Use savings or get a loan?

KTF

My boiler has packed up and a replacement is going to cost me in the region of £1500. I have savings to cover this but have also been looking into getting a 12 month loan instead as (if I have done my calculations correctly) the cost of the finance would be less than the amount of interest that I will lose if I pay for it out of my savings.

Is it a good idea to go for the loan instead of using savings or would you recommend that I just pay for it out of the savings?

inmypocketnottheirs

If the interest on the loan is less than the interest on the savings then take the loan. If not use your savings and discipline yourself to pay the amount of the loan repayments back in to your savings. ALternatively how about a 0% credit card? Apply for one and buy the boiler on that, and repay before the offer ends.

KTF

Thanks for the replly. The interest rate is on the savings is 5.30% which (if I am correct) earn me 1404.40 in interest (1095.50 after tax) if I didnt touch it or 1484 (1157.52 after tax) if I took out a sum to pay for the boiler. The difference between the two figures (after tax) is £62.01.

A loan from Northern Rock @ 5.8% would cost me £128.89 (1500/12 months) which is a total of £1546.68.

If my calculations are correct then it would only cost £46.68 for the loan against a 'loss' of £15.33 (interest I would lose less the cost of finance) if I used the savings.

The saving is marginal but it is a saving nontheless.

grumpyoldgit_2

Couple of extra questions I would be asking myself at this point:
1. Can I afford the monthly repayments without impacting on other plans/commitments?
2. After payments are made will I have sufficient flexibility in my budget to meet other possible events such as this?
3. Do I need to keep my cash reserve intact?

GoG

John_Jackson_2

It sounds more like a matter of convenience as the difference is so small.

Borrowing at 5.8% APR should cost less than using savings earning 5.3% gross, so I'd go with the loan.

matthew6476

If you have savings that pay nearly £1500 a year, then I dont think you need to worry about it either way!

I think the 0% credit card idea is good, you will not incurr any interest, nor will you lose any on your savings

jonesMUFCforever

KTF wrote:

Thanks for the replly. The interest rate is on the savings is 5.30% which (if I am correct) earn me 1404.40 in interest (1095.50 after tax) if I didnt touch it or 1484 (1157.52 after tax) if I took out a sum to pay for the boiler. The difference between the two figures (after tax) is £62.01.

A loan from Northern Rock @ 5.8% would cost me £128.89 (1500/12 months) which is a total of £1546.68.

If my calculations are correct then it would only cost £46.68 for the loan against a 'loss' of £15.33 (interest I would lose less the cost of finance) if I used the savings.

The saving is marginal but it is a saving nontheless.

You are quoting savings rate for the total of your savings which is considerably more than £1500!
Credit interest for £1500 at 5.3% for one year is £79.50 (£63.60 after tax) so if you can find a loan cheaper go with it but if as I suspect you can't spend some savings or as other posters have suggested go with the 0% credit card.

KTF

Thanks for the replys guys. I like the idea of a 0% card but he is doing the work this week so it would take too long to get one and sort out the Balance Transfer (assuming I can find one that doesnt have a fee) with Xmas and everything else getting in the way.

I have sorted out a transfer from my savings to cover the bill that will arrive at the end of the week and will sort out a standing order to top it back up again from my current account.

Rafter

KTF,

Right decision I think. It is highly unlikely you would get Northern Rocks best rate for such a small loan over such a short period. The interest to them would not be enough to even cover the cost of processing your application and taking the payments. (Remember they have to 'borrow' the money they lend you from savers or from other banks too - which is going to cost them at least the bank of england base rate)

I think your sums may be slightly out too. The APR is there to help you make just this sort of decision. If the APR on the loan is higher than the rate on your savings (net after tax) it has to be better to use your savings.

Although not relevant to this board, are you making full use of your ISA allowance to get your savings tax free?

Good luck and enjoy a warm christmas with your new boiler!

R.

KTF

Rafter wrote:

Although not relevant to this board, are you making full use of your ISA allowance to get your savings tax free?

Good luck and enjoy a warm christmas with your new boiler!

R.

Yeah, I have an ongoing rollover Tessa which gets skimmed every year. I should really look into opening an ISAs as well to get the full benefit (assuming I can do this with the ongoing Tessa?

To be honest I am way past caring about paying for it at the moment. I just want to be warm again. The bangings from upstairs suggest that might be very soon as well

Rafter

Yup - you can have new ISAs as well as old TESSAs.

R.