Personal loan versus cash buy

James6363

I am looking to purchase a new car for £12000. Do I get a personal loan or pay cash from savings?

I can get a loan for all of this sum at 2.9%apr and keep the cash in a saving account paying 1.5%.

Or do I pay cash to avoid paying loan interest and save the ‘car payments’ back into the 1.5% account.

Looking to pay everything off in either 1 or 2 years.

DCFC79

James6363 wrote: »

I am looking to purchase a new car for £12000. Do I get a personal loan or pay cash from savings?

I can get a loan for all of this sum at 2.9%apr and keep the cash in a saving account paying 1.5%.

Or do I pay cash to avoid paying loan interest and save the ‘car payments’ back into the 1.5% account.

Looking to pay everything off in either 1 or 2 years.

Can you get a loan at 2.9% ?

James6363

Yes. I have applied and been accepted.

AnotherJoe

1.4% interest (the difference) on £12k over 2 years would be about £170. Not huge but at few nice meals or your first years service.

macman

Then you've answered your own question. But choose an account which will pay you more than 1.5%. Plenty of current accounts will pay 5% up to a set limit (Nationwide Flexdirect, for one).

James6363

I don’t need to accept the loan if it is cheaper to pay cash and I already have a couple of the smaller 5% accounts.

So the answer would appear to be, take the 2.9%apr loan over 2 years as the interest on the £12000 savings would cover the cost of the loan??

Lungboy

No....2.9% interest is higher than 1.5% so paying in cash is better.

James6363

The 2.9% is apr. Does that not mean that the actual rate paid will be lower as the balance is reducing?

AnotherJoe

Forget the APR and look at how much you'd actually pay over 2 years with a loan, compared to what you would lose out on interest. That's what my back of a fag packet calculation was in post 4. You are roughly £170 better off over 2 years by using savings.
Unsurprising since you either pay 2.9% to a loan company or 1.5% if you loan it to yourself from savings.

p.s. of course with the loan from a company yes you pay off some, so you are paying less actual interest as the amount left declines, but that also applies to your savings, as you replenish them, you start to get the interest on what youve put back.

Hence all that matters is the difference between the rates which means that its 1.4% more expensive to borrow from someone other than yourself (which is as you'd expect it to be, they have to make a profit after all)

BakingC

Strictly speaking as everybody else has said it is better to pay with your savings and then replenish via what you would have spent on car payments.

However something you might not have considered is how much do you value flexibility of retaining the savings? If paying in cash would eliminate all your savings what would you do if you had an emergency tomorrow? Would you have to rely on something like a credit card which would incur more than the interest you saved by using your savings to begin with.

AnotherJoe

Good point though if the OP can pay off a £12k loan in a year I suspect he's got much more than £12k in savings already, plus he can always trade off the chances of that emergency being as big as £12k (maybe it would be a new boiler at say £3k for example) vs the certainty of saving money, and could even put it on a zero % credit card which usually you get a year on, and he could pay it off by that.