Best use of 16.5k lump sum

m0ns00n

Hi,

I have recently received cash lump sum of £16,400 and I'm currently trying to figure out the best way to use it.

I am thinking the best options would be either:

1. Pay off my car loan
2. Deposit the lump sum in my offset mortgage

Car Loan
This is a hire purchase agreement with the following details:

Amount Borrowed: £17435
Amount Repayable: £20890 (47 monthly payments of £265.11 + final payment of £8429.50)
APR: 6.8%

Repaid: £3976.65 (15 months)
Outstanding: £16,913
Time left: 33 months

I have been given a settlement figure of £15,203.50 - for some reason I forgot to ask how this was calculated and they are now closed. However, it appears this may be a figure of £14,955 for the remainder of the loan, and a fee of £249 (hopefully someone can confirm this).

In any case, this means I'd save £1,710 in interest payments over the next 33 months.


Offset Mortgage
Amount Borrowed: £82,400
Term: 25 years
APR: 4.99% (fixed for 5 years. Ends April 2013)

Current Balance: £68,958


My 2 Options
The question here is whether to use £15,203.50 to pay off the car loan, or to put it into my mortgage (the other £1200 would go into the mortgage regardless).

If I put the money into my mortgage, I would expect to save the following amount in interest:

Interest saved = 15203.50 * 1.0499^(33/12) - 15203.50
= £2,178.53

This figure might actually be less depending on what the SVR is when my fixed term ends (currently seems to be around 3.8%).

If I pay off the car, I would make a saving of £1710 as stated earlier, and have £265.11 extra each month which can be saved.

I would probably use this to overpay on my mortgage, however I am currently struggling to figure out exactly what I would save in the way of interest.

As a rough estimate, I think I would earn the following:

£265.11 * 33 months = £8748.63
Average amount over 33 months = 8748.62 / 2 = £4374.31

Interest saved = 4374.31 * 1.0499^(33/12) - 4374.31
= £626.80

(again this may be less, depending on SVR)

This would give me a total saving of £2337.

It would seem, then, that the best thing to do is pay off the car loan (if my calculations are correct).


Moving House
The other factor affecting my decision is that I plan to move house in the next 1-2 years.

If I pay the lump sum into my mortgage, I will almost certainly be able to afford at least a 25% deposit on my next property (should be able to sell current flat for £95k, and looking to purchase a £200k property).

If I pay off the car loan, the 25% deposit will be significantly harder to achieve (although not impossible).

The other factor is whether the car loan will count against me when seeking a mortgage. It may therefore be better to pay it off for this purpose.



As you've no doubt gathered, I have a lot going through my head right now! I think I've explored my options, but there may be choices available to me I hadn't even considered.

Any help would be greatly appreciated!

Thanks,
Douglas

gkerr4

depends - are you managing with the monthly payments as they are? - id' probably do neither - i'd invest / save the cash or enjoy a little.

once it's gone, it's gone.

grey_gym_sock

i reckon the effective APR for continuing the car loan vs paying it off (obviously not the same as the original APR when taking it out) is about 5.36% ... my working being:

265.11 / 1.0536^(1/12) +
265.11 / 1.0536^(2/12) +
265.11 / 1.0536^(3/12) +
... and so on ... +
265.11 / 1.0536^(32/12) +
8429.50 / 1.0536^(33/12)
= 15204.21

i.e. i looked for the interest rate which, when you discount the future payments by that rate, gives approx. the surrender value.

whereas your 4.99% mortgage is presumably an APR of about 5.11%.

which suggests the car loan is the bettter one to pay off. which is the same answer that you got.

not a lot in it though, so i don't know whether you should let the 25% deposit issue swing it the other way.

wymondham

I've not idea, but it's excellent to see you do the sums - very impressive!

jem16

m0ns00n wrote: »

If I pay the lump sum into my mortgage, I will almost certainly be able to afford at least a 25% deposit on my next property (should be able to sell current flat for £95k, and looking to purchase a £200k property).

What would be the likely difference in the deals you could get with a 25% deposit as opposed to a lesser deposit?

If I pay off the car loan, the 25% deposit will be significantly harder to achieve (although not impossible).

How would you achieve it? Would you have to use other savings which would reduce interest on that?

The other factor is whether the car loan will count against me when seeking a mortgage. It may therefore be better to pay it off for this purpose.

It may be neutral if you can't afford the higher deposit and have to borrow more on the mortgage.

jem16

gkerr4 wrote: »

depends - are you managing with the monthly payments as they are? - id' probably do neither - i'd invest / save the cash or enjoy a little.

once it's gone, it's gone.

I doubt you would be able to get a savings rate to compete with either the mortgage rate or loan rate so what would that achieve other than more debt?

Investing would only be correct if for the long term. As the OP wishes to buy a house in 1/2 years it doesn't sound appropriate.

DiggerUK

You need to decide what you want to protect most in a crisis. The home, or the car.
Decide which is most important to you, then pay it down.
..._

atush

My 2 cents are that you should pay off the car loan, and offset the rest into the linked acct.

Then SAVE the car loan payment each month by DD into your savings acct. Since you are currently paying this money anyway, you aren't bound to 'miss' it.

I started doing this years ago when I paid off my last car loan. Once paid, I continued to save monthly so I could pay cash for the next car w/o finance. In your case you'd be saving towards your next house.

But I have a proviso. If you don't have 6 months spending saved in easy access cash, then you are at risk of falling into debt. And maybe can't afford to move house in a year or 2?

m0ns00n

gkerr4 wrote: »

depends - are you managing with the monthly payments as they are? - id' probably do neither - i'd invest / save the cash or enjoy a little.

once it's gone, it's gone.

As jem has pointed out, no short term investment will be able to beat the interest rate I'm paying on the loan. With regards to enjoying the cash, I think I'd feel better paying off my car loan as that was me enjoying cash I never had in the first place!

jem16 wrote: »

How would you achieve it? Would you have to use other savings which would reduce interest on that?

I currently save £250 / month into a stocks & shares ISA. I could divert some/all of this into mortgage overpayments to make up the necessary 20 - 25%. Or I could keep paying into this into the ISA in the hope the return is greater than 5%, then withdraw when I need it.

atush wrote: »

My 2 cents are that you should pay off the car loan, and offset the rest into the linked acct.

Then SAVE the car loan payment each month by DD into your savings acct. Since you are currently paying this money anyway, you aren't bound to 'miss' it.

I started doing this years ago when I paid off my last car loan. Once paid, I continued to save monthly so I could pay cash for the next car w/o finance. In your case you'd be saving towards your next house.

But I have a proviso. If you don't have 6 months spending saved in easy access cash, then you are at risk of falling into debt. And maybe can't afford to move house in a year or 2?

This is what I was leaning to. As I mentioned in my first post, I would start saving the car payment every month - as you say, I won't be missing the money.

I currently have a First Direct Regular Saver account, which gives me an 8% AER gross (only limitation is you can only save £300 per month, but this is more than I need). After tax this would work out at 6.4%, so this is probably the best place for the cash (this rate expires end of Feb 2013, but I should be able to open another one at that point).

With regards to my emergency fund, I have more than 6 months in a stocks & shares ISA (this is just general rainy day savings). If the worst happens, I could dip into this if need be.

Spiggle

Not doing the sums but my opinion would be to pay off the car loan pdq and save the eqivalent monthly amount into savings/offset to increase your likely deposit on the new property.

Good luck with it,
Spigs

gkerr4

jem16 wrote: »

I doubt you would be able to get a savings rate to compete with either the mortgage rate or loan rate so what would that achieve other than more debt?

Investing would only be correct if for the long term. As the OP wishes to buy a house in 1/2 years it doesn't sound appropriate.

it depends though - there are more things at stake than just amassing debt at the moment.

what i'm saying is, if the OP has no current savings, and lets say for argument sake, has outgoings of £2k a month including a car payment of £300 and a mortgate payment of £500 (for example)

now he/ she can use the 16k to reduce his/her monthly payment by £300 by clearing the car or make no impact to the monthly payment by paying off a chunk of mortgage - or, he / she could manage the 2k monthly payment and put the csh somewhere.

if he / she loses their job (a common worry for us all at the moment surely) they they can live for 8 months worry free with the 16k in the bank - whereas either other option would result in default on both loans within a very short time period - like i say, if you come into 16k and you have nothing else (we don't know this part right enough) then once its gone, its gone.