Do I use savings to buy a car?

Question

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?

Answer 1

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.

Answer 2

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.

Answer 3

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.

Answer 4

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.

Answer 5

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.

Answer 6

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.

Answer 7

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.

Answer 8

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!

Answer 9

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.

Answer 10

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.

Answer 11

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.

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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.

Answer 12

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.