# Wiser to buy car for cash or borrow?



## sadie (30 May 2005)

Wondering what way makes the most economical sense to buy a car? Have the cash to buy a second hand or new car, but is it wiser to pay for it partly by a bank loan or finance package, so that you are not 'spending' all your money at the beginning, as it were?


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## ClubMan (30 May 2005)

In general it does not make financial sense to borrow while maintaining savings. If you have no other use for the money right now or in the forseeable future it would probably make more sense to use it to buy the car rather than pay interest on a loan especially if the car loan is charging rates of up to 10%.


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## Wiggles (30 May 2005)

I have a friend who bought a car from his own savings and paid himself back every month.

Interest free loan.


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## gar123 (30 May 2005)

gor for it with your own cash, this is what i do, i take out the amount agreed at the start of the loan ( there was some serious negotiation went on! ) at the start of the month and put it back in the other savings account


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## daltonr (31 May 2005)

It only ever makes sense to borrow if you either
a) Don't have the cash
or
b) Have it but can get a better return on it than you are paying on the loan.
    So as pointed out above if you are paying interest on a car loan
    (7% or 8% is typical)  then you need to be earning at least that
    much annually on the cash that you chose not to spend on the car.

I bet you a penny you're not earning that kind of return on your savings, so 
it makes sense to spend it rather than borrow.   The desire for the comfort of 
having a big wad of savings while repaying a loan is a common one but most people don't consider how much the loan is actually costing.

Here's an example.   You have 20,000 cash.  You want a new car that costs
20,000.

Option 1.  Keep your 20,000 cash and earn 3% interest on it with Rabobank
less dirt in 5 years time you'll 22268 in cash.  You'll have been paying permanenttsb 402 euro a month for 5 years to pay off the loan you took out and you'll have a 5 year old car.  

Option 2.  Spend your 20,000 cash,  and each month put the 402 you would have been paying in loan repayments into your bank.  Even earning no interest it works out
at 24120 in cash in the bank in 5 years time.  It's too late for me to work out what the
3% interest would to to that but it would slightly bump up your final balance.
You'll have the same 5 year old car but you'll have more cash in the bank.

Only ever borrow for a car if you have no choice and even then you still have the choice of a cheaper car which if you're borrowing is a good idea.

-Richard


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## oysterman (31 May 2005)

daltonr,

Excellent post - this should be a key post.

I've had a plan for some time now (it appears on my project list between read Ulysses and visit Lough Derg) to write a surefire bestseller self-help book "Be your own bank".

The theory is exactly as you outline - if you ever come in to a sum of money (and maturing SSIAs are an obvious opportunity) you could use it to ensure that you never fail to fully pay off your credit card nor run an overdraft again (and pay yourself the respective penal interest rates every time you dip into your fund) plus you could offer yourself term loans at market equivalent interest rates.
I will then write a follow-up entitled "Move into your own house". Theory here is to calculate the transactions costs (stamp duty, legal and estate agency fees, removals etc.) of moving house and, realising that you won't see any direct benefit from that expenditure to your equity, spend that on throwing out everything you own and having your house entirely made over structurally, decoratively and replacing all your furniture. And there you are - a new house for free without the hassle of selling and moving.

Now where did I put that publishing contract?


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## CCOVICH (31 May 2005)

sadie said:
			
		

> Wondering what way makes the most economical sense to buy a car? Have the cash to buy a second hand or new car, but is it wiser to pay for it partly by a bank loan or finance package, so that you are not 'spending' all your money at the beginning, as it were?



If you are willing to risk buying a Rover or MG, I think that they will be offered with 0% finance over 3 years or something like that.  I read this in the Irish Times around a month ago, but haven't seen anything since.


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## daltonr (31 May 2005)

CCOVICH makes an interesting point there are 0% deals.   In that case you should still pay of the car out of savings, but pay it in the installments offered by the dealer.   E.g.  Pay them 402 a month or whatever, so you're not spending the full 20000 up front,  you're still earning a little interest on the portion you haven't paid.

You have to be very careful though.

Issue #1.  When the interest free period runs out you may have to pay the balance in full.  If you continue with monthly repayments for a further year or 2 you may find that the interest you saved is actually added back in in full.   This is what I call "The Dixons Scam"

Issue #2.  The dealer giving you the 0% deal may not be giving you as good a deal (discount, trade-in etc) that he might have otherwise given.  The difference could actually be more than the interest you supposedly save.

There is no area in life where it is more important to read the terms and conditions and small print than in financial services and in particular credit agreements.   The stuff they come up with to swindle you in subtle way's is frightening.

-Rd


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## oysterman (1 Jun 2005)

daltonr said:
			
		

> Issue #2. The dealer giving you the 0% deal may not be giving you as good a deal (discount, trade-in etc) that he might have otherwise given. The difference could actually be more than the interest you supposedly save.


 
Remember, while the customer is paying 0% for the credit, the retailer isn't. So the only way the retailer can offer such a great financing deal is to factor in the cost of the credit to him/her into the retail price on which the 0% credit is advanced.

These so-called deals are the spawn of Satan and will have a chapter all to themselves in "Be your own bank".


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## CCOVICH (2 Jun 2005)

I have bought goods before at 0% that were the same price as would have been the case if I had bought them from another retailer for cash.

Are you sure that the retailer would be getting credit from the financial institution?  The credit agreement would be between the customer and the financial institution, not the retailer and the customer as far as I know.

Obviously 0% deals should be investigated carefully to ensure that you are not paying extra for the goods versus buying outright at the time of purchase, but sometimes they can be a good deal.


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## oysterman (3 Jun 2005)

No credit company can afford to offer interest free credit unless, as with an introductory offer on a credit card, they are doing so to gain custom which will become profitable in the future.

This could not be the case in a hire purchase/retail financing type situation because the consumer is not establishing an ongoing relationship with the finance house.

om.


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## MugsGame (3 Jun 2005)

Oysterman - if anything I'd say the retailer makes a profit on these schemes.

It's like the 56 days (or similar) interest free period on all credit cards - the financially undiscplined pay over the odds to subsidise things for the rest of us. 

In the case of most 0% deals I've looked at, there are lots of ways you can mess up and end up paying all that extra interest, by not strictly meeting the terms of the deal (e.g. balloon balance payment to be made 5 months after "purchase", no sooner, no later.).


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## oysterman (3 Jun 2005)

MugsGame said:
			
		

> if anything I'd say the retailer makes a profit on these schemes


You're dead right - yet another reason to run a mile from "0% finance". As I said before: 



			
				oysterman said:
			
		

> These so-called deals are the spawn of Satan


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## RainyDay (3 Jun 2005)

It could be that the cost of the finance is built into the OTT ticket price of the item itself.


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## CCOVICH (3 Jun 2005)

MugsGame said:
			
		

> Oysterman - if anything I'd say the retailer makes a profit on these schemes.


 
Can you explain how-the finance is provided by a financial institution/finance company, not the retailer.



			
				oysterman said:
			
		

> This could not be the case in a hire purchase/retail financing type situation because the consumer is not establishing an ongoing relationship with the finance house.


 
Maybe not, but they will have the customers's data on file to use for marketing purposes (as long as they have given their consent)

Just because something is complicated and it's easy to mess up doesn't mean that you sould 'run a mile' from these agreements. You just need to ensure that you read and understand the small print and adhere to the terms of the agreement in order to avoid paying any excess charges.

If you believe that you are going to be swindled anyway, fine. I have had no problems with these type of deals in the past (I did not pay any interest or charges and the price of the goods was the same as if I had paid cash to the retailer in question or any other reatiler that I knew of).


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## oysterman (4 Jun 2005)

Retailers have agreements with finance houses...the retailer sells the finance package to the consumer on behalf of the finance house.

Otherwise, retailers would be unable to offer more than a limited number of credit deals at any time.

Your local garage probably has hundreds of cars sold on outstanding credit at any time. They simply wouldn't have the working capital to finance this themselves.

So if they offer you a 0% "deal", do you really think the finance company is doing it as a favour to you or the retailer?

Somebody has to pay for the finance (think of it as the opportunity cost of the capital tied up in the financing). Who pays? The consumer.

The same would be the case in circumstances where the credit is in fact being provided by the retailer. That capital could have generated a return (interest) if used in another way (that's the opportunity cost). So that return has to be funded by somebody or the shareholders will kick up a stink. Who'll pay? The consumer.

If you can't get a better price as a consumer when offering cash on an item on which 0% credit is being offered, you're not trying hard enough or you're not getting access to the right person in the shop who is authorised to do a deal with you.


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## CCOVICH (4 Jun 2005)

You're assuming that shareholders know anything about what the finance company they have invested in knows exactly what that company is doing (i.e. who they are lending to and at what rate etc for every loan).

You're also implying that I was taken for a fool in not getting a better price for cash. Not likely, as I did enough research in advance to know otherwise. 

We'll agree to disagree (or maybe not, but I have said my piece)- I see no harm in 0% deals, as long as you know what you are getting in to, you say otherwise.

Just as a matter of interest, I'm thinking of changing credit cards and doing a balance transfer that will attract a 0% interest rate for six months. What is the 'hidden' cost to the consumer in this instance? (The rate after the introductory period is still lower than most other credit cards and won't necessarily be a factor as long as the balance is cleared on time anyway).


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## MugsGame (5 Jun 2005)

Oysterman,

Imagine the retailer offers the goods at the lowest margin they are willing to take. A finance house lends you the money to pay the retailer. The finance house pays the retailer a commission on the finance deal. The finance house can afford to do this because the vast majority of consumers "default" on the interest free terms, making them liable for much higer interest rates than a bank loan.

That's how I think most of the 0% deals operate. In that case, I can't see how you can get a discount by offering cash - if anything the retailer might give you a discount if you go with the finance deal, as they get a commission on it.


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## oysterman (6 Jun 2005)

CCOVICH said:
			
		

> I'm thinking of changing credit cards and doing a balance transfer that will attract a 0% interest rate for six months. What is the 'hidden' cost to the consumer in this instance? (The rate after the introductory period is still lower than most other credit cards and won't necessarily be a factor as long as the balance is cleared on time anyway).


No hidden cost to you in this instance and it's obviously a smart move if you currently have an unpaid balance on your cc. What's in it for the cc provider to which you are moving is that it is a perfectly tartgeted piece of cherrypicking by them. It is almost uniquely somebody who doesn't pay off their cc in full every month who will consider availing of such an offer. These are the profitable customers. The cc company doesn't want the boring people who do pay theirs off religiously. A small number of the latter category may switch and allow a balance to build up over the six months intending to pay it in full at the end of the period. Some of these will let their finances get a little out of hand during this period and be unable to pay in full as intended after the six months. These will now be profitable customers. It's great marketing.




			
				MugsGame said:
			
		

> the vast majority of consumers "default" on the interest free terms


Do they? If they do then your analysis is sound but are customers really that stupid? Even in the case of very large credit deals like cars? If they do default through sheer carelessness they probably deserve every bit of the APR they get.

oysterman.


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## IrishPunter (7 Jun 2005)

What bank is offering the best rate on a car loan at the moment?  Anybody out there researched this recently?


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## CCOVICH (7 Jun 2005)

In general I think it's ptsb finance, who will offer a rate of 6.9% (from their Auto Ireland magazine) if it's a new car and worth over €9,000.  The quaotation on their website seems to suggest a rate of 7.9%???  Best to give them a call directly.


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## ClubMan (7 Jun 2005)

The best buys list in the  section lists some personal loan offers in case that's of any use.


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