Car - should you finance if you have cash?

Patsy68

We are looking at buying a fairly new used car for about £12,000 (inc trade in). We could pay cash but that would leave us with less than £10,000 in savings (built up when I was working, now I'm not because I'm a full time mum).

So the question is, should we pay cash outright or do some kind of finance/loan deal for all of it or part of it ?

If we added £10,000 to our mortgate, works out about £70 extra per month. Not alot of money but can't imagine wanting to pay that back over 19 years !

thenudeone

You should almost certainly pay cash.
If you take a loan you will pay at least twice as much interest as the savings rate, probably many times more so.
The only exception would be if you could borrow more on your mortgage AND the rate you would pay on the extra was no higher than the rate you could get on your savings AND the mortgage allowed extra repayments or savings offset (otherwise you will end up pay interest for decades). That combination is unlikely.
I have an offset mortgage at 0.5% above base rate :j but although I have plenty of free equity for a further advance, it could only be made at the SVR not the much lower base rate tracker rate

Hintza

Inflation 4.5%
Mortgage round the same
Loan +/- 8%
Interest accrued on savings around 0.5% (some bonds pay a bit more)

To me this is a no brainer, buy the car with cash and replenish savings each month by a liitle more than you would lose in interest. To keep it simple and excluding compunding.

A £9k car spread over 3 years is £250/month if you replenish savings by even £255-£260/monthyou will be quids in.

vaio

It’s a straight sums question. Look at the interest you get from your savings and compare it to the interest you’ll pay on the finance

Go with whatever works out the cheapest, the only tricky bit is the nice warm feeling you get from having a rainy day fund has a value too but only you can work that out.

To further complicate it, you might find that the car price will vary depending on whether you pay cash or finance (because the garage get a nice commission on finance)

I think I’ve seen threads where people have gone for finance (and hence the lower car price) and then cancelled or paid off the finance early to avoid the interest.

If you do decide on cash make sure you pay at least some of the cost on a credit card as this will give you s75 protection if you get any car/garage problems further down the line.

gilbert_and_sullivan

Cash unless the garage offer interest free credit, in which case use it but pay the loan off well before the punitive real interest rate kicks in.

Meself i'd buy a jalopy and dump that £12k straight off the mortage, paying that off is the most important thing..

Flyboy152

gilbert_and_sullivan wrote: »

Cash unless the garage offer interest free credit, in which case use it but pay the loan off well before the punitive real interest rate kicks in.

Meself i'd buy a jalopy and dump that £12k straight off the mortage, paying that off is the most important thing..

When will that happen?

hcb42

Definitely a bad idea to add a car loan to the mortgage..

Patsy68

Thanks everyone, makes me feel alot better about paying cash. It's just the thought of all that hard earned money going out the door. But hey, we have no choice. Now have three children and we don't fit in our present car !

pinkteapot

It would be going out the door if you put the car on finance, but it would be going out the door plus interest and therefore cost you more. If you want to really visualise it, look at the 'total payable' on the finance. I.e. car cost £12k, APR x%, total payable £16,959.

And it's not really going out the door - you're spending your hard earned money on a new car.

alanrowell

Whilst I agree on the general thrust that you compare interest rates on loan & savings you also have to take into account the possibility that you might need cash in the short to medium term. You also should consider if you can get a discount for paying cash as opposed to taking out the loan (or vice versa).

Hammyman

If you can get a 0% deal or one that is lower than your savings rate then consider finance.