Use savings vs loan to purchase car

Gmac11

Edit - as was pointed out to me by one of the respondents I somehow posted this on entirely the wrong board. Apologies and please move/delete

A conundrum as old as time itself (well since the invention of cars and the advent of money lending!)

I'm a long time MSE disciple and like to think I'm more than savvy enough to pick a good deal however in this instance I am struggling to square a circle with regards to whether it's cheaper to use my savings or take out a loan.

I always just assumed that Loan Rate > Savings Rate then better to use savings however the respective calculators I use do not bear this out.

Am I missing something blindingly obvious?

Figures (£12k for new car):

Savings rate 3.5% = £420 interest assuming that entire amount remains in the account for 12 months

Borrow £12k from HSBC fixed rate loan @6.5% and their calculator shows a total repayment of £13,203 over 36 months = £401 per year.

It's also quite likely I'll pay the loan off early anyway which will further save on interest however the 36 month spread just leaves the monthly repayments comfortable at this stage in case of any unforeseen eventualities.

Bigphil1474

Probably not the right board for this question.

Yes, your calcs look right. The interest paid on the loan goes down as the balance does, so even though the rate is higher on the loan, you aren't paying it on the full £12k for 3 years whereas you are getting the interest on the full £12k for 3 years. Only slight issue is if the savings rate goes down, but you may be unable to predict that. The good thing about utilising the loan is it helps your credit rating, and having the savings on hand is good if you end up having to pay the loan off for some reason.

Grumpy_chap

As well as considering bank loan vs savings, what dealer finance is available and does that come with any incentives?

Gmac11

https://forums.moneysavingexpert.com/discussion/comment/82054490#Comment_82054490

Thanks. I never even noticed the board! Entirely my bad that one - whoever needs to move it feel free to do so.

Ah yes, that was the glaringly obvious thing I was missing - I hadn't taken into account that the savings will always be at £12k (or even higher if I continue paying in) whereas the loan decreases over time 🤦‍♂️

Gmac11

https://forums.moneysavingexpert.com/discussion/comment/82054502#Comment_82054502

Yeah dealer finance was a non-starter. They were working at 9.9% and I was getting nothing by way of price reduction or incentives to make that worth anyone's while.

Frozen_up_north

I haven't done the maths, but have you considered a fixed term cash ISA? These have at least a 1% improvement over the 3.5% mentioned.

3 year cash ISA rates are around 4.5% although withdrawals are automatically allowed with an ISA, early withdrawals will often result in a loss of interest. For example, a 3 year fixed term cash ISA with Nationwide pays 4.6% but a withdrawal will result in the account being closed and a loss of 180 days of interest.

DrEskimo

https://forums.moneysavingexpert.com/discussion/comment/82054579#Comment_82054579

If the savings are not going down (i.e. it is not being used to service the monthly loan payments), then presumably your paying for the loan monthly with additional income.

In which case, for a true like-for-like comparison, in the scenario where you use your savings to pay for a car, do you not need to also account for the monthly saving by not having to service the loan monthly payment from your income going back into your savings and accruing interest over the 3-yrs?

Gmac11

https://forums.moneysavingexpert.com/discussion/comment/82055284#Comment_82055284

Locking away (or an interest losing penalty setup) isn’t really an option as we do intend to start work on a house extension within the next 12-18 months if I can ever secure a builder (that’s a discussion for another day!).
So as it is I’d prefer to have the savings just ticking along earning decent interest but still easily accessible.