Are my sums correct???

jonray

The interest rate is net of tax, roughly on ICICI savings account.

westernpromise and tomstickland i see your figures and agree with them. The only bit I still dont get is if I pay for the car outright I surely must have to factor in the lost interest on the £8000 over four years

grumbler

The same question was discussed in these threads:
Better to take loan then pay cash upfront??
should I pay it off ???

jonray

Thanks grumbler. The link you provided again highlights the fact that using money to pay for the good loses the interest that could have been made on the cash. This has to be taken into the equation. That is why taking the loan doesnt seem too detrimental.

tomstickland

Looking at the sums provided by Westernpromise and myself, you'll be around £1200 better off if you don't borrow the money.

westernpromise wrote:

Thus borrowing to buy the car makes it about £25 a month more expensive.

tomstickland

You're confusing me now!
The OP needs to do the sums properly, but whatever way you look at it, borrowing at 5.7% whilst having savings at 4% is the wrong way to go about it.

tomstickland

Actually, I understand what you were saying now.

Whatever; the original sums were flawed.

westernpromise

jonray wrote:

The only bit I still dont get is if I pay for the car outright I surely must have to factor in the lost interest on the £8000 over four years

You do, but you only need to factor it in once...! In my case A above, you do get the interest, and Case B, you don't.

The key thing is, you have to look at both deals in total. In one case you can:-

1/ keep your savings (good) and
2/ earn interest on them (good) but you must also
3/ pay back a loan (bad).

In the other you must

1/ spend your savings (bad) but
2/ replenish them with monthly deposits as though repaying a loan (good).

All other factors, like depreciation on the car, are constant between cases, so they just cancel out.

Incidentally, you will find that a lot of banks (Halifax springs to mind) offer 'regular saver'-type accounts which pay quite a bit better than normal deposit rates, even ICICI. Eg Halifax has one which pays 7% gross, about 5.5 net, as long as you put in between £20 and £300 a month.

I forget the exact terms but you get the idea - it is no more burdensome than paying back a loan.

tomstickland

Something I meant to write yesterday:

tomstickland wrote:

OK here's my sums.
Plan A:
Borrow £8K at 5.7% gross rate for 4 years. Make 48 payments of £186.78
Total paid back £8965.
Meanwhile savings at 4% net get from £8K to £9385.
At the end you have a car and £9385 of savings.

Plan B:
Pay for car outright.
Then pay £186.78 into savings account each month. At end of 48 months you will have £9924 in the savings account.

At the end you have a car and £9924 of savings

If you chose to only pay 8000/48 in then you will end up with £8855 at the end.

There are various other ways of making the comparison, but the important point is that both choices have to have the same conditions. ie: the way I've done it you feed £186.78 into both options, either as a payment to the loan, or as a payment into savings.

You could do the same comparison without feeding £186.78 in.
Take the loan, withdraw £186.78 from the savings out month and pay it into the loan.
Versus just buy car outright.
In this case you'd run out of savings before the end, so you'd end up with a negative savings balance.

jonray

I get it, eventually. Thanks for all of your help. I will pay for the car myself and pay the monthly money into a regular savings account. Thanks again

Mrs_pbradley936

Something which might suit you even better is to lease a car for 2 or 3 years. I have not leased anything myself but friends have and are full of it. I think the money saving with leasing has something to do with the depriciation of the car over those 2 or 3 years.