Thinking about APR vs Inflation

North22

Hi. I am buying a new car and ordered it some months ago when the APR on the Personal Contract Plan (PCP)  finance package was 4.9%. That was locked in and will be the rate I pay for the next 3 years if I go ahead with the finance option when the car arrives in a few weeks after the long delivery lead time.  Obviously 4.9% is less than the rate of.inflation is at the moment and for the foreseeable future.  My alternative is paying cash and buying the car outright when it arrives.  With inflation reducing the real value of payments is it a no brainer that I should borrow at 4.9% because inflation will reduce the real value of payments, which are set out at the outset, more than if I paid interest at 4.9% over and above the cash price?

Nebulous2

Can you earn more than 4.9% on your cash? 

Little point in having cash at 2% and paying 4.9% on a loan. 

Dave_5150

The price in your contract is likely to be based on you taking the manufacturer's finance at 4.9%, so it is unlikely you can simply decide to pay with cash instead.

However you could potentially settle the finance immediately after delivery + any early repayment settlement.

phillw

Obviously 4.9% is less than the rate of.inflation is at the moment and for the foreseeable future.

You would have a debt that increases by 4.9%, comparing it to inflation is irrelevant.
What you need to do is compare it to what your cash is increasing by, which is probably 2-3% at the moment.

If all your cash is invested in the stock market and you are seeing 8% returns, then borrowing money at 4.9% is worth it.
If all your cash is in an ISA earning 1.5% then you should pay cash for the car.

I would ask them how much the car would cost for cash.

Exodi

North22 said:

Obviously 4.9% is less than the rate of.inflation is at the moment and for the foreseeable future. 

But you're not achieving the rate of inflation (~10%) on your savings so this point is irrelevant.

I predict that savings accounts may be paying around the same as your PCP by the end of the year, should the BoE continue to raise interest rates as expected.

Early next year they may be paying more (but then they may be paying less after?).