Should I use loan or savings to buy a new car?

Cornish_Pirate_3

In brief, my partner and I are currently saving for our first house and progress is good (we're aiming to have our deposit by mid 2013). I have checked Experian/Equifax and our credit history is OK (no blemishes), but excluding credit cards (upto a £1000 limit) neither of us have ever taken out a loan.

With the MOT of our car due in September, im considering upgrading our motor to something newer and hopefully more reliable (was considering spending circa £5000). However, im unsure how I should finance this - I could dip into our savings (for the full amount) or get a loan.

How do I know if my credit score would improve enough (for our eventual mortgage application) to justify the additional cost of paying interest on a loan?

Understandably, I don't like the idea of paying someone for a loan, when I have the money sat in a Savings/ISA account. Is their a financial product where I can secure my loan against savings to get a better rate for the loan? (I’m guessing not, but worth asking!)

At the moment, I’m thinking I may go 50:50, with a loan of £2500 – any suggestions/thoughts would be appreciated.

Many Thanks, Ben.

opinions4u

Having debt will reduce the amount you can borrow on mortggage.

Having debt will cost more in interest than cash will earn in your savings account.

So as long as you can still fund deposit and fees for house purchase, pay cash.

Or, alternatively, sort the car out after the house move.

Tixy

Are you thinking that having had a loan will make your credit history look better and make it easier to get a mortgage?

Unlikely to work like that - as long as you have some credit accounts, such as your credit cards, that you have shown you are handling well then you don't need to have had lots of loans/credit to prove you can manage a mortgage.

redpete

Rather than just considering "loan vs savings" I'd suggest the first consideration is "house vs car".

Whatever the source of the money to buy the car you will be reducing the amount you have towards the house - and maybe delaying the time when you will be able to buy a house.

So, is a newer car worth putting off the house purchase?

Cornish_Pirate_3

Thanks for the feedback - the "house vs car" decision is something I have considered carefully, and im fairly confident that now is the right time to sort out the car.


Any loan I do take out I would ensure is fully paid off before applying for the mortgage.

Would it be fair to say that any improvement in my credit history from obtaining a loan would be negligible? If so, it seems using (abusing) the savings would be preferential.

Thanks again for the advice.

trebor21

If you plan to repay before getting mortgage, then the obvious answer is use the savings and pretend its a loan, repay x amount into the savings every month.

You will not have to pay any interest that way, which would be very high on a loan of £5000. (Normally 12%+)

Banks will want your bank statements when applying for mortgage and it looks far better money going into a savings account then into a loan.

27col

Why would you want to borrow money at a high interest rate to buy a car, when you can "borrow" it from yourself for virtually no interest. In my book it's a no-brainer.

Cornish_Pirate_3

Using my savings appears to be the consensus (which would be my preference too).

However, let me play devils advocate for a moment....

If I did take out a loan, and that improved my credit score to the extent that I was offered a better mortgage rate, surely the long-term benefit would outweigh the cost for the original car loan?

I’m probably just over complicating the issue, for some reason I was under the impression that taking out a loan would significantly improve my credit rating. Tixy seems to have summed up my situation well - so I shall stick to credit cards in order to prove my credit worthiness (unless anyone concurs with the devils advocate?).

yorkshire-lad

as mentioned above, why not loan yourself the money from your savings, and just pay back a certain amount a month to get your savings back up to what they were before your borrowed.

and with regards to your credit rating, why just not get a credit card put your weekly shop or fuel on it, pay it off each month.
if you do this for 2 years, it will improve your credit history and show that you can manage your finances well.