HP Dilemma

fattyboomboom_2

Here is the background to my dilemma:

I recently bought a new car on hire purchase. I have now got a new job where I walk to work and therefore I never use the car anymore as we use my fiance's car for general use.

To continue to pay for the car seems like a complete waste of money, and we are getting married in September 08 so the money could be put to better use.

I therefore would like to buy myself out of the HP, I have been given the early settlement figure and am happy with it. I can then sell the car.

I need to take out a loan to buy out of the HP. We would also need to take out a loan to pay for the wedding

The dilemma is therefore this:

Option 1 - Do I use the proceeds of the car sale to immediately pay off the personal loan? And then take out another separate loan in the future for the wedding?

Or Option 2 - do I put the proceeds from the car sale in savings to earn interest.

I know that the savings interest will not match the interest on the loan, but it will offset the interest to some extent - say i am paying 7% on the loan, and earning 5% on the interest - this means the net interest on the loan is 2% for the time that the money is kept in savings.

Meanwhile, I continue makling repayments on the personal loan (which would be the same as on the HP) - therefore reducing the outstanding balance.

The money in savings is kept there until needed for the wedding.

With option 1, our savings are only likely to accrue at about £350 a month, with interest of approx 7% on the future wedding loan.

Whereas with option 2, interest is accrued on the whole proceeds of the car from day 1 (the only interest lost being the current account interest on £350 a month for the loan repayments plus the interest paid on the loan less the interest earned on savings) - say net 2.5% interest payable.

We also then have the benefit of already being a year ahead on loan repayments with option 2 by the time the wedding comes around.

To me, option 2 seems the best - but am I missing something?

Appreciate any help.

Thanks.

CLAPTON

assuming that the loan is fully flexible and there are no penalties for early repayment then it makes no sense to be paying 7% in interest and have savings earning 5% (i.e. 4% after deduction of tax)..
Once you have paid off the loan, obviously you are going to save the money (that is now freed up) for your wedding so reducing the amount you need to borrow for the wedding.