A new car, and gilts

valiant24

I'm buying a new car.  Let's say it's going to cost £55k

The dealer is offering finance at 2.9% APR over 4 years.  Well, this looks like a good deal.  I could put a 5% deposit down, and use the £50k I would have handed down now to buy a TG27 gilt with a yield of 4.74%.   Sure this will come down to about 4.45% after I pay 20% income tax.  All else being equal that's a profit of about £750/yr for 4 years.

(I got the number from yieldgimp, my new favourite site mentioned by another poster this week).

I could buy an index-linked gilt, say T27, with a 1.25% coupon priced at 100.44p.  Per yieldgimp this has a "Breakeven IP Growth" of 3.86%.   Can anyone explain in simple terms what this term means please?

Thanks
V

Andreg

I don't know for sure how yieldgimp do their calculations, but I expect this is the breakeven level of future inflation at which an index-linked gilt pays more than a similar conventional gilt.  i.e. if inflation is higher than 3.86% in future you'd be better off with the index linked gilt, if lower than you'd be better off with the conventional gilt.

EthicsGradient

Going back to the car, is the alternative to the low interest finance just the full cash price? Or might the dealer give you a discount for paying in cash, in full?

RogerPensionGuy

Or haggle the car price down a lot. 

Buy on finance at the cheapest possible price. 

Then in the cooling off period, pay off the loan and pay no interest. 

Dealers love loans, means they can sell cars over the prices needs and realy good kickbacks from the loan companies.

Can you confirm car and the standard RRP of said car on the headline sticker price?

I'm guessing someone here will find same car much cheaper I suspect.

talexuser

You can get a deal for cash, but a better deal for the dealer by far is the kickback they get from your finance deal, so they actually are not so keen for cash sales. All my new cars have been cash deals the last 15 years and you used to have deals of 0% finance for a couple of years worth doing, long gone, replaced by say £800 worth of 5 years servicing for a finance deal you could terminate after 2 years which costs you ~£150 in interest, so a no brainer - the service deal moved to the next owner increasing the value. Any cash discount was mainly down to haggling about all the extras as freebies

talexuser

I should add a lot depends on the make of car. Quality makes are less likely to large discounts whereas e.g. Ford and Vauxhall have regular large discounts always which are just then reflected in the second hand prices.

RogerPensionGuy

talexuser said:

I should add a lot depends on the make of car. Quality makes are less likely to large discounts whereas e.g. Ford and Vauxhall have regular large discounts always which are just then reflected in the second hand prices.

I'm my experience I have noticed and achieved the ability of getting Mercedes, BMWs & Audis new cars much much cheaper that RRP 20/25% on occasions, sometimes 40 or 45% if they want out of old stock.

Mercedes used to have clear outs when it suited them and one BMW I remember about 10 years ago, 44% off new 630s IIRC, I nearly got one but just didn't like it too much  so reluctantly purchased another brand.

Also to mind, find a wrong order or canceled order in a showroom waiting to go out the door can be very cheap espically if spec and colour combinations are very undesirable. 

There's plenty of cheap cars about and I guess these cheaper cars will be more common the next few years as more cars are getting handed back and some handed back 50% earlier than dealers were used of.

valiant24

EthicsGradient said:

Going back to the car, is the alternative to the low interest finance just the full cash price? Or might the dealer give you a discount for paying in cash, in full?

I think I'd already got the best deal from the dealer (it's a Merc EV) before I looked at the finance.  They didn't discount the price but threw in 2 years' servicing plus some insurance for small dents that i wanted as I live in a rural area with crap roads - probably these are worth about £2.5k all in.

Back in the day I had a Saturday job at a car dealership and yes, a cash buyer was always rewarded with extra discount.  As others have remarked though I think these days are gone, because salesmen/women get extra commission from selling finance.

Grateful for and interested in as I am about buyers' tactics for agreeing the car price as I am, only one person has addressed the actual question about  "Breakeven RPI Growth" btw ;-).

Andreg

Presumably you will need to make monthly payments on the finance deal, so you will not be able to invest the full 50k in a four-year gilt.

Anyway spending 55k on a car isn't money saving.  Why don't you spend 5k on a car and buy the gilt with the rest.

valiant24

Andreg said:

Presumably you will need to make monthly payments on the finance deal, so you will not be able to invest the full 50k in a four-year gilt.

Yes that's a good point.  I suppose it's £12.5k in each of a one-year, 2-year and 3-year gilt, or something similar.

EthicsGradient

valiant24 said:

EthicsGradient said:

Going back to the car, is the alternative to the low interest finance just the full cash price? Or might the dealer give you a discount for paying in cash, in full?

I think I'd already got the best deal from the dealer (it's a Merc EV) before I looked at the finance.  They didn't discount the price but threw in 2 years' servicing plus some insurance for small dents that i wanted as I live in a rural area with crap roads - probably these are worth about £2.5k all in.

Back in the day I had a Saturday job at a car dealership and yes, a cash buyer was always rewarded with extra discount.  As others have remarked though I think these days are gone, because salesmen/women get extra commission from selling finance.

Grateful for and interested in as I am about buyers' tactics for agreeing the car price as I am, only one person has addressed the actual question about  "Breakeven RPI Growth" btw ;-).

I'm afraid I don't know about the index-linked gilt numbers.

Yes, the salespeople may get commission from selling finance that has a higher APR, and is thus profitable for the finance company. But 2.9% APR for the next 4 years almost certainly isn't (which is why you can do better with gilts, if the price is the same), which may mean the dealer is already foregoing any commission, and they or the manufacturer are paying the finance company - it's just there to close a deal. But the 2.5k for servicing and insurance is what to compare it to, it seems.

As you say, you'd have to have something to redeem to keep up the regular payments. If you used normal gilts, I reckon as a 20% taxpayer you might get an average 5% return (from the yieldgimp.com page, averaging the gross and net of 40% tax yields); call that 5% on 50k borrowed over 2 years, compared with the 2.9% APR. That's 2.1% net, or £2,100. So your servicing and insurance deal might end up better.