Bank loan or savings? Please vote!

[GHDF]

We have some money in savings, enough to cover our outgoings for a few months. We need to buy a big family car as our car got written off (not remotely our fault, just really bad luck and an irresponsible coked up young driver). We need the car for work, long drives, and general life. Sadly, the cost of replacing the car is a lot more than we got from the insurance.

DH has done a lot of research and decided on our budget and it’s the majority of the amount we have in savings. We’d be left with enough to cover us for six weeks, up to two months if we were very frugal. We want to buy the car outright (ie not finance). We have the option of either:

a) using around half the money and getting a bank loan for the other half and paying it off monthly

b) using the majority of our savings but not getting a loan, and then building savings back up monthly

We can afford the monthly payment on a loan or to save monthly. We both earn well and have jobs which are very secure. DH is worried that we wouldn’t have much to cover us in an emergency. I share that worry but would prefer not to be in debt if we don’t need to be, and would prefer not to add interest onto the cost of the car. We will also be remortgaging in about 18 months so could release a little money then if we needed. Our only other debts are a second car payment and the mortgage. No credit cards or anything else. Also we need two cars for work. That’s (sadly) non-negotiable. Any advice appreciated. Obviously not expecting MN to make the decision, I’m just not sure what others would do in this situation and want to check my thinking.

Voting:

YABU - get the bank loan don’t use up savings

YANBU - use your savings and build them back up

DH has done a lot of research and decided on our budget

Has he indeed?

What is the payout and what sort of car do you need?

I think unless the bank loan is 0% interest, you'd be mad to take on debt you possibly can't afford with the current financial climate and unpredictable interest rates.

Agreed, I don't think anyone can say without an idea of the actual amounts.

You sound very sceptical! Interested to know why?

We need a large family car as have 2DC. It needs to be safe and reliable. We want something relatively new and reasonably low mileage.

I don’t want to say the amount of money as I’m just interested to hear the responses.

@orchi no it’s not 0% so we would pay interest. Very good point about the uncertainty at the moment. I agree with that totally. Then I suppose that means savings make us feel more secure.

Would a 0% interest credit card for 21 months help? You could cut up the card, divide the balance by 21 months, and set up a DD to pay it off, before the interest kicks in?

Definitely use savings, if something came up E.g redundancy that meant you had to rely on savings having a bank loan on top is only going to make that worse.

Also chances are a bank loan will cost you more interest than savings would earn you

If you went with option B, do you have immediate access to an equivalent amount in an emergency (eg on credit cards)? So if, for example, the boiler packed up, would you be able to pay for a new one on a credit card or would you have to apply for a loan which would mean delay/uncertainty about whether you could get the money?

And how long will it take you to build the savings back up to their existing level?

Really helpful replies, thank you all so much.

We are both public sector in essential roles, so just about as secure as you can be, regarding redundancy. If either of us were made redundant we would walk into another job either agency or permanent, no problem. Despite the hideous working conditions, we are lucky in that respect.

but yes the loan would cost more than we’d get interest on our savings, @PinkFrogss

I’m sorry, @Plexie , I’m not 100% sure what you mean. We don’t have any credit cards but I don’t doubt we could get one.

@Blacknosugarplease interesting suggestion about 0% credit card. I will look into that, thank you. Not sure how much you can borrow on a card, but I’m pretty sure it would take longer than that for us to pay off. However maybe we could borrow a small amount on a card just to keep a little more back in case of an emergency.

What sort of interest rate would the loan be?

I was in a similar position and found that taking a loan for more than I needed for the car was actually cheaper than taking just what I needed. So I took £7.5k loan and stuck 2k in a savings account with higher rate than the loan. Then I'm overpaying the loan each month rather than pay into savings (but still have an emergency pot). It's definitely worth playing about with the figures.

It is not the time to be using savings unless your jobs are virtually guaranteed as secure.

I would rather negotiate a repayment holiday or lower repayments on a loan in the event of redundancy, and having savings to tide me over.

However, if your jobs are as safe as you think, use the savings because they will earn you less interest than it will cost you to take out a bank loan. Then repay your savings every month until they're replenished.

I'll always take advantage of 0% credit offers if available, but I would never pay interest on something if I didn't have to.

Another vote for put a proportion of it on a 0% if you don't get it paid off towards the end of the term then you switch it to a 0% balance card which also has long 0% rates.

But to get the above offers you need a reasonable credit rating. Both sign up to money saving expert credit club and check your scores. It's free and you can also do soft searches on cards/loans etc and compare your chances of getting them without it effecting your score.

I was in a similar position when we did house renovations but because of DH previous redundancies from no where I wanted highest savings possible so did 50/50 of using savings and a credit card.

The other plus side of using a 0% credit card for a proportion is that your protected with a section 75 charge back as it will be over £100 which basically protects you if something goes wrong and you can request the bank to refund the money if the garage refuses they then chase the garage directly

Having a loan may impact your ability to get a mortgage. Generally the less debt you have the better for mortgage purposes

Savings are for unexpected events/emergencies and needing a replacement car sounds like the exact thing you have savings for. Not using your savings just in case something else happens and getting a bank loan for something that has actually happened doesn’t seem logical to me.

If something else happens whilst building your savings back up, that would be the time for a 0% credit card or bank loan. Don’t take on more debt then you need to, especially with rising interest rates.

If you haven’t had a credit card before, it might be worth getting one and paying off the full balance monthly to help build your credit score just in case you need it in future.

The reason I asked how much it is, is because I would do neither of your options.
I would buy a cheaper car, without finance, and keep a reasonable amount in savings.

If all your savings are £500 and that's the budget you are looking at - then my preference probably isn't an option.

If on the other hand you are talking about £20k, then you could reconsider the car budget.

You already have 1 car finance payment, you are looking to remortgage and talking about taking equity out of your house.

While a 0% credit card has been suggested, you are likely to find that garages will only accept a credit card for the deposit and not the balance.

Have you already agreed the payout from your insurance? If so, ignore.

If not, it's perfectly possible to use current adverts for the same model same condition vehicles to prove the actual value of your car (as opposed to computer average price). My DH did this for a van he had - it was immaculate despite its age, the insurance wanted to write it off as it needed a new side, but he proved the value was so much higher vs other vans, and they agreed to repair

Why take out a bank loan when you could use savings and a credit card with an interest free period of a year or more? Have a look at the mse website to see more about the options.

Thanks so much for the replies. There’s a lot to think about here. To answer some of the questions. We do have pretty good credit scores and, without wanting to sound too wanky, a lot of equity in the house. We have used cards or credit to buy things on 0% sometimes, but we don’t use them day to day and tend to close the cards once paid off. Someone said about dealerships not letting you pay for a car on a credit card which makes sense.

We have agreed a payout from insurers for the car that was totalled. DH argued back and forth with them and got nearly double what they originally offered. however, the car we had wasn’t a big family car, so it doesn’t come close to covering the cost of the new car. We were going to keep it another couple of years until we were done with nursery fees, as we owned it outright and we’d looked after it. But thanks @Ariela that’s good advice.

@AutumnLeaves5 your advice was really helpful, thank you. You’re right we have savings for exactly this reason.

We’ve talked more about it this evening and decided to buy the car from our savings and build back up. We are hoping to spend slightly less than our max budget as well. That seems to be the consensus on here as well, and I’m glad it doesn’t seem like we’re doing something completely stupid.

I really don’t get the large family car aspect because you have 2 DCs. a smaller car will fit 4 adults so should have no problem fitting 2 adults and 2 children even in car seats. unless you are going to be using for going camping or something?

I would consider option c-> spending less on the car and just getting something to tie you over for a couple of years with the insurance payout. Unless we are talking a tiny budget here you'll be able to get something that will do you for enough time to get your finances into better order.

Well, it was a year ago OP was posting about this so hopefully she’s come to a decision by now… 🧟‍♀️ 🧟‍♂️ 🧟