By a new car or not?

dellas1979

I am interested in buying a new or newish car.

I have €20,000 in savings (lodged in a high interest account).
In 2 years it has yielded me about €1400 so I would like to leave it there another few years (I am almost 30 and would like to buy a house in 2-3 years).

Anyways, I have questions about financing this car – I have never bought a new car or have had a loan. I have no debt (no I don’t live at home-I rent). I am in college part-time doing a Masters also (paying tuition fees and I work 4 days a week).

These are the following options as far as I can see:
Option 1 car for €12-13000: Also at my disposal I have about €3000 on hand in another bank account. What do you think if I got a loan for that amount and left the €3000 in an account to begin paying off the loan? I could top it up every month with around €100 for future loan payments. Is this something people do? I could then sell the car off in 2-3 years. Its tax is €100 per year, 4 year guarantee and 4 years AA coverage.
Option 2 car for around €5000: There is a 1L 06 for 5500 that I am also kinda interested in-not as much as the one Id like for 12000-13000. But of course it would make more financial sense. I would still be €2000 short. So I was thinking of getting a loan for 2000 (again putting 100 a month into an account to pay off loan). Think it would work out about 50 or 60 a month over 2 years.

Option 3 stay with the car I have: This isn’t such a bad thing – but Ive never had a newish or remotely new car (current car is 12 years old NCT’d for another year). But Ive worked hard, why shouldn’t I treat myself to something new?

From what I have told you, what do you thing I should do? I guess I am just looking for advice financially. I am normally very very cautious about what I spend money on – but I dunno, since I am hitting my 30s I kinda think I should be looking after myself more rather than saving all the time. I know we are in a recession so I am torn as to what to do.

dotsman

Hi dellas,

I would probably go with option 2 as the compromise. If you are intending on purchasing a home in 2-3 years, then you will need a decent amount saved up for a) a deposit (ideally aim for approx 10% of house price) and b) to furnish your new home and finally c) to also have some money left over for a rainy day.

Also, you will definitely to be debt free before you go to purchase a home as any other loans will have a detrimental effect on your DSR/NIR (the percentage of your income that a bank will let you service your total debt)

By going with option 2 you would only need to borrow €2000. This would easily be paid off within 2 years (at about €90 per month). However, to take advantage of interest rate differences between loans and deposits, and also avoiding DIRT, I would actually recommend that you use the final €2,000 from your main deposit (leaving €18,000). Trust me, you will pay more for the interest on the loan than you would receive in deposit interest (after DIRT). However, the amounts in the grand scheme of things are not large, so it's up to you. The only reason I would go for a loan would be that, if going for a mortgage with the same bank, you would increase your exposure and financial history with that bank, but that's only a small thing.

I would personally not recommend Option 3, because you are right - you do deserve a treat:)

P.S. you calculations on 50-60 per month are way off I'm afraid. As per above it would be at least €90 per month to borrow €2,000 for 2 years (Total repayments => 24 * €90 = €2,160), varying slightly between different repayment terms and interest rates.

broker2008

Yeah I'd go option 2. Consider the credit union for the loan as they are usually a bit more sympathetic if there were troubles and less paperwork too. I spend a little more time on the actual car. There are SERIOUS bargains out there with more to come as repos increase.:o

Pinkster

I would also go for option 2. There are very good deals out there on second hand cars. If you are going to buy a house you will need to have about 10% of the cost of the property. You also have things like valuations and solicitors fees when you are taking out a mortgage. You could do a combination with savings and a loan for the car. You do not need to be totally debt free to take out a mortgage but the less debt you have the better.