I think I have had a good idea, but i'm not smart enough…

[Prisoner 24601]

I think I might have had a good idea, but i'm clearly not intelligent enough to know if it is a good idea or not!

Building on my thread yesterday in the Car Buying forum re. PCP end of term. I am coming to the end of my own 3 year PCP term, and I am not overly convinced that getting an equivalent car (slightly newer), and locking myself into 48 consecutive months of paying £270 is a good approach to wealth building.

I am relatively happy with my current car and it is worth £5k more than the final balloon payment. I need to pay £12k.

I have looked at loans from finance companies and banks, and I was tempted by this route. I'd borrow £12k and pay off circa £14k ish, there or thereabouts. over 3 years perhaps.

Then last night I had a thought. I have quite a sizeable chunk in funds in a GIA, which I am trying to move over to both ISA and SIPP. Would it be a good idea for me to loan myself the £12k from the GIA? sell down HSBC american fund (or UK), pay the finance company balloon payment, then instead of paying the bank £14k over 36 months, I could pay myself back into an ISA (or SIPP) and pay circa £250 - 300 per month (on top of whatever else I might contribute). Thereby not paying interest and it's all done internally, with the money coming back to me over time?

Now, you might say "well what about your tax return, what about your annual allowance"? OK - but in principle, is it a terrible idea or does it have mileage?

[Countdown]

I think the important question is

How much interest will you pay on your loan?
How much are your investments likely to grow over the same period?

If B > A then it makes sense to take out a loan and vice versa.

[MitchT]

On a similar note...

I'm looking to buy a new (to me) car - probably an approved used BMW for about £25k.

To me it makes more sense to "borrow" the money from my savings and lose the 5% interest on the borrowed money until I've replaced it than to take out a loan which will cost more in interest. Also, by borrowing from my savings I can repay a different amount each month depending on my financial position that month and clear the "loan" early without an early redemption penalty - I won't be tied to fixed monthly payments over a fixed term.

[Prisoner 24601]

said:

I think it's a worthwhile idea, so long as you have enough 'critical mass' in your savings and it only represents a smaller % of your savings - say less than 20%? and then you need to be disciplined to replace it. In my circumstance I would set up (or amend) a direct debit into interactive investors ISA account.

[Prisoner 24601]

Countdown said:

I think the important question is

How much interest will you pay on your loan?
How much are your investments likely to grow over the same period?

If B > A then it makes sense to take out a loan and vice versa.

It might transpire that the share price (in general, FTSE and Dow) go down for approx. 18 months, then I would be drip feeding the money back, hopefully as the share price gradually increases again as things settle down?

[Ron-ski]

I bought a 3 year old car in 2012, paid outright for it, still driving it now.

Now that's cost effective.

[Simpo Two]

Prisoner 24601 said:

Then last night I had a thought. I have quite a sizeable chunk in funds in a GIA, which I am trying to move over to both ISA and SIPP. Would it be a good idea for me to loan myself the £12k from the GIA? sell down HSBC american fund (or UK), pay the finance company balloon payment, then instead of paying the bank £14k over 36 months, I could pay myself back into an ISA (or SIPP) and pay circa £250 - 300 per month (on top of whatever else I might contribute). Thereby not paying interest and it's all done internally, with the money coming back to me over time?

It's all your money, just in different places. You wouldn't be paying interest to a bank but you're likely to lose growth on the sold investments instead.

As for tax returns, proceeds from the funds you sell, unless in an ISA, will be liable to income tax and CGT, subject to the usual allowances. Just do the maths to decide what's best.

[ARHarh]

9 years ago I bought a 10 year old car for cash, £6k. Sold it last month for £1k. Now that's cost effective

[Panamax]

These old car figures need "total cost of ownership", i.e. including servicing and repair bills, to make them comparable.

Personally I'm a big fan of buying cars outright and keeping them a long time. Modern cars generally last their first nine years with ease and at a fraction of the cost of splashing out on a new one every three years. If you sidestep heavy depreciation the repair bills should hopefully pale into insignificance. (No, I've never owner a Range Rover or a Jaguar...)

[greengreenwood7]

surely comes down to how your GIA is invested and what returns you would be forfeiting?
if it's just monies tied up in low risk tracker type stuff - giving a return that's similar to the interest rate on a personal loan - might make sense to do as you said?

But if you'd be forfeiting potential big moves during what 'should/could be' an interesting year ahead ( rate cust/liquidity etc) - then maybe not such a great idea.

everyone sees things differently - but i'd much rather pay 7-8% (whatever) and have monies invested.

[crofty1984]

Ron-ski said:

I bought a 3 year old car in 2012, paid outright for it, still driving it now.

Now that's cost effective.

Yes, but that's a different situation to the one the OP is asking about, and he's probably aware that you can buy cars for cash. I saw an elephant once, but I didn't think it was relevant to the thread so didn't ring it up until now, but seeing as that doesn't seem to matter, I thought people should know.

[Steve H]

If the gia is showing recent gains that are lower than a typical loan rate it may be time for a better gia……..