This is a technicality - I know!
But - if you had £15k saved in the bank and you intend make the payments on the £15k you have borrowed from the interest you earn
You won't earn enough in monthly interest on svings to make the monthly repayments hence your capital will be decreasing and hence the interest you earn will be decreasing as you will be earning less interest on less capital
On £15k @ 5% = £750 interest per annum or £62.50 per month
Repayments on £15k @ 5.9% will be about £450 per month
Your capital - and interest earning capability will continue to fall dramatically
Otherwise, you could borrow the money and stick it in the bank and pay off the loan from the interest
Which I think, would mean most banks would go out of business
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This is normal tactics now - bank will offer to lend at very low APR, then offer you (specifically) slightly higher APR (known as "suited to your financial circumstances") and then after 6 months start rising and rising APR indefinitely. Just ask any Cahoot Flexible Loan customers - we all started with stoozing on 5.7% revolving account, which are now, year+ later on 14.9% and capped to £100 above balance. This is the new cowboy tactic, after whole shabang with credit card charges backfired on them...
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[Nissan 2.2 dCi are NOT Renault engines. Grrr...]
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to expand on jemima's reply:
using rounded figures:
in year one, you will be paying off roughly £455 per month out of the initial £15,000 you borrowed.
so each month the balance in your savings account goes down until at the end of year one, you have about £10,000 left. that means that you will have earned interest of £625 (on the avearge account balance £12,500 over the first year, and assuming you can get 5% net after tax.)
and so on until in year three all your saving will have disappeared and you will be needing an overdraft to pay the final instalments.
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Thats probably correct but I wasn,t planning to do this.I just think that its more sensible to spend cheap,borrowed money(on a car) ,than to use your own savings if you can earn more in interest than the interest charges you're paying for the loan.Although the above poster is correct,if the lender is allowed to increase the interest rate at a later stage,then you're in trouble!
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... just think that its more sensible to spend cheap,borrowed money(on a car) ,than to use your own savings if you can earn more in interest than the interest charges ..
sure, if that were to be the case.
even with fixed rates, however, as jemima and i have shown, you are not getting that result using the interest figures you quote in your first post. you are on a definite loser in your example.
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Don't forget they are hoping, and trying hard, to get you to buy some insurance. This is very profitable for them.
Banks are not charities.
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Dalglish,you seem to know what you're talking about,but i dont understand how i'm on a loser. example; I borrow £15000 over 3 years,total cost to me is £16500.
I spend £15000 of my own money from my savings account which pays 5% a year, meaning It has cost me £17250 over 3 years in real terms.Surely therefore its £750 cheaper to take out the loan,providing its a fixed rate, yes?
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My understanding of this is that you might be mixing up/comparing 'real' and 'notional' or 'unreal' costs/savings.
£15k @ 5.9% = total amount repayable of £16.5k is a 'real' cost of £1,500.
The £2,250 you 'could' have earned in interest on £15,000 is a notional amount..
If you had the money, and can keep it in the bank for three years from now and the interest rate stays at least the same, then technically, yes, you might earn that interest.
However, you would have to keep the full amount of £15,000 on deposit for three years to make this 'notional' saving/profit.
Whereas a car loan is usually on a fixed rate, same payment every month for three years, unfortunately savings rates can go down as well as up and you would need to wait three years to see if you actually did make a profit.
Banks lend out money at rates which are dependent on how much it cost them to borrow the money.
If they lend it to you at 5.9% - they will still be making a profit compared to what they paid to borrow the money.
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... usually on a fixed rate, same payment every month for three years, unfortunately savings rates can go down as well as up...
jemima:
fray bentos is on loser even if he gets his borrowing and deposit rates both on a fixed deal.
the point that is being missed is that £15,000 is not borrowed for three years, but only for the first month the first monthly payment has been made. if it was being borowed for 3 years, then that assumes you are repaying interest charges only and the capital stays constant to the end.
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... I borrow £15000 over 3 years ..
as i said, assuming your are paying back £450 per month on a cpaital+interest repayment basis, then you have borrowed £15,000 for one month, then £14650 for two months, then £14,200 for three months, and so on until in the last month you have only borrowed £450.
on the other hand if you are saying you have borrowed on an "interest only repayment" basis, you will pay £74 per month in interst only and at the end of the 3 years you will have paid interest of £2655 and still have the original £15,000 capital remaining to be settled.
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.... in order to prove your thesis, you would have to be able to find a savings account with a three-year (same period as loan), guaranteed, fixed rate of 5%
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5% after whatever tax is due?
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Currently earning 5.75% after tax, guaranteed to be .5% above bank of England base rate so can go up!
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Fray - please post details of any account which pays 5.75% AFTER the payment of basic rate tax. We'd all like some of that action!
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Sorry Dalglish
I feel lost on this one - the distinction between 'interest only' and 'capital + repayment'
I'm thinking of an unsecured personal loan which would always be always 'capital + repayment'?
The 'fixed monthly payment' would incorporate the 'compounding' calculation
So, if Fray can borrow £15,000 @ 5.9% and the total interest charge is £1,500.
Fray could stick £15,000 in the bank with Scarborough which is a 3 yr fix at 5.8 ish and at the end of 3 years Fray will have £17,800 ish.
This looks like a profit to Fray of about £1,300
BUT - this ignores the fact that Fray has also lost the interest on the repayments he would have been making over the three year period.
There is no 'real' profit to be made on this.
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Jemima, I think you've finally got it! But could you elaborate on your last comment about 'lost interest on the repayments i would have been making over the 3 years'.
Thanks.
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ha ha ha - thanks Fray - it took a while...
This is how I see it....
Fray borrows £15k = cost to Fray of £1,500 (this is after 3 years)
Fray deposits £15k = interest to Fray of £2,700 (after 3 years) giving net profit of £1,300
However, over those 3 years, you have been paying £455 per month to the bank.
This is £455 (£16,500 over 3 years) that you could have had the interest on if you hadn't taken out the loan in the first place - so technically, you have actually lost this interest.
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You can't make your £455 monthly payments from the £15,000 you put in the bank because otherwise you won't earn the £2,700 interest.
So, you have to find the money elsewhere - imagine you have another pot of savings in another bank account, and every month you are reducing this and hence losing interest
or paying it out of income and losing interest on what you could have put in the bank
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fray bentos's premise happened to me.
18mths ago I bought a C Class from MB Direct and wanted to pay cash. They dropped their loan rate until eventually they were offering me a loan at 2.9% flat, when I (or at least my wife) was getting 4.25% gross (3.3% net) on the money in the bank. Adding in the setup and final charges it came out that it would have been slightly better to take the loan. As savings interest rates have increased then the gain would have been greater.
The dealer must somehow still make money even at 2.9% as they were pretty hacked off when I still didn't take the loan! I'd already negotiated a hefty discount on the car too.
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they were offering me a loan at 2.9% flat, when I (or at least my wife) was getting 4.25% gross (3.3% net) ..
bill payer: as you probably already know, 2.9% flat equates to over 5% real apr depending on period of loan.
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>> they were offering me a loan at 2.9% flat, when I (or at least my wife) was getting 4.25% gross (3.3% net) .. bill payer: as you probably already know, 2.9% flat equates to over 5% real apr depending on period of loan.
I do know that, but the APR has always been meaningless to me. I'm also not sure that comparing APR's on loans and savings is valid.
I calculated the total cost of the loan (deposit, payments and start and finish fees, minus the principal) vs the interest earned on the money in the bank and the loan came out marginally cheaper. With rising savings interest rates (fixed on the loan of course) I'd be better off. Of course with such low interest rates, you're talking about a negligible difference anyway.
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fray and jemima:
let us try it this way.
assume your have twins named fray and jemima. they have everything identical, including their income and outgoings and savings accounts. as it ahppens they have both save £15,000 by managing to squirel away about £455 every month.
they see two identical cars for sale at £15,000 cash.
fray decides he will take the cash on loan from alliance and leicester and pay off £455.65 per month. so now he has his £15,000 savings intact earning him his magical 5% aer net after tax. however, he no longer has the £455 disposable income per month left to save as he is paying off his loan with that.
jemima, wise girl that she is, decides to pay the for the car with her £15,000 savings. so has no savings left, but her savings account now starts to accumulate £455.65 every month and earns her the same 5% aer after tax interest.
my back of the envelope (rounded up or down) figures show this:
fray's savings account balance: £15,000 initial, then end of year 1 £15750, end of year two £16540, end of year 3 £17360.
jemima' s savings account balance: £0 iniital, then end of year 1 £5610, end of year two £11490, end of year 3 £17660.
so after 3 years, fray is worse off by about £300.
(all figures rough, and assume constant interest figures quoted by fray bentos, and asume income is tax free and that there are no extra "arrangement" fees to be paid for the loan ).
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See! - Jemima knows best!
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I am not a great believer in borrowing money - prefer to pay cash, especially for things like cars.
However I have to say that at the moment I would be more inclined to go for the loan. I would rather be locked into a low-interest loan than spend my savings. I think borrowing rates will likely rise over the next few years and therefore if I (for whatever reason) urgently needed a wedge of money in the next three years I would rather take it out of the savings than borrow it. You can worry about a few £'100's either way, but its not really much more than the cost of a couple of tyres and small beer in comparison to depreciation costs.
I have a fairly small offset mortgage and my savings effectively 'offset' most of the 5.7% mortgage interest - so as a higher rate tax payer I am effectively getting 5.7% interest on my money. I'm quite happy to let the savings sit there for the next few years until the mortgage is paid.
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Yes,that sounds sensible,so would that senario still hold true if the savings interest rate is higher? And I assume if the loan rate was only slightly less, say 5.6%, then the best 'buying scheme' would be to take out the loan?
Thanks to all, Fray.
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Well, probably it would. But you are only talking about small differences in interest rates, so only a few hundred quid either way over the three years. If you are going to worry a lot about a few hundred pounds then you probably shouldn't be buying a new car - you'll lose that money in the first week!
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The problem is in not comparing like with like. In the savings example, you are 'lending' the bank £15,000 for 3 years. In the loan example, you are only borrowing an average of about £8,000 over 3 years (£15000 in the first month and next to nothing at the end) so of course the loan interest is lower if the rates are close.
To put it another way, if you paid cash and drank the £400 a month then it would cost you more - but if you put the £470 you weren't paying on the loan back into your savings account, then the loss of interest would be about half.
Flat rates are misleading - ignore them, and compare APRs with AERs.
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To put it another way, if you paid cash and drank the £400 a month then it would cost you more - but if you put the £470 you weren't paying on the loan back into your savings account, then the loss of interest would be about half.
That's very true - my simple comparision of the costs assumes that if I paid from savings then I wouldn't have a specific plan replace those savings. The thing I wanted to avoid in the first place was being tied to having to make a monthly payment.
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Dalglish; I've said it before and will say it again: your otherwise no-doubt clear explanations are rendered at best difficult to read, and at worst incomprehensible, through lack of capital letters. It just seems a shame that you go to so much effort to type it all out, and then lose out on presentation.
Fray. You are borrowing at 5.9% and saving at 5%. Gordon Brown takes 20% of your 5%, thus leaving you with 4%. Net cost of borrowing = (5.9-4) = 1.9%.
You lose. Try to convince yourself as much as you may that you are beating the banks; you aren't. Compare APRs.
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Compare APRs.
I still APR's don't make sense (to me). They're a moving target, really, based on the loan principal decreasing.
If you borrow £1000 for a year at 2.9% flat then the interest charged is £29. But the APR comes out at typically double. I know it's because the amount borrowed decreases over the year, but (to me) it's easier to understand the flat rate. It is crucial to be aware of the set-up charges though, as they make quite a difference at low interest rates.
It's also easier to assume that if you invest at 2.9% then you'll get £29 interest. Again, if it's calculated more frequently than annually, you'll actually get slightly more, but calculating from the flat rate is straightforward.
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Dalglish; I've said it before and will say it again: you' otherwise no-doubt clear explanations are rendered at best difficult to read, and at worst incomprehensible, through lack of capital letters.
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mapmaker - like this like is definately the innernet, like, innit? so their. but i will give you a peace of my independant mind for your piece of pedentic mind, like, i don't want people to be lead astray but i like the metalic color of led and zinc but now i the risk of loosing you'r attention with all this lose talk. since your dead serious:
- so may i refer you to: news.bbc.co.uk/1/hi/uk/976960.stm
.....growing use of small letters is in the interests of humility and egalitarianism.
"The Home Secretary and the Foreign Secretary are now the home secretary and the foreign secretary, the sort of people you might find standing next to you in the queue for the bus."
Though purists have spotted a decline in the use of capitals in recent years, the struggle has raged between upper and lower cases for centuries.
Change a cummings
In the 20th Century, minuscules won the backing of such cultural visionaries as poet e.e. cummings and singer kd lang.
In the 1920s, Germany's influential Bauhaus design school advocated the abolition of capitals from typography.
"Why have two alphabets when one will do?" said Bauhaus master Lazlo Moholy-Nagy.
Dot.coms: Ventures without capitals
"we write all small, then we spare time." read the school's letterhead.
definate,independant, loose, lose, lead, led, etc. etc. - those are the mistakes that get to me, especially when they are made by the legal profession.
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Mapmaker, thanks for your concern but Gordon Brown is NOT taking his cut as I am not paying tax on this particular savings product I have,which is currently paying a healthy 5.85%,and will probably go to 6.1% in March.
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