Take out a loan or use my own money?

Not_tight_just_careful

Maybe sounds like a crazy question?

I am just about to buy myself a fairly high priced (18K) used Audi and here is my quandary.

Based on a 10K loan as an example:-

1) I can use my own money which is currently making me 3% in a Santander 123 account but would Loose me £1140 in interest after tax over 5 years (Providing Santander does not pull the rate in the future that is)

2) Or I can take a load with Sainsburys @ 3.7% (providing that is the rate I'm actually given on application) Costing me £932 in interest over 5 years.(No arrangement fees either)

So, I'm actually £208 better off by taking out a loan rather than using my own money?

I'm sure there are other factors to consider here with regards to credit scoring etc but I wanted to put this out there.

I would be interested to hear the thoughts of the deep thinkers among you :-)

Pixie5740

If the cost of borrowing money is less than the interest you're making on that money elsewhere then taking out the loan makes more sense financially.

I have a Nationwide loan @ 3.6% APR because whilst I had the money to buy what I wanted my money is making more than the loan costs me. If I were to lose my job tomorrow and it was unliekly I'd get another job paying anywhere near the same in the future, then I know I could pay off the loan in full so there's not much risk involved.

Not_tight_just_careful

That is currently my train of thought also.
I have the money in the bank should anything happen job-wise.
So wheres the risk?

owlet

I know not a lot about interest and the way it's calculated but I'm intrigued -

If the money in Santander is earning 3% but a loan is costing 3.7%

How does it work that you are saving? As I say, I'm just asking from a curious & wanting to learn perspective. ...

andyfromotley

As pixie has said theres nothing wrong with your plan but the key point is that you MUST keep cash in savings and not be tempted to spend it elsewhere. If you did and then lost your job for example you would be left with a loan to service and no income. its a question of discipline.

enjoyyourshoes

3% Santander is Gross interest, tax payer its 2.4%. Have you compared apples with apples ? i.e. £10 K actual saving in Santander not a higher figure that you have as a balance ?

TrickyDicky101

owlet wrote: »

I know not a lot about interest and the way it's calculated but I'm intrigued -

If the money in Santander is earning 3% but a loan is costing 3.7%

How does it work that you are saving? As I say, I'm just asking from a curious & wanting to learn perspective. ...

^ this.

Also, you pay tax on interest received (currently, anyway) but get no relief on interest paid.

V.Lucky

One thing you haven't taken into account with your calculations is you won't actually lose £1140 in interest, as if you make monthly payments back to yourself you will accrue more interest over the 5 year period.

lee111s

owlet wrote: »

I know not a lot about interest and the way it's calculated but I'm intrigued -

If the money in Santander is earning 3% but a loan is costing 3.7%

How does it work that you are saving? As I say, I'm just asking from a curious & wanting to learn perspective. ...

The interest on the money in the bank will be compounded. So at the end of year one you'd have £10300, you'd then earn 3% on that over the next 12 months giving you £10609. The next year you'd earn 3% on that amount and so on and so on. These quoted amounts are before the tax is removed from the interest.


The interest on the loan amount will be decreasing as you pay off the capital, therefore you're paying less the closer you get towards clearing the balance of the loan.

Not_tight_just_careful

enjoyyourshoes wrote: »

3% Santander is Gross interest, tax payer its 2.4%. Have you compared apples with apples ? i.e. £10 K actual saving in Santander not a higher figure that you have as a balance ?

Yes, as quoted in the original post the interest figure quoted was after tax.

Not_tight_just_careful

owlet wrote: »

I know not a lot about interest and the way it's calculated but I'm intrigued -

If the money in Santander is earning 3% but a loan is costing 3.7%

How does it work that you are saving? As I say, I'm just asking from a curious & wanting to learn perspective. ...

This is because the loan is a decreasing term, i.e the amount you owe keeps going down.