Loan or use savings

looknohands

I'm looking at getting a personal loan to finance a car, I had thought of going with PCP.. but seems it's a silly option as advised on here. I've now looked into a personal loan and have been offered £14k at 3.5% from my bank over 3 years, which is a lot cheaper than PCP and HP (I now see the benefits now of not going PCP!)

I have a £5k credit card completely un-used, which has 0% for 29 months left.
I also have £6k in a savings account, self invested ISA, growing between 6-10% in value over the past few months. The car i'm looking at is £14k, so I would then take a dividend from my company to top this up.

I'm wondering if it makes sense to use the savings or get the loan, as they're out performing the interest of the loan currently, but am aware these aren't paying until I sell them. I've got the savings in a range of funds / shares aimed at long-term, and then some individual share options that are performing really well at the moment but probably a little more risky.

Any thoughts here, I'm aware next March the savings will likely take a hit with Brexit. So I could shuffle them around or use them from the car. Just the loan is fixed interest so wont really matter with Brexit as the repayment will remain the same.

madvicker

If your return is sitting at 6-10% don't even think about using your savings, particularly as you've invested them with long term growth in mind.

From the situation you've highlighted, the most cost effective way to finance the car would be to part pay £5k on your credit card and get a loan to finance the remaining £9k. But this only works out best if the loan you get for the balance is less than 6% APR. Otherwise, part pay as much as you can on the credit card and get a loan for the rest until the loan APR portion is less than 6%.

DrEskimo

It’s worth pointing out that your S&S ISA are investments, not savings. They have the possibility of going down as well as up, and it’s advised that you should be holding these for at least 10years to ride out the ups and downs of the markets.

Do you have any savings in a current/savings account? It’s highly advised that you have 3-6months of expenses in a current/savings account that is not at risk, and can be accessed as an emergency fund ‘just in case’.

Once that is funded, you can look at how much you need to borrow to buy the car. I would use the 0% interest CC and then borrow the additional needed on the loan.

However, I high advise against borrowing the full cost of the car. I personally never borrow more than 50% of the cars purchase cost. Why? Becuase it’s a depreciating asset. You want to ensure you always owe less than it’s value, just in case you can no longer service the loan, you can easily sell the car and the settle the debt, rather than use your emergency funds to clear any ‘negative equity’.

looknohands

Thanks, understand about investments I just refer to them as savings but I know there's a risk there.

I can use the investment to self fund 50% to prevent any negative equity.
But the loan interest jumps up quite a bit when it's a smaller amount. Is it worth paying that extra to avoid the negative equity?

£2k loan @29.9% (30 months, £730 interest)
£5k CC @0% (30 months)
Then £6k investments + £1k self funded.

If I borrowed more and didn't use savings.

£9k loan @3.5% (30 months, £405 interest)
£5k CC @0% (30 months)

I usually keep around £3k in my current account, monthly outgoings are £750 for mortgage and bills,

MallyGirl

Have you asked the dealer about taking payment by CC. We pickup our new (to us) car today and they would only take £3k on a CC - against a much higher ticket price than yours

looknohands

MallyGirl wrote: »

Have you asked the dealer about taking payment by CC. We pickup our new (to us) car today and they would only take £3k on a CC - against a much higher ticket price than yours

That's interesting, thank you, I'll ask them as just assumed it would be fine if you are self financing.

enthusiasticsaver

A few good points already mentioned. I think that some dealers won't take credit cards. I had to use a debit card when I bought mine. Also, although your investments are doing ok now there is no guarantee they wont fall in value. Brexit alone should not be an issue if you are well diversified globally as you should be but it is fairly inevitable sterling will be hit which may hit your s and s isa depending on where it is invested. Personally I look at investments as long term so would be averse to selling them for a car.


If you are planning to take a dividend from your company presumably this means you do not need as much as £14k regardless of whether you use loan or savings? On balance I would take the loan but in the future if you intend changing cars in regularly it might be better to use regular savers to build up a cash balance ready for the next one. That is what we used to do. Now retired we don't change cars as often.

DrEskimo

looknohands wrote: »

Thanks, understand about investments I just refer to them as savings but I know there's a risk there.

I can use the investment to self fund 50% to prevent any negative equity.
But the loan interest jumps up quite a bit when it's a smaller amount. Is it worth paying that extra to avoid the negative equity?

£2k loan @29.9% (30 months, £730 interest)
£5k CC @0% (30 months)
Then £6k investments + £1k self funded.

If I borrowed more and didn't use savings.

£9k loan @3.5% (30 months, £405 interest)
£5k CC @0% (30 months)

I usually keep around £3k in my current account, monthly outgoings are £750 for mortgage and bills,

Oh, yea no point borrowing less if it will cost more. Is there a facility to borrow more, and make an overpayment to lower the amount..(i.e. take out £9k at 3.5%, and repay £7k in the first month)?

I mean, that's just my rule, you may have a different attitude to risk, and if you have spare funds to help you deal with any shortfall, that may mitigate your risk enough for you personally.

looknohands

enthusiasticsaver wrote: »

A few good points already mentioned. I think that some dealers won't take credit cards. I had to use a debit card when I bought mine. Also, although your investments are doing ok now there is no guarantee they wont fall in value. Brexit alone should not be an issue if you are well diversified globally as you should be but it is fairly inevitable sterling will be hit which may hit your s and s isa depending on where it is invested. Personally I look at investments as long term so would be averse to selling them for a car.

If you are planning to take a dividend from your company presumably this means you do not need as much as £14k regardless of whether you use loan or savings? On balance I would take the loan but in the future if you intend changing cars in regularly it might be better to use regular savers to build up a cash balance ready for the next one. That is what we used to do. Now retired we don't change cars as often.

Thanks, yes the investments I really want to keep and also keep adding to them too which will still be possible even with the loan repayments. I have just wondered how responsible this was with the debt, it sounds like it's wise to keep them.

We can both take a dividend but we are a bit averse to taking money out of our companies for a large personal purchase. Both my OH and me have companies with equity, but we try and keep our money in our companies first unless we absolutely need it (we both have employees / commitments with the companies)

This is our first nearly new car. Our current car is a 20 year old VW Golf.. which we've driven into the ground so we have no money from that to put toward this one. Your advice is exactly what we planned, we do quite low mileage (around 5k a year) but need reliability. So we'd likely replace in 3 years when the manufacturer warranty is out / MOT is due and in the meantime save to finance that gap, but yes maybe a regular savings rather than investing. Thanks!

looknohands

DrEskimo wrote: »

Oh, yea no point borrowing less if it will cost more. Is there a facility to borrow more, and make an overpayment to lower the amount..(i.e. take out £9k at 3.5%, and repay £7k in the first month)?

I mean, that's just my rule, you may have a different attitude to risk, and if you have spare funds to help you deal with any shortfall, that may mitigate your risk enough for you personally.

The loan document says you may have to pay interest of 58 days if you pay it early but you can pay earlier definitely. And I understand what you're saying, makes perfect sense, but seems strange that would be such an simple loop hole to getting lower interest though.

enthusiasticsaver

looknohands wrote: »

Thanks, yes the investments I really want to keep and also keep adding to them too which will still be possible even with the loan repayments. I have just wondered how responsible this was with the debt, it sounds like it's wise to keep them.

We can both take a dividend but we are a bit averse to taking money out of our companies for a large personal purchase. Both my OH and me have companies with equity, but we try and keep our money in our companies first unless we absolutely need it (we both have employees / commitments with the companies)

This is our first nearly new car. Our current car is a 20 year old VW Golf.. which we've driven into the ground so we have no money from that to put toward this one. Your advice is exactly what we planned, we do quite low mileage (around 5k a year) but need reliability. So we'd likely replace in 3 years when the manufacturer warranty is out / MOT is due and in the meantime save to finance that gap, but yes maybe a regular savings rather than investing. Thanks!

Of course in 3 years time you will also have the residual value of the car you are buying now. You could also maybe use regular savers to overpay the loan. Presumably this is being bought as a personal vehicle not a company one as you own your own companies? Do you get any tax breaks for purchasing it as a company vehicle?