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?
