Should I go for a loan or a credit card to buy a second hand car?

griffster

I'm having to buy a used car at the moment and I need to get the finance pdq for £6000. Having read through pages on this website I thought, to minimise the interest I'd have to pay, I thought I'd get a loan with a 48 month term and then pay off the balance by doing a balance transfer on to a good 0% balance transfer card, then basically become a credit card tart in moneysavingexpert terminology!

I've managed to find a loan at a decent rate (8.9%) paying £150 a month. Problem is, the application form displays some examples for the right to settle early which are confusing me a little.

I found this loan off a price comparison website and I narrowed it down to those with the lowest settlement rates (one or two month's interest). The total amount repayable is £7214.88, so I'd have thought the total interest applied there would have been £1214.88. Dividing this by 48 gives me £25.29 a month. If I was to be charged one or two months interest, I'd have thought it would cost me £25 or £50 to settle early. I may be being totally naive here...

The example in the loan application is for if I settle a quarter way in (12 months) based on paying regularly. It states that if I pay early I would have to pay £5,086. In my simplistic thinking I would have thought I would have to pay the remaining 3/4 (£4500) plus two months interest = £4550 which is £536 less!!! I phoned up the company asking them to explain this figure and the operator stated she was only a sales person and suggested I looked at the FSA website to see how it's calculated!!! Needless to say I didn't get very far on there either...

My questions therefore are:

1) are my calculations wrong above?
2) if so, how should I calculate the early repayment amount?
3) should the loan people give me an exact figure and explanation?
4) Is getting a loan and a balance transfer the best option?

I do not currently have any credit cards by the way, which is why I'm not purchasing via a credit card. Would I be better off getting a credit card and trying to balance transfer that as soon as possible to another 0% balance transfer card assuming I can get a £6000 credit limit straight away?

Rafter

Can see your logic, but you don't pay an equal amount of interest or the loan off each month. At the start of the loan the interest each month is higher (because you are borrowing the full £6,000). As you make more and more payments they interest bill each month drops but the amount you pay off your debt rises.

So 1/4 of the way through your loan you will owe more than 3/4 of the loan amount.

The interest penalty will also depend when you are paying off the loan. In the first month (when you are borrowing £6000) the penalty might be one months interest on £6,000 at 8.9% which is around £45, whereas later on when you have made more payments this will start to drop.

Your best bet is to try and find a loan without early repayment penalties - the post office do these as does zopa - although with zopa you pay a fee up front to arrange the loan.

Answering your questions

1) Yes

2) Use a spreadsheet to work out for each month the starting balance, interest charged, your fixed repayment and the balance carried forward - you should then be able to see your loan going down in value until aafter 48 month you owe nothing. You should also be able to see what your interest charge each month is which will also be the interest penalty if you repay at this point. (do an online search for an excel loan calculator to help maybe?)

3) Unlikely - they are complying with the FSA rules by giving an illustration and wouldn't normally prepare a personal loan illustration for every possible repayment scenario you might have.

4) Probably - if you can get the credit limits and are very organised and do your sums properly - a balance transfer fee, particularly for less than 12 months can often cost just as much as a best buy loan.

Good luck

R.

griffster

That's great advice thanks Rafter. I'll look in to those. Looks like there's a lot of loan calculators out there...

griffster

Ewh, just checked the Post Office Loan area and it states in their FAQ section that an early repayment fee may apply, so that one may not be an option.

CLAPTON

have you actually been offered a loan at 8.9& APR or simply seen an advert?

-if you have, then bite their hand of and take it and stop worrying about a couple of bob in early settlement fees

-if you haven't then why do you think your will be offered this rate/

you say you will get a 0% CC to BT to
-how will you do this as most CC will only BT from another CC and not a loan
-what makes you think you will get a large enough CC limit

-as you can't afford a 6k car had you considered buying something you can afford and saving for another car later

jamesd

Even if a loan has an early settlement fee it's often possible to just overpay to almost clear the balance, then let the last few monthly payments finish the clearing job without any fee.

CHR15

Before all the financial world collapsed I was tarting on some credit cards. I have an impeccable credit file and the most I ever received on a new card was £3,000

I think it optimistic to assume you will be able to obtain a £6k limit on a 0% card.

griffster

CLAPTON wrote: »

have you actually been offered a loan at 8.9& APR or simply seen an advert?

-if you have, then bite their hand of and take it and stop worrying about a couple of bob in early settlement fees

-if you haven't then why do you think your will be offered this rate/

you say you will get a 0% CC to BT to
-how will you do this as most CC will only BT from another CC and not a loan
-what makes you think you will get a large enough CC limit

-as you can't afford a 6k car had you considered buying something you can afford and saving for another car later

It wasn't a couple of bob, it looked more like a few hundred pounds. That may have been through my calculations though.

There are some cards that allow this apparently as I know MBNA have done something similar for someone I know recently.

Didn't say I couldn't afford a 6K car, I was trying to minimise the cost of buying one.

CLAPTON

griffster wrote: »

It wasn't a couple of bob, it looked more like a few hundred pounds. That may have been through my calculations though.

There are some cards that allow this apparently as I know MBNA have done something similar for someone I know recently.

Didn't say I couldn't afford a 6K car, I was trying to minimise the cost of buying one.

rafter post showed that one month interest was about 45 on the full 6000 loan.
once the loan capital is paid down a bit then the amount would be less

MBNA do indeed allow 'BT ' from your current a/c so you can then use the cash as you will;
however, they may not give you a card; if they do they may not give you a sufficient credit limit
and unless you pay by the end of the 0% promotional period you may then end up paying 25-30% APR
However, it will cost you nothing to apply and see.

And.. by 'afford' I meant that you lacked the cash to buy it without borrowing.

Rob71

If you're starting out looking at a 4 year loan, then repay what you can and when you can - you're going to be having to move cards each year, so you'll be paying 3% everytime you do it - might be best to overpay on the loan in the first instance in order to reduce fees, then stick with cards with the longest BT life - e.g. 15 months.

In terms of 0% on a credit card - just use a credit card cheque (or if you want to get it into your current account, and pay from there) a Money Transfer - remember however if you default on payment or if the 0% period ends, this'll wind up costing more than a normal Balance Transfer.

MBNA allow that, and have done so for me recently... Look at their Platinum card for more info.

You might find MBNA might give you a decent limit - they gave me 13.5K recently, despite the fact I've had CCJs in the past (obviously everyone's circumstances are different).

The only other suggestion is to take out something like a Barclaycard with a fixed term low interest rate for Balance Transfers (see here) - it'd probably need to be on a card to start with, but you'd pay something like 6.3% apr - still cheaper than your loan, and better still there are no overpayment penalties.

If I were in your position I'd either buy on card, or transfer cash from a card - enjoy the interest free period and pay the minimum each month which'll be £60 with MBNA (a lot less than your loan repayment) - at the same time, pay the difference between what you would have paid against the loan (and what you're paying to the card) into a decent savings account (that's about £90 per month - save more if you can afford it!).

End of the 0%, use savings (about £1080 before interest has been added - more if you've saved more) to clear down as much of the remaining balance as poss and transfer the rest to another card... rinse and repeat.:D

You have a handy buffer with savings, and you earn interest (whilst not paying any!).

Takes a bit of dedication though...