Interest Free Loan, a good idea?

kteara

Brief background Info. I am 21, male, Living in London and studying a degree at home. I have a part time job and I earn roughly 800 a month of which I save 500 each month. I have zero expenses apart from Gym (£15/per month) and Petrol which is roughly £100 a month.

I currently have £7000 saved. I own a car which I can sell for £2000. I want to buy a new car which will be around £4000. I don't want to dip into my savings because my aim is to build it up. The reason I want the new car is because I have worked extremely hard and I feel I deserve some form of reward and cars are my biggest joy. My current car is also very old and mechanically problematic with ongoing problems with the gearbox despite repairs.

So we've got the background info out the way, here's the main point of this thread. My father has offered to loan me money which I can pay him back without interest. I have never done this sort of thing before and honestly, I hate the idea of being in debt. I can borrow £2000 from my dad and pay him back monthly in £250 instalments which will take 8 months to fully reimburse him. Although I hate the idea of being in debt, I can comfortably afford to repay him £250 a month. I am already saving £500 a month so that will be reduced to saving £250 a month for 8 months. Once the 8 months is done. I plan to sell the car and then upgrade again, as long as I continue to save.

The 8months time frame is made up by myself, would it be more beneficial to me to extend this time frame or reduce it?

Is this a good plan? Would it be a better choice to take the interest free loan rather than use my savings? I'm sorry if I sound ignorant but I naively can't see many benefits of an interest free loan due to my stigma about loans in the first place.

Thank You for taking the time to read this

[Deleted User]

Personally I would use my savings. But it entirely depends on the relationship between you and your father and how you both feel about it.

kteara

In what situation would this no interest loan benefit someone? That is what I'm trying to work out.

[Deleted User]

From your point of view, it would allow you to borrow without paying interest, and continue to earn interest on your savings. Having savings also gives you a buffer for emergencies.

kteara

Deleted_User wrote: »

From your point of view, it would allow you to borrow without paying interest, and continue to earn interest on your savings. Having savings also gives you a buffer for emergencies.

My plan is to sell the car in 8 months time, once I have repayed my father the full £2000. The fact i'm selling the car would it make a difference whether I borrowed or used my savings?

It's a very annoying situation for me because I really want to maximise my savings (I set a personal goal to reach 10k savings by March but I get roughly 1k bonus in that month) but the car I am driving now really is mechanically problematic and I feel as if I would suffer by keeping it for much longer. I also feel re-sale price may drop the longer I keep it too.

I am still unsure which choice to make though. In terms of the bigger picture, once I buy this new car with the loan, I will sell it after the 8 month loan repayment. at that point, I aim to purchase another car (dream car worth about 10k) and I would want to take an interest free loan from my dad once again. Because the car is worth 10k I feel safer having a loan from my dad. I also feel it will benefit me doing it this way.

JimmyTheWig

That's a very kind offer from your dad.

Personally I wouldn't take it for two reasons...

1. Interest-free loans cost the person lending the money. Usually this is a company bearing the cost and often results in paying a higher price for the goods in the first place. E.g. we bought double glazing recently and had the option of interest-free finance. Or the salesman offered us 6% discount (what the interest-free agreement would cost them) to pay on card. We paid on card as we didn't need the finance. In your case it will cost your dad in interest that he could be earning on this money. Why do that when you have the money in your own savings? [Ignore technical phrase if you want: If you treat you and your dad as a single unit it is a zero sum game.]

2. Borrowing money to buy a car that you don't need is never sound money management. You sound like you are doing so many right things when it comes to money (maybe _not enough_ being spent on fun, but that's a personal choice!), don't fall into bad habits now.
With the money in savings some people wouldn't see it as borrowing money which would be fine. But it looks like you do, so I'd say no.
If the car is worth buying with money from your savings then go for it. When you have built your savings back up you can upgrade the car again if that's what you want to do.

kteara

JimmyTheWig wrote: »

That's a very kind offer from your dad.

Personally I wouldn't take it for two reasons...

1. Interest-free loans cost the person lending the money. Usually this is a company bearing the cost and often results in paying a higher price for the goods in the first place. E.g. we bought double glazing recently and had the option of interest-free finance. Or the salesman offered us 6% discount (what the interest-free agreement would cost them) to pay on card. We paid on card as we didn't need the finance. In your case it will cost your dad in interest that he could be earning on this money. Why do that when you have the money in your own savings? [Ignore technical phrase if you want: If you treat you and your dad as a single unit it is a zero sum game.]

2. Borrowing money to buy a car that you don't need is never sound money management. You sound like you are doing so many right things when it comes to money (maybe _not enough_ being spent on fun, but that's a personal choice!), don't fall into bad habits now.
With the money in savings some people wouldn't see it as borrowing money which would be fine. But it looks like you do, so I'd say no.
If the car is worth buying with money from your savings then go for it. When you have built your savings back up you can upgrade the car again if that's what you want to do.

The problem is, the car I really want I can't afford. Its worth just over 10k. The car I want now will replace my problematic car now and it will also satisfy my car urges for a while.

JimmyTheWig

kteara wrote: »

My plan is to sell the car in 8 months time, once I have repayed my father the full £2000. The fact i'm selling the car would it make a difference whether I borrowed or used my savings?

Selling the car makes no difference.

Consider scenario 1 - you borrow the money from your dad
You would have savings of £7000 and debts of £2000.
After 8 months of paying your dad back £250 a month and paying £250 a month into savings you would have savings of £9000 and debts of £0.

Consider scenario 2 - you use savings
You would have savings of £5000 and debts of £0.
After 8 months of paying £500 a month into savings you would have savings of £9000 and debts of £0.

Exactly the same.

The only difference is in interest on your savings.
In scenario 1 you would have an average savings balance of £8000. Lets assume you can get 3% net on your savings, that would give you £160 in interest.
In scenario 2 you would have an average savings balance of £7000. Again lets assume you can get 3% net on your savings, that would give you £140 in interest.

So by borrowing the money from your dad you are £20 up in interest.
But remember that in lending you the money your dad is £20 down in interest.


If you were borrowing from a company (but didn't view it as a loan as you have the money in savings) then I'd say go for it. Why not pocket the £20 interest at their expense?
But do you want to pocket £20 interest at your dad's expense?

kteara

JimmyTheWig wrote: »

Selling the car makes no difference.

Consider scenario 1 - you borrow the money from your dad
You would have savings of £7000 and debts of £2000.
After 8 months of paying your dad back £250 a month and paying £250 a month into savings you would have savings of £9000 and debts of £0.

Consider scenario 2 - you use savings
You would have savings of £5000 and debts of £0.
After 8 months of paying £500 a month into savings you would have savings of £9000 and debts of £0.

Exactly the same.

The only difference is in interest on your savings.
In scenario 1 you would have an average savings balance of £8000. Lets assume you can get 3% net on your savings, that would give you £160 in interest.
In scenario 2 you would have an average savings balance of £7000. Again lets assume you can get 3% net on your savings, that would give you £140 in interest.

So by borrowing the money from your dad you are £20 up in interest.
But remember that in lending you the money your dad is £20 down in interest.


If you were borrowing from a company (but didn't view it as a loan as you have the money in savings) then I'd say go for it. Why not pocket the £20 interest at their expense?
But do you want to pocket £20 interest at your dad's expense?

Appreciate the detailed reply you have given me a really good understanding on this topic. Can I ask, for your personal opinion. When do you feel it would be best for me to purchase the car? Either the 4k car or the 10k dream car.

Thanks

JimmyTheWig

kteara wrote: »

The problem is, the car I really want I can't afford. Its worth just over 10k.

£7000 savings.
£2000 for selling your old car.
£2000 available to borrow from your dad interest free.
= enough for the £10k car.

:Runs away and hides as I've just contradicted everything I've said above!!

The car I want now will replace my problematic car now

Reasonable. However, though I'm guessing that you know more about cars than I do (most people do!) I'd bet that you can get your current car fixed for less than £2000, so this would be the sensible option in the short term as far as I can see.

and it will also satisfy my car urges for a while.

This, I feel, is the crux of it. You want to buy a new car.
You like cars.
You work hard.
You save hard.
Why shouldn't you be able to buy yourself a new car?
Well you can - if you dip into your savings. If you have to borrow then you can't afford it.

kteara

JimmyTheWig wrote: »

£7000 savings.
£2000 for selling your old car.
£2000 available to borrow from your dad interest free.
= enough for the £10k car.

:Runs away and hides as I've just contradicted everything I've said above!!



Reasonable. However, though I'm guessing that you know more about cars than I do (most people do!) I'd bet that you can get your current car fixed for less than £2000, so this would be the sensible option in the short term as far as I can see.


This, I feel, is the crux of it. You want to buy a new car.
You like cars.
You work hard.
You save hard.
Why shouldn't you be able to buy yourself a new car?
Well you can - if you dip into your savings. If you have to borrow then you can't afford it.

Apologies. The 10k car in question is sort of a goal that I've had for many years now. I am definitely not in a financial position to purchase one now. I was asking at what stage would you recommended I purchase it given that I have the option of the interest free loan and that I am a huge petrol head. What you said about working hard and saving hard is very true. I am motivated by the possibility of owning the 10k car in the near future (hopefully) though admittedly, I have no clue when this will be sensibly possible.

Thank You!