What is going on here i5 2500k?

Not sure what you exactly did but the first thing you do is up the multiplier until you start having issues then raise the voltage accordingly. Use prime 95 to stress test unless you are using something better.
 
If you want my tip to overclocking the i5, set the multiplier to 40 and the volts to 1.25.
Test with Prime, and then up the multiplier by 1 untill it's unstable. If you like the speed (my predictions are around 4.1-4.3GHz (it varies a lot, these numbers are predictions)) stay at the speed, if you want more, slowly bump the voltage upwards.
3.5GHz isn't an overclock in my book, it does that stock with some cores (I think it's 3.3-3.7GHz at stock)
I think what happend is that you set your overclock within the stock parameters. If you run all four cores at 100%, it'll do 3.3GHz. If you run two or one core, it'll run it at 3.7GHz.
Try going beyond the stock clocks (4GHz is a nice place to start imo)
You will reach a point where the volts required for the next multiplier bump isn't worth it. My i7-2600k (nearly identical to your i5) will do 4.4GHz at 1.275v, but 4.8 at around 1.425. Those last 400MHz aren't worth the massive volt bump, if you see what I mean?
 
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