Current a/c overdraft facility - buying a car..?

RainbowsInTheSpray

The maths escapes me on this one. Can anyone help?

Looking (maybe) to buy a second hand car for around £5k and wondering what the most cost-effective way to borrow money may be.

I have an authorised overdraft facility on my current account which I've rarely if ever used. It is large enough to meet the £5k  - and I would be in a position to "repay", in effect, to the tune of several hundreds of pounds per month on average.

Is there mileage in this idea as opposed to applying for a discrete, dedicated loan?

turnemc

I’d suggest it’d be a very expensive way of buying the car based on the interest rate on my overdraft. If you check the interest rate you’d pay on your overdraft you can then compare vs loan costs.

RainbowsInTheSpray

Yes but, in effect, the amount outstanding is entirely within my control depending on how much cash I have available each month. I can pay off as 'early' as I like - and with no penalties. 

No arrangement fees. No backhanders to car companies.

turnemc

I appreciate it gives flexibility but if I look at my overdraft (0% EAR variable on the first £250, 39.9% EAR over) the interest would be ridiculous on £5k. You’d be better getting a personal loan from your bank and then save any extra cash you’ve got to pay it off early.

fatbelly

Typically the effective apr of an overdraft is 40%

You may be able to get a 5k loan at 7.2%

Does the vendor accept credit cards? Some do. If so, 

https://www.moneysavingexpert.com/credit-cards/best-0-credit-cards/

Altior

An overdraft can theoretically be called in by the lender at any time. Overdrafts should only be used in extremis, not as a facility for medium/long term borrowing.  

CliveOfIndia

RainbowsInTheSpray said:

Yes but, in effect, the amount outstanding is entirely within my control depending on how much cash I have available each month. I can pay off as 'early' as I like - and with no penalties. 

Yes, but unless you're able to repay the whole lot within a very few months, it's going to be a very expensive option - the APR on an overdraft is usually an awful lot more than a standard personal loan.  If you go for a loan, you'll pay less interest, and you're still (usually) free to make overpayments without penalty (though obviously do check the T&Cs before signing on the dotted line).

Also bear in mind, use of an overdraft is generally viewed negatively by lenders.  This may not be an issue for you if you don't intend taking out any further credit in the next few years, but it could count against you if you need more credit any time soon.

RainbowsInTheSpray said:

No arrangement fees. No backhanders to car companies.

It's fairly unusual for an arrangement fee to be charged on a personal loan (it's more common on a mortgage).  And I'm not sure what you mean about "backhanders".

MEM62

Buying a car with an overdraft is not only a high risk strategy (as they can be withdrawn with little notice) but it is also an expensive one as the fees / charges are relatively high. 

In general, borrowing to fund a car is not the best idea you could have.  Stick with something that you can afford to buy (ie with cash) and save up for a better car further down the line.     

RainbowsInTheSpray

Thanks to all who replied. I put up the idea as I seemed to remember reading somewhere that using an overdraft in this way can sometimes be not the worst idea, as it has great flexibility and you pay the interest on a reducing amount.

CliveOfIndia

RainbowsInTheSpray said:

Thanks to all who replied. I put up the idea as I seemed to remember reading somewhere that using an overdraft in this way can sometimes be not the worst idea, as it has great flexibility and you pay the interest on a reducing amount.

But that's true of any loan - interest is calculated, whether daily, weekly, or monthly, on the remaining balance (despite the common misconception, front-loading of interest is illegal).  The more you pay off the capital, the less interest you're charged.  And you can almost always make voluntary overpayments on a loan if you wish.  If you pay off the whole loan amount early then yes, you may be charged an early settlement fee - but even then, there are ways around that.

I can't see any advantage to using an overdraft as opposed to a standard personal loan (assuming finance of some description is required, rather than using savings) - unless you happen to have some sort of promotional deal which means the APR on the overdraft is lower than you can get a loan for.  But usually the APR on overdrafts is horrendous - often even higher than a credit card.