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I'm a bit hopeless on this sort of thing.
Inflation is running at 5%
My salary increases at 5%
My bank account gives an interest rate on savings of 3%
I can either buy a car outright for £20,000 or get an interest free loan for 5 years for the total amount.
How much will I 'save' by getting the loan?
My bank account gives an interest rate on savings of 3%
I doubt it does for 20k
Personally I’d take the interest free loan and keep my 20k in the bank. At the end of the day the loan will cost nothing and you’ll still get a little interest on your savings.
If you have considerably more than 20k then buy the car outright. That's what I did. Try to avoid paying for a debt.
Surely high inflation and a zero interest rate loan is a pretty good option, even if you service the debt with money from savings. £20k now is more that £20k paid over the next 5 years at 0% and 7% inflation.
Unless you can get more money off for cash of course.
Interest free loan.
Even if you can afford it outright, take the loan, stick funds aside in bank account to pay it off as and when.
You will be better off by the interest.
(20k*1.03^5-20k, assuming all paid off at the end) and you still have 20k sat around for if a massive emergency happens
How much will I ‘save’ by getting the loan?
Using your figure of 5% inflation and 3% savings rate:
Your repayments for the loan devalue at the rate of inflation, so the first payment you save nothing but after 12 months you are saving 5% as the money you are paying back to pay off the loan is worth 5% less due to inflation. You also generate 3% interest on your £20k sat in your account. After 2 years it will be 0.95^2 saving for inflation and 1.03^2 for savings.
Although the 3% growth on savings is still below inflation, so your savings are actually decreasing in purchasing power terms, but at only 2% below inflation.
Get a cheaper car and a new mountain bike??
If you have considerably more than 20k then buy the car outright. That’s what I did. Try to avoid paying for a debt.
Did you actually read what he wrote?
What is he paying for?
^^^ this.
He is getting an interest free loan so he is paying nothing at all (assuming the car price hasn't been artificially increased so they can afford to offer 0% finance).
You'll save a frickin fortune by not buying a car at all.
You’ll save a frickin fortune by not buying a car at all.
🤣 Have you seen the price of train tickets?!
Where the hell are you getting an interest free loan for £20k from in this climate? Hitachi (Novuna) have jumped from 3.3% 3 years ago to 8.4% now
Loans are never interest free, try renegotiating the price of the car for a payment by cheque/bank transfer.
A five year interest free loan for £20k? Please can you tell me where this is available as it sounds too good to be true.
If inflation is running at 5%, then £20k this year is £21k next year and £22k the year after. By the end of five years it's almost £25k. So the simply fact that this loan is interest free means whoever is giving it to you is going to lose £5k in five years.
Except, no one is that stupid, so you're obviously paying for it somewhere else. Is this a car that costs £20k today but which last year was only £15k by any chance and the financing is coming fromt he dealership?