Get loan or use savings...?

tiernanm

I am buying a car for £13,500, which I have in savings. However, I have been offered the £13,500 over 3 years on HP with an APR of 6.8%. This works out at a total cost of £14,925.16 over the 3 years. BUT, I can get a 3 year fixed rate bond with my local bank at 4.5%. I worked out that as a basic rate taxpayer, I would earn £1,511.12 interest on my £13,500, which equals £15,011.12 i.e. my savings return would be higher than the HP interest!!! Seems to me I would be better off taking the HP loan and putting my savings into the 3 year bond. This sounds too good to be true - am I missing anything or can anyone think of any downside to this...?

PS come April I could put £5,100 into a 3 yr fixed cash ISA at 4% and my savings return would be even higher than above...?!!!

simondm

If you were buying with your savings (i.e. cash) couldn't you negotiate a cheaper price for the car?

Rob71

Hmmm... the sums don't add up, or maybe I'm missing something.

If you're borrowing at 6.8% but saving at 4.5% (before tax, 3.6% in reality) how could the money earn more interest than what you'd have to pay?

Have a look here: http://www.online-calculators.co.uk/interest/compoundinterest.php

£13,500 saved @ 4.5% = 1,905.74 interest (before tax, so really it's £1,524.59)
£13,500 borrowed @ 6.8 = 2,945.52 interest

That looks like you'd be 1400 quid worse off...:(

Lokolo

Rob71 wrote: »

Hmmm... the sums don't add up, or maybe I'm missing something.

If you're borrowing at 6.8% but saving at 4.5% (before tax, 3.6% in reality) how could the money earn more interest than what you'd have to pay?

Have a look here: http://www.online-calculators.co.uk/interest/compoundinterest.php

£13,500 saved @ 4.5% = 1,905.74 interest (before tax, so really it's £1,524.59)
£13,500 borrowed @ 6.8 = 2,945.52 interest

That looks like you'd be 1400 quid worse off...:(

That was my original thought. However this says otherwise:

http://www.pem.co.uk/common/calculators/loan.html

Says the OPs amount is correct

CLAPTON

you are comparing apples and oranges

to compare like with like your two options are

a. keep your current saving of 13,500 earning 4.5% less tax
and spend about 414 per month from income for the loan

or

b. use your saving to buy the car
save your 414 per month in a saving a/c

then you need to compare the outcomes

Rob71

Lokolo wrote: »

That was my original thought. However this says otherwise:

http://www.pem.co.uk/common/calculators/loan.html

Says the OPs amount is correct

Hmmm... my bad - I was using the wrong calculator!

I've just checked w/MoneyFacts and a bunch of others (inc. the link you posted) and they all agree with the O/P.

CLAPTON wrote: »

you are comparing apples and oranges

to compare like with like your two options are

a. keep your current saving of 13,500 earning 4.5% less tax
and spend about 414 per month from income for the loan

or

b. use your saving to buy the car
save your 414 per month in a saving a/c

then you need to compare the outcomes

Bingo! Yep, I was missing the obvious...

So to borrow 13,500 @ 415.61 a month would cost £1461.96 in interest.
To save £415.61 a month would make £1024.93 before tax (£819.94 after tax)

That makes the O/P £642.02 worse off to borrow rather than save if they put away 415.61 either to the loan or into savings.

The nub of it is that if they pay out of savings, there's no monthly commitment.

nemeth782

The reason for the discrepancy is that the interest will not be calculated on £13500 every month of the loan, if you were paying back, say, £500 a month, this may on your first payment be say, £300 interest and £200 capital, the next month you would be paying interest on only £13300, etc etc

As such, while the APR is higher, the capital that is is calculated on is constantly decreasing.