Should I take the loan?

[jimmybell]

petrolhead4 said:

This week I put down a deposit down on a used car that works out around 11% of gross income and 20% net income. I have just over 2x the value of the car as cash in bank.

I also applied and was approved for a bank loan at 4.5% to part finance the car 50:50 bank loan and cash.


However, I'm not sure whether I want to sign the loan agreement as I am in a position where:

1. I will still have enough cash in bank to cover expenses and worst case scenarios, including being fired/made redundant

2. I could "recover" the value of the car in about 5 months of saving with the current rate that I'm able to save after rent and bills


The advantages of the loan are:

1. A little more cash in bank, so a little more peace of mind

2. Helps strengthen credit profile to show that I am a responsible with unsecured loans as all previous credit has been either on cards or PCP finance

3. Could settle the loan whenever, however, this would bring down the average age of accounts on credit profile which could lower credit score


The disadvantages of the loan are:

1. It's a loan, there is interest

2. Ignoring student loan, I have no other debts. This would be the first debt I'd had since the PCP finance

3. I get quite anxious about having debt, despite this loan being more than affordable and in fact I have the cash available to settle it whenever I liked

Wise to be cautious, not that there's huge risks but perhaps a positive attitude for minimising risk. Debt often works most useful for those that least need it - and worst for those that would rely on it. I'll just spew some ideas to ponder based on how i do my man maths - hopefully something useful.

Let's assume a £2k net income, and roughly a £5k car - hypothetically you'd have £10k in the bank. You're talking about a 2.5k loan to keep 7.5k of accessible funds in the bank rather than £5k. £32k/yr jobs are likely easier to come by than say.. if all those numbers were based on a 50-60k salary - or a PH director's 150k where you'd assume 'finding work' isn't such an immediate thing. At 2k you can probably cover your outgoings with a shelf stacking job - but at 100k your outgoings will likely dwarf that easy to find income.

How many months of committed monthly expenditure does said 7.5k buy you - should the absolute worst happen? (Think complete loss of income, cant find work for 3 months and your car breaks down.. as an example).

How does that change if you had no loan outstanding - but only 5k in the bank?

How employable are you at current earnings? niche job? is it a baller sector you work in? booming industry?

Is this particular car worth any stress the added financial commitment may cause? does it cause you any anxiety or concern (that wont go away)? could you wait some months and save the required extra?

All of that said - i'd say your numbers are pretty conservative - you are in a position to pay it off if you had to, or perhaps sell it and recover the money. Check what your 'i need to sell it right now' return would be from WBAC etc - and is that a loss you can swallow.

It's certainly a case of everyone having a different tolerance for debt - and completely based on individual circumstance that you should weigh up yourself and be comfortable with. FWIW one of my cars is on a sainsburys bank loan (3.5% - don't accept their first rate offer ... there is room for manoeuvre over the phone) for 100% of the value. I could pay it off right now but i prefer having the cash in the bank, the monthly is about 3% monthly net, so its a useful method of keeping cash available (or to put it in investments that beat 3.5%) and the interest over the total term (which was as long as i could get it to be at like .. 7yrs) isn't huge and beats any PCP on similar cars by miles. The personal loan method is also more flexible imho - but the caveat being you need to be able to sell it quickly should you have to.

PH is a mix of people who think debt/car finance is laughably irresponsible - and some who are PCP'd up to the eyeballs. Take all responses with a pinch of salt - the kind of trolls that appear on finance threads are some of the most amusing. I wouldn't give too much consideration to credit scores.

[anonymous-user]

Don’t over think it.
If you have twice the value of the car in cash, buy it outright, then save hard to reinstate your float (as you suggest in point 2 of your post). Looks like a win win to me.
Forget the credit score.

Edited by anonymous-user on Tuesday 12th February 21:33

[VAGLover]

petrolhead4 said:

This week I put down a deposit down on a used car that works out around 11% of gross income and 20% net income. I have just over 2x the value of the car as cash in bank.

I also applied and was approved for a bank loan at 4.5% to part finance the car 50:50 bank loan and cash.


However, I'm not sure whether I want to sign the loan agreement as I am in a position where:

1. I will still have enough cash in bank to cover expenses and worst case scenarios, including being fired/made redundant

2. I could "recover" the value of the car in about 5 months of saving with the current rate that I'm able to save after rent and bills


The advantages of the loan are:

1. A little more cash in bank, so a little more peace of mind

2. Helps strengthen credit profile to show that I am a responsible with unsecured loans as all previous credit has been either on cards or PCP finance

3. Could settle the loan whenever, however, this would bring down the average age of accounts on credit profile which could lower credit score


The disadvantages of the loan are:

1. It's a loan, there is interest

2. Ignoring student loan, I have no other debts. This would be the first debt I'd had since the PCP finance

3. I get quite anxious about having debt, despite this loan being more than affordable and in fact I have the cash available to settle it whenever I liked

He loses circa 50% of his income to tax. Higher rate tax payer, thus this is an expensive car I’m guessing.
Also, 4.5% is terrible rate. Most likely as most teaser rates cap at £15k.
I’d shop around on IR and part fun the car, say 25% equity and 75% loan. So if you need to sell it you can always clear the finance

[Macneil]

Just buy it mate keep it simple.

[Draculaw]

Honestly, I’d buy with cash and get a credit card to build a credit profile on unsecured debt.

As above, 4.5% is a poor rate. I think Zopa are sub-3% on their higher value loans which is pretty cheap.

Edited by Draculaw on Thursday 14th February 20:27

[Ed/L152]

If you're buying from a dealer one benefit of using finance is having the weight of the finance company behind you when persuading a dealer to keep to their post sales/warranty obligations if there's an issue with the vehicle.

[couragebest88]

At those numbers I’d buy it outright, personally. Credit card for work expenses is good for rating, if you ever have to get trains or customer lunches etc.

[steveo3002]

pay cash then save hard to replace the savings

get a credit card to buy stuff and pay the bills off each month to help with credit profile

[anonymous-user]

You’re on 50k pa with 20k in the bank. And looking at an 8k car ?

Dude come on.

https://www.porsche.com/uk/models/911/911-carrera-...

[jimmybell]

on those numbers - personally i'd buy it outright with your cash and save hard to replace it. you have comfortably 6+months of rainyday/ilostmyjob money.

[flatso]

Half your savings for a car? Loan for a car?

Why?

We are all car onsessed here, but at some point we have to be mature and realise that for the most part its an appliance and a liability with depreciating value.
No way would I take on debt for a car, and no way would I pay half my hard earned cash for a car. Money is stored human energy (when you worked for it), the time you put in earning it cannnot be bought back. The car will be staying parked utterly ununsed for cca. 90% of the time (unless you earn your money with that car)....I really do not see the value proposition here, half of my fundamentally limited time for an object that is just lying around 23 hours/day.

So, there you have the dose of Sunday pragmatism. Let the bashing beginn!

[Barga]

Are your savings making 4.5% after tax?
If the answer is NO then use your own money and save to make up your balance imo!

[Angpozzuto]

Barga said:

Are your savings making 4.5% after tax?
If the answer is NO then use your own money and save to make up your balance imo!

This is my thought too, money in the bank is worth fk all at the moment