Drawbacks of taking a long term loan

mok95

Hi there,

I am considering to buy a car. I know I will probably want to change it in about 2 years time. I have looked at the following two scenarios:

1. Take out a personal lease on a new car worth £32,000 (3+23 payments)
Diposit: £1,500
23 payments of: £475
Cost over 2 years = £12,350

2. Take out a loan on the same car, but 3months old, worth £28,000
Diposit: £3,000
Loan to take: £25,000
Term: 10 years
Monthly repayment: less than £300
Interest: 7%

In two years time
Paid (including interest): £7,200
Balance outstanding: ~£18,300
Car worth: more than £20,000

Cost over 2 years = ~£8,500

The idea is taking a long term loan to keep monthly payments low, and then cancel it when I sell the car back. Also, by buying the car just a few months old, much of the initial depreciation should have taken place already.

My question is what do you think are the downsides of this approach? What are the negative aspects of having such a high value long term loan?

Thanks in advance!

peterg1965

I do not think that after two years of paying £300 per month on a £25K loan over 10 years that the settlement will be £18,300. Most providers front load the interest and the settlement figure is more likely to be £21K-£22K. That means the car will be worth less than the money you owe on the loan.

margaretclare

£300 a month for 120 months is £36,000.

The main drawback of a long-term loan is, the longer the term, the more interest you pay in total. There is a false illusion here, because over a long period the repayments are advertised as 'easily affordable'. In a pig's ear!

Margaret

lynzpower

erm the obvious drawback is you are paying over 12k on a depreciating asset.

NOT MONEYSAVING AT ALL

mok95

That's most useful. Thank you.

How can I find out how lenders distribute the payment of interest vs. capital? eg. how much interest am I paying on month 1, vs how much interest am I paying on month 24.

Would it be possible to ask a provider to run simulations of how much balance I would have outstanding after 24months?

Thanks again.

daviduk_2

The link below will show you the figures you are after.

http://www.askcab.co.uk/money_site/cintcalc.asp

peterg1965

mok95 wrote: »

That's most useful. Thank you.

How can I find out how lenders distribute the payment of interest vs. capital? eg. how much interest am I paying on month 1, vs how much interest am I paying on month 24.

Would it be possible to ask a provider to run simulations of how much balance I would have outstanding after 24months?

Thanks again.

Just ask the lender. As the loan is uner £25k it will be regulated under the CCA. As part of the agreement they are obliged to provide you with an indication of what the settlement figure will be at a quarter, half and three quarters of the way through the loan (2.5yrs, 5 yrs and 7.5yrs) for you.

Most, although not all, charge 2 months interest for early settlement. Northern Rock doesnt.

By the way, I read your responses in the other motoring thread. the Audi TT and BMW 3 series Coupe are good choices! I have just ordered a BMW 335d M Sport Coupe for September! It is worth looking at a PCP option too.

nomoneytoday

IMHO there are 3 realistic ways to fund the car.

1 - A PCP - smaller payments and handback/refinance/balloon at the end
2 - Personal loan over 2/3 years
3 - Buy a cheaper car

nomoneytoday

p.s. repayments off the loan principal are not linear, so you may owe more than £30k in a couple of years with the wrong choice of loan...

mok95

nomoneytoday, why do you exclude PCH (or leasing) from your list?

peterg1965

mok95 wrote: »

nomoneytoday, why do you exclude PCH (or leasing) from your list?

PCP and PCH are just alternate, but similar ways of funding the car. each has its drawbacks and advantages. The PCP usually gives a guaranteed future value and the option to purchase. You dont get this with a PCH, you just hand the car back at the end of term. Both will also be different in terms of how to get out of the contract. I think it is a lot easier with a PCP.

Another alternate is Balanced Payments on a very expensive car. This isvariable interest rates, easy to get out of and is like HP with a balloon. This method is popular for people funding very high value cars and who like the option to change regularly.