# Irish Indo recommends borrowing rather than spending SSIA



## gearoidmm (6 Feb 2007)

This is one of the most dishonest things I have ever seen in the paper.

They are trying to suggest that if you have 18,000 in your SSIA and you want to buy a car you should keep the money in a savings account and borrow the money to but the car at 8.5% from the EBS.  They suggest that it will only 'cost' you 821 euros over the 3 years and you'll have the use of the SSIA over the period (of course, it's implicit in their calculations that you do nothing with the SSIA money and just leave it there accumulating interest)



In fact, if you use the SSIA to buy the car and put the 566/month into a rabobank savings account at 4.75%, you will end up saving 3037 euros over the 3 years after tax compared to borrowing the money.


----------



## ClubMan (6 Feb 2007)

_EBS _is not mentioned at all in that article as far as I can see.

The link above doesn't work properly for me (keeps refreshing the page) so this one might be more reliable.


----------



## KalEl (6 Feb 2007)

I read this article and thought it made a lot of sense. I'm not sure where you got the EBS angle?


----------



## decembersal (7 Feb 2007)

*Article in Herald AM re. borrowing for car or spend SSIA*

There’s an article in today’s Heraldam (page 10) in the “Smarter Money” section (what a joke!). The article is entitled “Put the brakes on a cash splash. Why borrowing for a new motor can make better sense than paying for it with your hard earned SSIA windfall”. 

The article opens as follows “With 2007 car sales already reaching record highs for the first month of the year, most motorists recognise that it makes more sense to borrow for their new cars while saving their SSIAs”. 

It does make the point that it makes sense for many not to use the SSIA on a depreciating assess such as a car “if it’s spent then the SSIA is obviously used up. Whereas retaining it then the SSIA can provide leverage (equity towards borrowing for an even better investment)” (a general principle I wouldn’t argue with).  The article then returns to its main point which is to suggest that it would be better to borrow for a new car while saving your ssia. It goes on to provide a worked example from steven dargan of bank of scotland (Ireland) based on his bank’s forecourt finance.

Scenario 1 (put forward in the article as the smarter move)

“say the person borrows €18,000 over 36 months at an APR of 8.5%. With monthly payments of €565.60 this will mean €65 per month in interest payable across the full term of the agreement. in addition a documentation fee of €75 is payable with an initial direct debit.
if that same person reinvests their €18,000 SSIA lump sum in the banks Halifax fixed rate saver account for 36 months they receive interest of 3.5% for the first two years and 3.25% for the third – earning €1520.30 after DIRT deduction.
by pairing off the cost of the loan against the income from the deposit, the net cost is only 821.25 over the 36 months. at the same time the saver will still have their 18,000 lump sum plus their car. Dargan concludes ‘in contrast, if you use your SSIA to buy the same car you may only be left with the car worth about 9,000’ “

I would like to suggest that while he carefully covered himself with a “MAY only be left with” it is bad form that the article would not pick up on the fact that the bank person assumed that the person would not save the amount of the repayments, in which case the scenario would look different …

so scenario 1 in summary:

18,000 ssia – place in savings account for 36 months at 3.5% for first two years and 3.25% for third year. earning 1520.30 after DIRT deduction.
borrow 18,000 to purchase car – 8.5 percent over three years. monthly repayments of 565.60 plus documentation fee of 75.  total repayment = €565.60 x 36 months + €75 = €20,436.

position at end of three years: car worth 9,000 and savings worth 19,520.30.


Scenario 2 (my scenario)

18,000 ssia – spend on car
save the 565.60 (which you would be forking out on loan repayments in scenario 1) for 36 months in account at 3.25% (I don’t know how to work out the 3.5 for 2 years and 3.25 for third year as in scenario one so have erred on side of caution. if someone can help here please do) giving total savings at end of 21,414 – DIRT (not sure what this is, can someone calculate for me?)

position at end of year 3: car worth 9,000 and savings worth 21,414 – DIRT

this article really bugged me. leaving aside the fact that there may be better – if riskier - investment options for the SSIA lump sum which could potentially yield a higher return than the cost of borrowing to buy the car, is it not simply the case that the general premise of the article is wrong and misleading for consumers and in most cases the banks would be the only winners??? or am I thick and missing something?


----------



## gearoidmm (7 Feb 2007)

ClubMan said:


> _EBS _is not mentioned at all in that article as far as I can see.
> 
> The link above doesn't work properly for me (keeps refreshing the page) so this one might be more reliable.



Sorry, BOSI rather than EBS - some strange form of dyslexia maybe?.



> I read this article and thought it made a lot of sense. I'm not sure where you got the EBS angle?



I don't think it ever makes sense to borrow to buy a depreciating asset if you have the money.  Borrowing that money will cost you 3000 euros more than simply spending the SSIA and saving the equivalent amount every month.  By their logic, you would basically hand back the gain that you made by having an SSIA in the first place (ie the 25%) to the bank in the form of interest poayments.  Why bother having an SSIA at all?

This is totally irresponsible and a con by the banks


----------



## ClubMan (7 Feb 2007)

Caveat emptor. Don't depend on independent, professional, comprehensive advice from tied agents with a vested interest in selling you something. Or from financial journalists.


----------



## KalEl (7 Feb 2007)

I actually agree with the central point of these articles, although clearly their motivation is not what's best for the the consumer!

Say you have 20 grand on deposit...assuming you want/need a new car I think it's better to borrow the money from Tesco @ 6.9% rather than just using you SSIA to fund the purchase.

You can then either leave the SSIA on deposit with Rabo/NR and drip feed it in to a regular saver product maximising your return. Yes you will be losing out technically but not by much. And having cash on hand is worth something.
Or you can avail of tax relief and fund your pension...or use the SSIA as to fund all or part of an investment.

The right article with nefarious input from vested interests.


----------



## gearoidmm (7 Feb 2007)

KalEl said:


> You can then either leave the SSIA on deposit with Rabo/NR and drip feed it in to a regular saver product maximising your return. Yes you will be losing out technically but not by much. And having cash on hand is worth something.



If you can find an investment that pays more than 6.9% after tax then it might make sense but why not spend the money and put money directly into the same regular saver account?

Sure, you won't have a lump sum for a period but you'll end up with more money in the end and even after 1 year if you get an interest rate of 4.75% you'll have over 6,000 in the bank.

So for the 'peace of mind' of having the money in the bank, you'll lose 3000 euros and have less left over after 3 years


----------



## KalEl (7 Feb 2007)

gearoidmm said:


> If you can find an investment that pays more than 6.9% after tax then it might make sense but why not spend the money and put money directly into the same regular saver account?
> 
> Sure, you won't have a lump sum for a period but you'll end up with more money in the end and even after 1 year if you get an interest rate of 4.75% you'll have over 6,000 in the bank.
> 
> So for the 'peace of mind' of having the money in the bank, you'll lose 3000 euros and have less left over after 3 years


 
It's a close run thing...I've just done more or less what the article refers to recently. I thought long and hard about it and borrowed from Tesco even though I had the cash.


----------



## ClubMan (7 Feb 2007)

Why did you do this? In pure monetary terms it doesn't seem to make sense.


----------



## liteweight (7 Feb 2007)

I suppose it might make sense if one didn't have a rainy day fund already. SSIA money is in bank for emergencies etc. However I think it's foolish to borrow and pay interest while keeping a large sum in the bank.


----------



## levelpar (7 Feb 2007)

Hi, If any financial institution advised borrowing their money and saving your own, you must realise that they are only thinking of what is best for you. Its not that they can make money lending you money and  earn more money by lending someone else your savings at a rate higher than they give you. No,No, Joe Soap is always  their first concern.


----------



## KalEl (7 Feb 2007)

ClubMan said:


> Why did you do this? In pure monetary terms it doesn't seem to make sense.


 
A combination of liking to have an emergency slush fund and knowing I'll need the money for an investment shortly.
I would of thought it was similar to not using lump sums to pay off your mortgage? I know the rates are obviously lower and DIRT is an issue but do you think I'm mad to do this?


----------



## room305 (7 Feb 2007)

liteweight said:


> I suppose it might make sense if one didn't have a rainy day fund already. SSIA money is in bank for emergencies etc. However I think it's foolish to borrow and pay interest while keeping a large sum in the bank.



Since you are eligible for the loan, then why not just apply for it if/when the emergency arises?

As you say, seems silly to pay interest on borrowed money when you have the same amount sitting on deposit earning far less interest.


----------



## ClubMan (7 Feb 2007)

KalEl said:


> A combination of liking to have an emergency slush fund and knowing I'll need the money for an investment shortly.
> I would of thought it was similar to not using lump sums to pay off your mortgage? I know the rates are obviously lower and DIRT is an issue but do you think I'm mad to do this?


I agree with _liteweight _above - if you _SSIA _money is your emergency fund and you don't have one otherwise then it may make some sense. Otherwise I don't think that it does make sense to borrow while maintaining savings in this context (unless you are lucky enough to have something that guarantees returns in excess of the loan rate).


----------



## KalEl (7 Feb 2007)

ClubMan said:


> I agree with _liteweight _above - if you _SSIA _money is your emergency fund and you don't have one otherwise then it may make some sense. Otherwise I don't think that it does make sense to borrow while maintaining savings in this context (unless you are lucky enough to have something that guarantees returns in excess of the loan rate).


 
It was the Tesco rate that clinched the deal for me. 6.9% over 2 years seemed very good to me. Was just going to use cash but figured I'd prefer to have a sizeable enough emergency fund...plus thinking of getting married plus will need cash for an investment shortly.


----------



## room305 (7 Feb 2007)

KalEl said:


> It was the Tesco rate that clinched the deal for me. 6.9% over 2 years seemed very good to me. Was just going to use cash but figured I'd prefer to have a sizeable enough emergency fund...plus thinking of getting married plus will need cash for an investment shortly.



So would you agree that this approach may make sense for you but that in general it is probably a bad idea to borrow to fund the purchase of car while leaving the same sum of money on deposit?


----------



## KalEl (7 Feb 2007)

room305 said:


> So would you agree that this approach may make sense for you but that in general it is probably a bad idea to borrow to fund the purchase of car while leaving the same sum of money on deposit?


 
Oh absolutely...but I think we all seem to be taking different meanings from the article. Suppose that's what subjectivity is?
Ignoring the clowns who obviously have vested interests in hawking products, I thought the basic premise was sound ; It may be better to borrow to buy a car and put your SSIA to work in other ways. "May" and "is" are very different.


----------



## ClubMan (7 Feb 2007)

*In general *it doesn't make sense to borrow while maintaining savings other than an emergency fund of a few months worth of living expenses. There are some exceptions (e.g. having a mortgage while making other investments). The scenario outlined in the original article doesn't change this general rule of thumb in my opinion.


----------



## liteweight (7 Feb 2007)

room305 said:


> Since you are eligible for the loan, then why not just apply for it if/when the emergency arises?
> 
> As you say, seems silly to pay interest on borrowed money when you have the same amount sitting on deposit earning far less interest.



Well the nature of an emergency means that one needs the money straight away. There's no guarantee that someone will loan the money at a future date. Also there is the security involved in knowing that a rainy day fund exists. Personally, I'd never leave myself without money in the bank. Then again I don't have any loans except mortgage and would save for anything I needed. That wasn't always the case when I was younger though.


----------



## polaris (8 Feb 2007)

liteweight said:


> Well the nature of an emergency means that one needs the money straight away. There's no guarantee that someone will loan the money at a future date. Also there is the security involved in knowing that a rainy day fund exists. Personally, I'd never leave myself without money in the bank. Then again I don't have any loans except mortgage and would save for anything I needed. That wasn't always the case when I was younger though.


 
If you don't mind me asking roughly how much is your emergency fund. We keep about €2k in the bank for this purpose as we both have PHI, income continuance protection, and life assurance. 

One of us recently inherited about €50k which we used to reduce the mortgage but some people were advising us to hold onto some of it.


----------



## ClubMan (8 Feb 2007)

polaris said:


> If you don't mind me asking roughly how much is your emergency fund. We keep about €2k in the bank for this purpose as we both have PHI, income continuance protection, and life assurance.


What is a suitable "emergency" fund will depend on each individual's circumstances. Some people use the rule of thumb of having a few months living expenses to cover periods in which they might find themselves out of work and while they find a new job. Ultimately it depends on your normal living expenses, lifestyle and how much you could pare back on discretionary spending in the event of some unexpected reduction in your income. Don't forget that many people are entitled to _Jobseekers Benefit/Allowance _and possibly other welfare payments which, while not huge, do help.


> One of us recently inherited about €50k which we used to reduce the mortgage but some people were advising us to hold onto some of it.


What people? Are they qualified to give you financial advice?


----------



## liteweight (8 Feb 2007)

As Clubman says the amount depends on your living expenses. I'm a bit of a worrier so I like to keep at least 3/6 months gross salary in a high yielding account. I don't mind transferring or drip feeding it, in part, to one of the high interest regular saver accounts. Also we own apartments, so we have to take 'voids' in tenancy into account.

With regard to paying 50k off your mortgage...my own opinion is that this will save you far more in the long term than keeping the money on deposit. It also gives you peace of mind to some extent. The trick is to do something with the money you save. It's probably not a big reduction in mortgage payments but by putting this amount aside you develop a habit of saving....perhaps enough to pay off your next lump sum.

Lots of people have advice to give when it's not their own money. Suddenly everyone's an expert! As long as you really take time to think financial decisions through, even if this means paying an independent advisor and, you're happy with the result, then IMHO that is the main thing!!


----------



## polaris (8 Feb 2007)

ClubMan said:


> What people? Are they qualified to give you financial advice?


 

No, these were just friends. 

I was just wondering if people were keeping 5/6 digit sums of money stashed for a rainy day. However, I take the point about people's circumstances being different. 

With secure jobs in the public sector and having health, mortgage, income and life insurances in place, I guess our emergency fund doesn't have to be very large.


----------



## liteweight (8 Feb 2007)

polaris said:


> No, these were just friends.
> 
> I was just wondering if people were keeping 5/6 digit sums of money stashed for a rainy day. However, I take the point about people's circumstances being different.
> 
> With secure jobs in the public sector and having health, mortgage, income and life insurances in place, I guess our emergency fund doesn't have to be very large.



A six figure sum would be a very large rainy day fund indeed! We have a 5 figure sum but we feel it's warranted. You're in a lucky position with regard to job security etc. so perhaps you don't need such a large amount.


----------

