Is this a good Idea?

billchecker1

After advice on the following proposal and for any flaws in my plan.

I am currently saving for a car. I put in approx £350 pm. I plan to buy the car in 2016.

Had an email from Santander offering me a (guaranteed?) rate of 4.3%. I have a 123 account with them offering me 3%.

My suggestion is to take the loan out which monthly payment will be £300pm. I will then place this into my 123 account earning interest.

The APR for debt is 4.3%
The net value of the savings is: 2.4%

Does this mean my actual borrowing APR is then 1.9% a very good rate indeed.

This makes no difference to the money I am saving pm but will mean I pay less interest overall and finish the loan off sooner.

Thoughts? Are my maths right?

masonic

I don't understand the value of taking the loan if it doesn't mean you get the car any earlier. If you don't take the loan, you are paid interest on your savings of 2.4% net. If you do take out the loan, instead you pay interest of 1.9% net of savings interest.

kidmugsy

It is indeed a good idea. For Santander.

greatgimpo

If your car is good for another 2 years without substantial outlay, stick with it.

billchecker1

The rationale behind this is that in 1.5 years time I will be unlikely to get a loan so cheap and pay less interest overall.

greatgimpo

billchecker1 wrote: »

The rationale behind this is that in 1.5 years time I will be unlikely to get a loan so cheap and pay less interest overall.

... but your replacement car will be 2 years older and worth less.

masonic

billchecker1 wrote: »

The rationale behind this is that in 1.5 years time I will be unlikely to get a loan so cheap and pay less interest overall.

With repayments of £300 per month, in 1.5 years time you will have repaid over £5k and paid roughly £70 in net interest on that portion of the loan that you didn't use for anything. You will also have paid interest on the remaining portion of the loan that you eventually use to purchase the car. So you will need to get a larger loan than you would if you waited and you will be paying a cost to service the debt during the interim. How much more expensive do you think it will be to take out a loan in 2016?

bowlhead99

You're right that it only costs you 1.9% net, if you put it in a bank that pays you interest on it so it generates a small income to put towards the interest bill. You say this net 1.9% is a 'very good rate indeed'. A gross rate of 1.9% that you could spend on a car would be a very good rate. But a net rate of 1.9% isn't, because you can't spend it on a car, or it will stop costing you only 1.9%, because it will no longer be earning you interest income.

So in other words it isn't a very good rate for what it gets you, because it gets you absolutely nothing.

You are paying them to give you money to put in an account and not spend. If you spend it on anything at all (car, holidays, living etc) it costs you 4.1% because you no longer have it in the bank and it's no longer generating any interest income to offset the interest cost.

As mentioned by the people above, if you are paying it off in fixed monthly slices, and you want to have, say, 10k of borrowed money to buy a car in a couple of years time, you need to borrow 15k now and make the payments for two years to still be owing them the 10k in two year's time. Once you take the 10k out of your account in two years you no longer have it earning you any cash so it is costing you the full 4.1%. So you'll have paid 1.9% for two years on a huge loan that you didn't even use, then 4.1% for the next few years on the finance you actually need to buy the car with. You are likely very much better off just borrowing whatever cash you need, at the point you're ready to buy the car.

So, keep saving as you are. In two years time when you want the car, take a look at the rates at that time and decide how much money to take out of savings and how much to borrow. It would generally be better to use savings to buy the car if they are only earning you 2.4%, rather than borrowing money at a higher rate than that. However you might decide you need to keep a lot of money back in savings for emergencies and you do want to borrow at 4% or 4.5% or 5% or whatever the going rate is at that point.

But it seems silly to borrow money that you don't intend using yet, just to lock into a very slightly better rate than you think you'll be able to get in a few years time. It also seems silly to buy a car now if you don't need it for a few years and were happy to save up for it.