Hi,

I was looking to change cars and while at a particular showroom they were trying to sell me a car and finance deal with a apr of 5%. They tried to sell it as beneficial to use credit instead of savings due to the following main reasons.

- Having money in your account gaining interest over a period of time (e.g. 2-3 years).
- Not using your savings in a depreciating asset.

If you are smart with what accounts you use could it actually be beneficial to use a car credit agreement?

Any feedback appreciated.

Thanks,

Kevin

Hi --- Make sure that rate of interest is not flat rate, car dealers ofeten express the interest by this method as it seems cheaper than quoting the correct APR%. Flat rate when converted to APR% works out at roughly double the rate.

Flat Interest Rates. If the three little letters A, P and R don't follow the rate… danger! The APR interest rate, that banks use, means the rate is charged on any outstanding debt. Borrow £5,000 over 5 years and by the last year you only pay interest on the amount remaining, say £1,000. At 6% APR the total interest is £800.

With a flat rate the interest is charged on the original amount borrowed, no matter what's been repaid, so in the last year you still pay interest on the whole £5,000. With a 6% flat rate, the total interest is £1,500.

Hence 6% sounds cheap but is roughly equivalent to a costly 12% APR, so if in doubt ask "what's the total I'll repay including all charges?"

Kevee -- There is no way that the figures will make it beneficial for you to take out their finance, instead of you using your own savings.....at least not beneficial in that way..............Except to the car dealers. !

That 5% quoted will be flat rate.....this equates to roughly double = 10% APR

Money borrowed nearly always costs more than the interest you earn on savings, especially car finance deals. If you know where investors can get 11% guaranteed on their savings year on year....then spill the beans. : - )

conmankiller:

That 5% quoted will be flat rate.....this equates to roughly double = 10% APR

99% of the time, I would agree there Conmankiller. However, periodically (especially on New Cars) there is a manufacturer backed low rate finance offer with no Dealer subvention required (no commission either) and no cash saving alternative. I know Ford are offering 4.9%APR at the moment on certain finance deals - it is of no financial benefit to the dealer or the salesman if the customer takes this finance.

Now, I don't know enough about savings and the like to comment on whether it's actually beneficial to do this but surely it has to be close if you can secure 5% APR...?

So you borrow money to buy a brand new car. You are then already paying more for the car than it is worth. And then, as soon as you get in the car and drive it away you lose some 10% of it's new cost, depending on the model.

Yeah that makes sense! Pass me another beer.

That's what you get buying a car - New or Used.

If your money earns more interest than you pay on finance then this is the best way to fund the purchase? The OP was asking this, not whether a New Car is a good investment in terms of value or depreciation