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My current car worth £700 needs £1500 of repairs. It’s a bit of a money pit at the moment with big repairs needed a lot.

I want to buy a new car. I’m looking at used cars and I found a 2015 Corsa that is £7000 and has done 41,000 miles, minus £600 for my part-ex and then 3 years of warranty for £499. This is with a dealer.

I have saved up for 4 years and have £7.5k in my savings account. I also have £15k in various ISAs. To take out a loan, the lowest APR would be 11.7%, so I am thinking of paying in cash in full. I can’t shake the feeling that this is a bad financial decision even though I’d be left with £1700 of easy access savings. I have a decent job, I could comfortably save £200 a month. Cars are so expensive at the moment.

Is this a good idea or should I back out last minute?

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    I would ask if a used but fairly new car might be a better/cheaper option Jan 5, 2023 at 16:29
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    Does the UK allow a lender to charge a penalty if a loan is paid off early? In the US, offering to pay in cash up front can cause the dealer take away incentives for the deal, and it can also mess with your credit rating.
    – Spencer
    Jan 5, 2023 at 19:42
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    @EugeneStyer a "2015 Corsa" is a used car - 7 or 8 years old. It's unlikely that going newer than that will be cheaper. Jan 5, 2023 at 22:12
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    You just wrote that you want to buy a new car. I think you should at least ask yourself whether owning a car at all is the best decision in your current sitation. Maybe you honestly need a car for your daily life. But maybe it is financially a lot wiser to use some other means of transportation for every day activities and rent a car for the few situations where you actually need one. Depends on your life situation which I don't know, just something to think about.
    – quarague
    Jan 6, 2023 at 7:58
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    Did you actually shop around for the loan? I just clicked on "Car Loan" on the HSBC website and for £7000 over 4 years it's saying 4.9% APR. Note that I'm not saying you should take a loan, just saying you should have the right figures to make a decision. Is the 11.7% something quoted by a dealer or did you get quotes from banks?
    – jcaron
    Jan 6, 2023 at 12:45

12 Answers 12

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At 11.7% I would definitely avoid going into debt for a car and pay from savings. Just make sure that you have enough savings left for unexpected events or bad times.

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    That's the deciding question: What else do you think you are going to need that money for in the near-term future? If there isn't anything that couldn't wait until you have saved up again, then absolutely buy the car for cash. If it would put you at risk of not paying a rent check or other essential purchase, then you might want to ask yourself whether you should wait and save some more before making this purchase.
    – keshlam
    Jan 5, 2023 at 9:29
  • I don’t currently have anything that I would need to necessarily spend a large amount on in the near future, however I’ve been using it to dip in and out of over the past few years. I’d then replace it with my salary the next month, so that immediate backstop would be removed, which causes me anxiety.
    – Jess
    Jan 5, 2023 at 9:45
  • I should mention that I’m saving towards a house deposit which I’m 3/4 towards but I wouldn’t use until the next 4 years.
    – Jess
    Jan 5, 2023 at 9:48
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    11.7% is significantly more than a typical ISA return, so even if the money was invested it wouldn't make sense. Jan 6, 2023 at 10:54
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    @keshlam What else do you think you are going to need that money for in the near-term future? for that I can only say: sh*t happens
    – Josh Part
    Jan 6, 2023 at 18:09
18

Let's consider options.

If you take out the loan, and assuming you pay it back over 4 years, you are going to have paid out roughly £1500 in interest. You would be able to keep the £7000 in a savings account, getting maybe £300 in income after tax if you do well, meaning you are out about £1200. That's a lot of money on a £7000 loan. For that reason alone you are always going to lean towards not taking a loan.

Other issues are whether you might need the money for something else. Your 15K in ISAs will do perfectly well as an emergency fund, so there is no need to keep anything more than that. You say you are saving for a house deposit in four years time, but in four years the car loan should be paid off, so you aren't helping yourself by keeping cash on hand over that period. If you don't take the loan your savings for the house will be larger by about £1200.

It's a no brainer. Pay cash.

If your question is about whether you should buy the car or not, then I would say spending £1500 to repair a £700 car is not a good investment, and a £700 car is probably not reliable. Definitely buy the car.

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    +1 for mentioning emergency funds, it's very important to ensure that emergencies are still covered. Jan 6, 2023 at 11:01
  • But you should also be able to get a loan if you need it. So if things go bad, you pay £7,000 for the car now out of your savings, next year you already saved £2,400, and then you suddenly need £6,000 so you only need a £3,600 loan.
    – gnasher729
    Jan 6, 2023 at 14:32
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If you think that £1500 repair bill will let your car run for another year then it is technically the best option financially because £7000 at 11.7% for 5 years costs £1848 per year. However, read onward:

At 11.7% I would deplete only £3000-£4000 in cash and finance the rest. If you find that you can comfortably pay off the loan in full after a year to avoid further interest then by all means do so.

Never leave yourself totally cashless. There is value in not being stressed out about affording day-to-day things. It would be silly to spend all your cash on a car and then finance petrol/groceries on a 25% APR credit card.

Just imagine if another sizable expenditure (£1000-£2000) came up shortly after you buy the car.

Don't forget that your insurance is likely to rise due to the car being newer.

Also don't get your hopes up on the 3 years of warranty for £499. It's usually fairly strict in what it covers and I've seen instances where the customer has to pay a £100 "diagnosis fee". Sometimes they have to "diagnose" it 3 times before finding the problem and other times 10 small things need replacement but the warranty covers just one of them. Sometimes they hold your car for 3 weeks so you need to find alternate transportation at your own cost.

The Corsa ranking 19 out of 22 in reliability doesn't help the situation so definitely anticipate additional expenditures soon after buying the car.

Even though it's a low mileage car, it's already an 8 year old car; rust typically likes to set in at this age if it hasn't already made itself present. Some people maintain cars on a strict mileage schedule and fail to realize that the recommendation is usually something like "x miles or y years; whichever comes first" which is a big issue for fluids. You don't want to drive a car with past-due fluids for very long because that just leads to larger mechanical failures.

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  • Huh? Did you calculate the cost of the loan as the cost of the payments? But you also get a car worth £7000...The cost of the loan is the interest plus depreciation. It's nowhere close to true that one year is long enough to justify the £1500 repair. Jan 7, 2023 at 1:35
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    @KevinArlin You're right from a value standpoint, but not when it comes to cash flow. If the goal is to maximize the amount of available cash a year from now, paying those £1500 is better than a year of loan payments (and vastly better than shelling out £7k). You can't use the equity in the new car to pay for a house or emergencies.
    – TooTea
    Jan 7, 2023 at 13:03
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    @KevinArlin If you think a 2015 Corsa is worth £7000 then OP's dealer would love to do business with you. Anyways, if £1500 gets OP another year out of their existing car then it makes a loan less attractive and even additional month is pure gravy. Yes, I admit there are a lot of optimistic IFs in my assessment.
    – MonkeyZeus
    Jan 7, 2023 at 14:37
  • @TooTea Sure, but why would you be trying to do that? We’re talking about OP’s long term savings. Jan 7, 2023 at 17:12
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It's not an either/or question, you can pay some amount up front and take out a loan for a lesser amount.

That way if you pull for example £3500 from your savings account and borrow the remaining £3500 you will save quite a bit in interest and keep a larger emergency fund available in your savings account for eventualities.

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    I would have liked to propose that too but in practice it is not that easy at all. In the UK banks charge a lot more interest for "smaller loan" and/or shorter loan. The interest on £3500 can easily be twice the rate for £7000. Once I needed to borrow £4000 but after looking everywhere I ended up borrowing £7000 at that was the threshold at which banks started to reduce the interest rate. This loan didn't allow early repayment but even then it cost me less than if I'd borrowed £4000 only. (Disclaimer: I had a good credit score, your mileage may vary ...)
    – Hoki
    Jan 6, 2023 at 15:36
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    From what I understand, the trick to getting small short-term loans at a decent rate in the UK is credit card deals. If you can make the purchase on the card directly, that is best. If not then some credit cards have "money transfer" offers. moneysavingexpert.com/credit-cards/money-transfers Jan 6, 2023 at 21:01
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Keeping the junker is a bad idea; you should basically never spend more on a car than it's worth, or even more than half it's worth, if you have any better options. The interest rate you're being offered is exorbitant, so cash is far better, here. But best would be to get a new car closer to the 4-5K range so as not to wipe out so nearly all of your savings.

That's only right if you can find one that's not going to be breaking down all the time, though! The Corsa with only 41,000 miles seems likely to run well for some time, and if it's the cheapest such car then it seems worth the price, since you can afford it. The worst of all possible worlds would be a somewhat cheaper car that still needs repairs as often as your current vehicle. For what it's worth, I see some Corsas on Carguru at just under 5K in London (presumably cheaper if you're not in London?) at around 60,000 miles and less than ten years old, which I'd expect will still run a long time as long as you can confirm they've been carefully maintained.

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  • The question isn't if he should keep the junker, it's if he should pay cash or take out a loan. Jan 5, 2023 at 19:48
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    @DJClayworth The actual final question is whether "this" (paying cash) is a good idea or whether OP should "back out at the last minute." They don't seem to be seriously considering the absurdly expensive loan. My answer also does not address keeping the junker at any length. Jan 5, 2023 at 20:15
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    If officially measured inflation was 9.3% over the past year (ons.gov.uk/economy/inflationandpriceindices), in what sense is 11.7% "exorbitant"? You would expect to pay less than 2.4% above inflation?
    – David
    Jan 6, 2023 at 22:11
  • @David I don't see how the trailing 12-month inflation is relevant. 5-year UK gilts are currently trading at a 3.5% yield. That means if I can get somebody to take an 11.7% loan then I'm getting a risk premium of 8.2%, which is indeed exorbitant. It might perhaps be consistent with the OP's credit rating, but that doesn't mean they should accept the loan. FWIW, in the US, car loan rates for prime customers are not currently substantially higher than 5-year Treasury rates. Jan 7, 2023 at 1:21
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    Upvoted for the observation that this isn't an either-or question.
    – keshlam
    Jan 7, 2023 at 1:33
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As much as I think you should pay cash for the car, I can't really recommend completely depleting your savings, either. If the UK is anything like the US, you still have to pay for tax, title, and license beyond the price of the car, which could come close to the £1700 left in savings. (I'm assuming the £7000 price you gave us doesn't include tax, title, and license, since that's often tacked on only after you are ready to sign the paperwork.)

At 11.7% for a loan, that's outrageous at any time, so that's pretty much out of the question for the entire amount.

However, I think a mix of cash and loan might work. This may sound a bit silly, but hear me out.

Take £2000-2500 out for a loan and pay the rest in cash. This leaves you money in savings and the 11.7% becomes a lot more manageable. If you can save £200 a month, that means you can pay this loan off in around a year. Your interest is minimal and you don't lose all your savings safety net.

Your concern for a house is definitely important, but you need a reliable vehicle now, so the house can't be a concern at the moment. But, as a side note, taking out a small loan and making payments on it, then making regular payments on time may help your credit rating by the time you get around to buying the house. You may be able to pay a lower interest rate because of this small loan now, as it helps establish that you are capable of using credit and using it wisely.

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  • In the UK we don't pay to transfer ownership of a vehicle, nor for a license plate (beyond the original registration when it was new). When it comes to tax, a car like this will likely be less than £150/year for to tax, and any already paid but unused tax on the old car will be refunded when it is transfered. Jan 6, 2023 at 1:03
  • @ThomasRedstone is right, but you may end up with an extra insurance cost, which should be taken into account (my van policy wouldn't transfer to a car, for example, so I'd have to cancel and start again, and that's expensive)
    – Chris H
    Jan 6, 2023 at 9:52
  • The OP has 15K in savings (ISA), even after paying cash. Jan 6, 2023 at 14:54
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    @KevinArlin, yeah, I suppose there is a difference between planning to use money from an ISA to buy a car and having the ISA as a fallback emergency fund while the regular emergency fund is being rebuilt! Jan 9, 2023 at 10:24
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    @KevinArlin in general both employer and employee contribute and most workplaces are required to run a scheme. The basic state pension isn't the only state provision either - there's a contribution-based element as well. But I'm not up to speed with the latest rules for that as for various reasons I don't expect much from it
    – Chris H
    Jan 9, 2023 at 17:23
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Ok, already lots of answers that you should use your savings, and I agree with them. But I wanted to put the question in a different light.

With a 11% interest rate, the issue is not if you should take a loan or use your savings. Use your savings as long as they are enough. If some unplanned expense comes by, then you take the loan to face that expense.

So, given that you have the option of not getting a loan, the questions are:

  • What are the alternatives to buying the car?

  • What are the alternatives to downsides of not getting a loan?

For the first part, there are some questions that only you can ponder:

  • Can you get a cheaper car? Just putting this point for completitude, certainly you are going for something cheap enough.
  • Do you know what are you buying? In order to ensure that you do not get some car with hidden defects that come bitting you later on. Here you are already covere
  • Can you get by without a car? Public transport, or public transport + electric scooter, or whatever alternative is available to you.

For what I read, it seems that you have done your research and it seems that you are being sensible. In any case many of these questions can only be answered by you.

For the second question, the main problem of not getting a loan would be that you have unexpected expenses and need to get a loan later on. That would be a problem only if that later loan were more expensive than the car loan.

So, to answer this question, you should have some idea of what it would cost you to get a personal loan.Typically you would get a cheaper loan for your car if it was used as a collateral (to reduce the risk to the lender). If the IR of a personal is the same than the car loan, the risk of needing that money later on costs you nothing.

An additional advantage is that you would get some info about the actual cost of loans; 12% seems awfully expensive and car dealers often do not give good offers.

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While the interest rate is excessive, it isn't all that unusual for a smaller loan . While paying in cash will be the cheapest option there is another approach which may be worth considering.

Take the loan, but overpay it.

Also, it is worth getting a quote for a slightly larger loan, loans often get cheaper over the £7.5k mark (and often cheaper again at around the £15k mark, but it all depends). Obviously you need to make sure you're getting quotes and not actually applying for multiple loans!

As long as you ensure over payments are allowed and without penalty you could take out the loan and repay all but £4,000 within a few weeks, if you then continue to overpay your loan aiming to clear it within a year. This would bring the cost of borrowing down to ~£245, while not leaving you with too little savings.

As the comment by Sidharth pointed out, make absolutely sure that you're certain over payments are allowed, you should always read the contract (they're generally fairly readable these days, but pretty long) but also ask, you can phrase it something like "I'm due a bonus in a few months, is it okay if I make an extra payment? What happens if I get another bonus next year and its enough to pay off the loan?"

If you need to keep the payments to around £200/month you'd be looking at 22 months to repay and a cost of borrowing of ~£440.

It's not cheap, but sometimes it's worth paying for a bit of flexibility!

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    I noticed you addressed this already: I think its prudent to ask the OP to explicitly ask "hey if I get a bonus in a year can i pay this off early without incurring additional interest?" Jan 7, 2023 at 21:49
  • That's a good point @SidharthGhoshal, while most loans are pretty flexible these days you don't want to misunderstand something end up trapped paying all of the interest! Jan 8, 2023 at 22:14
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Independent of how you pay, look at what mix of year and mileage you want. If you know you'll be driving 40,000 miles a year then you want an old car with low mileage. If you know you'll be driving 5,000 miles a year then you want a newer car with higher mileage. Say 5 years with 100,000 miles will last for a long time. Might break down in 8 years when it's 13 years old with 140,000 miles. 8 years with 40,000 miles would be less good for you because it will last 3 years less.

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Consider paying cash, but then immediately starting paying back into your savings account whatever your monthly loan payments would have been (at 11.7% APR over the duration you were considering taking the loan for).

If an emergency comes up the day after you've depleted your savings on the car, you could always take the loan then*

*with the caveat that if your circumstances change, it is possible you may not be eligible for a loan in the future.

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  • This is a nice idea but won't actually work, because the car loan rate is highly affected by it being a collateralized loan. A personal loan rate would be far higher for a given principal, and I'm not aware of any way to mortgage a car you already loan. Jan 7, 2023 at 1:24
  • @KevinArlin "it won't actually work" is quite a strong statement. Current UK best-buy loan rates are <= 5.6% for loans of greater than £5000. This is cheaper than the quoted car loan rate (and would only be needed if an emergency meant a loan was required), though as I said there are caveats. It also depends on the OPs risk tolerance. It's not a no-brainer, but is worth considering.
    – Jonny
    Jan 8, 2023 at 20:26
  • I think the likeliest presumption is that an applicant getting offered an 11.7% auto rate is not going to get offered a 5.6% personal loan rate. For me, the gap between auto and personal loan rates is at least 5% and up to 8-9% depending on details. Jan 9, 2023 at 17:11
0

Just to point out one more alternative: If you do buy the car for cash, and then need cash, you could at that time take out a Personal Like Of Credit loan with the car as collateral. On a used car the interest on that might not be very different from that on buying the car with a loan. (With a new car the "property-line depreciation" effect would seriously limit how much you could borrow back.)

A personal line of credit is not the cheapest possible loan, but it's usually far better than credit card rates.

There you go: Avoid paying interest unless you actually need to pay interest, at the cost of more hassle and possibly more expense if it turns out you needed the loan.


Another thought: My policy (which many will disagree with) has generally been "If the price I would pay for this repair is less than the price I would be willing to pay for this same vehicle after being repaired, and it will be safe after the repair, I should do the repair and keep driving it. If the repair will cost me more than purchasing that equivalent-but-fixed car would, it's time to let it go and see what else I can find."

Then again, I also believe that with care a car's lifetime should at least be 186,292 miles (a full light-second) or 186,292 hours (about 21.25 years), whichever comes first. I've never driven enough to hit the distance checkpoint, but my current vehicle has more than passed the duration test.

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You state that:

I have a decent job, I could comfortably save £200 a month

The used cars you are thinking buying will be 10 years old in 2 years. And its value will be substantially lower (I guess you are doing a lot of miles with the car). Because IC cars will have a much lower value, so it is not unlikely that in 2 years time the car will have a value of 5/600£.

If we go forward to 2025, you can have two scenarios:

  • two years ago you spent 7000£ on a used car that today (2025) has a value of 500£;
  • two years ago you spent 1500£ on repairing the car that today (2025) has a value of 100£;

Even if your unnamed current car needs more maintenance, it will be some 20% more expensive of a relatively newer used car, unlikely to be 2x or 3x times more.

If you can squeeze two more years of your current car, squeeze them.

P.s: It may even be that having a car is necessary but economically non-sense, but it is up to you to get to this thinking. For example, if thanks to having a car you can get a job that pays 1500£ per month instead of a job around the corner that pays 1300£ p/m, considering running costs of a car on the order of 200£ p/m it makes clear that the 1500£ job is bad for you: you get 1300£ p/m after car expenses, but you still carry all the stress and the risks involved in having a car.

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    You obviously haven't tried to buy a second hand car in the UK recently, their price has skyrocketed in the last couple of years ... and I wouldn't make bet on the future value of IC engines disapearing in 2 years time: a lot of peope are still not ready to make the step to EV, so there is going to be a significant demand for IC cars and with less supply we all know how the price behave in this cases ...
    – Hoki
    Jan 6, 2023 at 15:43
  • @Hoki All factors you are mentioning are relevant. It remains to be decided by OP what can he expect from a car costing 7000 today in 2 years time vs what can he expect from a car costing 1500 to be repaired today in 2 years time, depending on the car usage (never mentioned so it is difficult to assess whetherr is best to pay 7000 in loan, in cash or to pay 1500 in cash)
    – EarlGrey
    Jan 6, 2023 at 15:56
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    There isn't the slightest chance the car will lose essentially all its value in 2 years. In my answer I explicitly listed cars two years older than the OP's, of the same model, currently on sale in London for 5000 pounds. Using that as a far more realistic estimate of depreciation, the 1500-pound repair on the old car, all on its own, is almost the cost of depreciation of the proposed replacement. This is terrible advice. Jan 7, 2023 at 1:31
  • @KevinArlin "Past performance is no guarantee of future results."
    – EarlGrey
    Jan 7, 2023 at 8:51
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    @KevinArlin the only radical thing is to assume that a 8 yrs old will expose you to 2k depreciation in 2 years based on today market that is completely out of balance reg. demand vs offer. And you explicitly listed one single car, you have no idea on their effective sale price. They may be on the market for 5000£, but it does not mean they will be sold for that price. Maybe they are on sale since August, who knows. Additionally, you are extrapolating from one (shaky) data point to create a statistics. Try to buy a house with this methodology, then tell me how it went.
    – EarlGrey
    Jan 8, 2023 at 0:02

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