If the loan interest is lower than inflation rate, does it mean it would be less expensive to take a loan and spend now, than save to buy later?

Question

I am considering to buy an upright piano. For that, I have been planning the budget I would need and how much I would have to spend/save to be able to buy it .

A few things to consider:

• The piano store has a policy that lets you pay over several months for no extra fee (it's not a loan, although the piano is still legally theirs until fully paid, as explained in their terms and conditions). It can be done up to 15 months for the model I picked.
• I have nearly enough immediately available savings (not the long term one) to buy it right away, save for some extra months of saving. A few less months if I decide to buy it over several months instead of paying the full price right away.
• The net interest rate of my immediately available savings is 0.5% per year, so pretty low.
• Thanks to my long term savings, my bank has a loaning program that allows me to loan at an interest rate of 0.5%, so basically the same rate as my immediately available savings. The only drawbacks is I have to reimburse everything by 3 years (which I can definitely do with some leeway, according to my budget planning, so I can tolerate a few unexpected costs).

The way I see it, I have 3 choices:

• I can keep saving until I have enough savings to buy it right away. I will end up with nearly no immediately available savings.
• I can keep saving until I can buy it with the "pay in several months" option, which would allow me to acquire the piano earlier, but still need to wait until I have saved enough. I will end up with nearly no immediately available savings by the end.
• I can make a loan of around €12,000, which is more than what I actually need to still have some savings, for 3 years at an interest rate of 0.5% (a total of 1.5% of interest over 3 years). By the end, the loan will cost me around €180 of interest. But at least my immediately available savings won't be completely depleted, and I have all the time I need to pay back the loan too.

The piano costs around €17,000. If I pick the 3rd choice, after deducing all my usual monthly fees, expenses, converting the annual piano tuning fee into a monthly rate, and taking into account eventual unexpected costs, I can save €500 per month. Now, if we take into account the monthly cost of the piano, over 15 months, I would have to pay around €1,130, so slightly more than twice what I actually save.

Initially, I was thinking the 1st choice is the less expensive, and the 3rd choice is the safest. But then, I started wondering about inflation, and then I thought: if I take the loan to start buying the piano now instead of saving until next year, and if the inflation rate is higher than the loan annual interest rate (which is only 0.5%), does it mean it would cost me more to wait and save until I have enough money?

As a final note, I'm not a piano prodigy. I'm just someone who has a very picky taste, and I started to learn on a digital piano last year.

Answer 1

Whether a 0.5% loan is a good deal or not depends on if you can get a better rate of return somewhere else . For example if you can get a 3 year CD (Certificate of Deposit, "Festgeld", etc) for more than 0.5%, you should indeed take the loan and put the equivalent in a higher yield savings vehicle. I currently can't tell for France but in Germany you may be able to get a CD with a better rate. Than at the end of the three rate, you cash in the deposit, pay back the loan and pocket the difference.

Paying cash may also give you some leverage to negotiate a lower price for the piano. If the piano seller is not charging extra for financing, then it simply means that they have baked in the cost of financing into their price already. Dangling a large amount of cash in front of a sales person can sometimes be effective. It certainly would save on credit card fees for the seller.

This being said, given the current low interest environment, the differences between all these options are relatively small. No need to overthink it.

and if the inflation rate is higher than the loan

Inflation is mostly irrelevant here (other than its impact on interest rates). You can't turn the piano back into cash without a significant loss (new vs used), regardless of how much the price goes up with inflation.