would you borrow to use up your ISA allowance?

[NDT]

I was seeing the bank about a loan (I have taken a job with a lower salary and a higher guaranteed bonus so I need to smooth out cashflow a bit).

Bank manager is recommeding I get a loan 60% bigger than I need, so I can use up my cash ISA allowance for this financial year.
This seems wrong to me.

With a bit of luck I'll be maxing out my ISA allowance in future, but this year I've got an overdraft and need to get that sorted, so on balance I don't think I'll miss one year's tax free allowance.

Any thoughts? is there something I don't get here? Or is the bank manager just trying to sell another product?

[andy400]

Shirley it's only a good idea if you can borrow at a lower rate than the ISA pays out at, otherwise just bloody silly. Or am I missing something?

[walm]

You have until April 5th next year.
The cash ISA allowance is £3,600 max.
Save up for it.

[Simpo Two]

Sounds like madness to me.

'If you don't have any savings, borrow some money so you can save it? Nope.

[emicen]

Take his loan's APR - X%
Take whatever the best ISA AER you can find - Y%

If Y>X, it may be worth it. Otherwise, it is definately not.

Also, as the loan is to smoothe cashflow, would the extra monthly repayment amount due to the higher loan be manageable?

[illmonkey]

I don't see the point. Even if you are making a bit more intrest on the ISA, it isnt going to be much.

£3600 at say 6% versus loan at 5%. Is 1%, over a year is £36. But your monthly payments are going to go up stupidly. just to scrape a bit of cash.

[H2DaE]

Just to let you know, that is mis-selling which can get him in a whole world of st with the FSA

[Seight_Returns]

Not necessarily terrible advice but depends very much upon circumstances.

If you don't use your Cash ISA allowance for this year by April '09, then you've lost the opportunity forever. Assuming an available savings rate of 5% and that the OP pays higher rate tax, the additional return of keeping £3600 in an ISA rather than in a savings account and paying tax on the interest is about £100 a year for every year you leave it in the ISA.

If you'll be using your cash allowance next year as well, intend to leave the money you've saved in the ISAs untouched for some years to come and are absolutely certain that your guaranteed bonus will clear the loan, the long term tax savings of using your '08 cash ISA allowance may well justify incurring the short term financing costs.

If the only problem is that you won't have access to the money for your '08 ISA until after April '09, but are absolutely certain that you will get the money and you want to use your '08 ISA allowance as a long term investment, then it could be wise advice.

Edited by Seight_Returns on Monday 10th November 11:54

[Exige77]

Remember you get the tax free benefit from the ISA for ever. If you can it's worth doing.

It's a long term benefit so a bit of short term pain may be worth it.

Ex77

[Zeek]

Sometimes it pays to take a larger loan to benefit from a lower interest rate on the loan. Maybe this is where he was heading?

e.g. Lloyds will charge 12.9% on loans under £7500, and 8.9% on loans over £7500.

[NDT]

thanks chaps.

the loan isn't a small amount...
I think I need about 15k, they're offering me 25k @9.7% APR (so i need to shop around anyway)
I pay higher rate tax.
I will pay off the loan at end of 2009.
In 2009/10 I probably won't have enough cash to max out the full ISA allowance (just the cash bit), but would hope to in subsequent years.

Edited by NDT on Monday 10th November 12:07

[BoRED S2upid]

Interesting to see the banks throwing money at you.