut your outgoings and divert those savings into your cash account. The additional upside is that you would then be at much less risk of elevated spending as most people who start such a process tend to find that they don't stop when they hit their target but discover that they have converted themselves from being net spenders to net savers and in reality have noticed no detriment to their quality of life from spending less.

[TheMonster]

I think DonkeyApple's post is bang on. Highly unlikely to be a good idea but at the same time I bet a whole load of people that are telling you it's a terrible idea actually have savings and a mortgage which means they are doing exactly what you suggest

[Du1point8]

Does a flexi loan still exist?

attached to your account and you are only paying for what you use... I had £5k for many years and only paid for it when needed and was cheaper than a CC.

http://www.hsbc.co.uk/1/2/loans/flexible-loans/det...

I had it when it was 7%

[glazbagun]

When I bought my last car, rather than take out a loan I took out a 0% purchases credit card and racked up debt on that rather than using my cash for bills, then transferred the debt to another credit card 18 months later for a transfer fee fee of 2%.

I effectively got a three year loan for <2% (since I had paid down some by the 18 month point, anyway). But what it did lead me to realise is that I could shove the c/c companies money in my bank accounts and earn interest on their money before paying it back to them. I'm not expecting a call from Warren Buffet anytime soon, but it was an eye opener and a better idea than paying for a loan you hope to never use, providing you have a decent credit rating and the dicipline to not spend it.

Edited by glazbagun on Thursday 21st January 10:20

[AJS-]

It's not quite the same as having savings and a mortgage though. Mortgages are relatively cheap borrowing, and a house is useful because you live in it and hopefully appreciating asset, but a difficult one to liquidate. Having a few months payments in ready cash is a sensible precaution.

Borrowing money at say 8% just to have it sat in a bank account earning 1% on the off chance that you will for some reason need £10,000 ready cash quicker than you can borrow it doesn't make any sense to me.

I suppose it might arguably make some sort of sense if you were planning on something like going contracting or starting a business and were worried about having extended periods without work/cashflow where you also wouldn't be able to borrow, but then I would think you're better off saving the cash before you go contracting rather than being lumbered with significant loan payments income or not.

I can sort of see the appeal because it forces you to 'save' but I think there are better ways to do this, like having a direct debit straight out of your account on payday to an account you don't have easy access to, and small things like putting £5 in a jar every time you draw £50 out.

[DanL]

TheMonster said:

I think DonkeyApple's post is bang on. Highly unlikely to be a good idea but at the same time I bet a whole load of people that are telling you it's a terrible idea actually have savings and a mortgage which means they are doing exactly what you suggest

Nonsense. A mortgage and savings are not incompatible, as you're basically "renting" from the bank.

This is a bad idea, but (IMHO) only because you'd be paying for this cash cushion before you needed it. Short term debts can be dealt with either by agreed overdrafts or credit cards, as mentioned. If you really need £10k to see you through a period, you're better off borrowing it at the point you need it rather than ahead of time, as this will stop you paying interest on money you're not using.

In the meantime, why not set up a regular payment equal to your proposed loan payment into a savings account? You'll build up a reserve, reduce (or maybe eliminate) the need for a loan later, and be in the same net position regarding money left after pay day except without paying interest to a bank for no reason.

[Ozzie Osmond]

Bailey93 said:

If I was to take out a 10k loan for instance and put it into my savings account...

Stop! Do not pass go. Do not collect £200.

It is indeed lunacy.

[AndrewEH1]

I doubt you'd find many lenders who would give you £10k if you are 22 without a crippling interest rate.

[AJS-]

Using the loan calculator in my online banking, if you borrowed £10,000 at 7% over 5 years you would be paying back £11,880 in total. So nearly £2,000 just to have that spare cash, and £198 a month outgoing for 5 years.

[okgo]

Its stupid, but no more stupid than the people who have multiple credit cards with various debt on them that is NOT 0% interest, with no lump in the bank (hell, at least you might earn some interest) which statistically is going to be a fair few of the people who have told you you're being an idiot for even thinking about it on this very thread

[gibbon]

TheMonster said:

I think DonkeyApple's post is bang on. Highly unlikely to be a good idea but at the same time I bet a whole load of people that are telling you it's a terrible idea actually have savings and a mortgage which means they are doing exactly what you suggest

My mortgage is at a 1%.


So yes, i have savings and a mortgage.

[okgo]

gibbon said:

My mortgage is at a 1%.


So yes, i have savings and a mortgage.

Everyone on here makes 10% on their investments PA surely? Ergo we all have both ;-)