Is my attempt to justify my 9.9% APR car okay or a UKPF sin?lol

[agear69]

I make ~£58000 a year post-tax

I have a 2019 car, ~£18000 loan, 9.9% APR, 3 year long, £1000 down initially + £600 trade-in of my old car as scrap

I pay £220 a month (this includes warranty and breakdown coverage extras)

Instead of giving the details on how I couldn’t find a better option at the time, me explain my thought process:

I’m basically treating it as a lease. Right now I don’t care or think about paying this off at the end of the PCP. I’m just paying £220 a month to have the car, which doesn’t seem a bad deal to me. I can comfortably afford it. At the end of the term I can then figure out what I want to do potentially in a world with better rates OR in a situation where I have the cash to buy outright or some other more financially savvy deal. This just feels like an interim solution to me.

Is it crazy to think this way? If I have no intention of paying off the loan am I still suffering the evils of high APR? Does it still make no financial sense? Would UKPF still be screaming at me to pay it down as fast as possible?

Interested to hear what you guys think!

 

[dlinkered]

@agear69 I'm not sure this will be the consensus here but I'm on board with you. You're basically earning £85k a year and spending 4.5% of your net pay on a vehicle. If the rest of your finances are in order I really wouldn't worry at all, like you say it's basically a lease and many, many people with a lower salary than you will be spending more than a couple of hundred pounds a month on a financed car.

 

[agear69]

@dlinkered Honestly glad to have someone else on board. Even though I feel fine with decision it does sit in the back of my mind that most other people into personal finance may think I’m being an idiot haha

 

[talisra]

@agear69 I'm with you to an extent as well, it is a small amount of your wage and it is always a balance of living in the moment vs preparing for the future.

However, any savings or investments (apart from your emergency fund and pension payments) are basically pointless as you will be paying a higher interest rate on the outstanding balance than you will be getting in interest/growth.

Most companies will allow you to overpay until you have paid off the outstanding amount and it will save you money. You still have to hand the car over at the end of the term but you could pay off the finance in a few months (again, depending on the scheme).

 

[agear69]

@talisra But if I don’t plan to pay off the final balance at the end and instead just plan to hand the car in, does the interest rate even matter, and if oils that still make any savings and investments pointless?

I figure my payments are just £220 a month for 3 years to have the car. The loan can grow as big as it wants at whatever pace it wants. It doesn’t affect my monthly payments and I’m not planning to pay the final amount left over at the end.

So I guess I just want to double check that scenario then doesn’t make any saving and investing I’m doing pointless because that growing loan essentially doesn’t exist to me…?

 

[talisra]

@agear69 You are paying 10% interest on £18k or £1.8k a year interest. If you save £18k, in a year, how much would your returns be? 3% at best so £540. You are -£1260.

If your interest on your liabilities is higher than the return on your investments you are better off paying the loan.

If you pay it off now, you will be around £1.8k(reducing slowly over time) better off a year.

Are you sure the £18k is what you are paying interest off? At that rate you have the loan for 90 months. Is the car purchased for £18k and the balloon payment £10k as £8073 PCP at 9.9%apr over 36 months appears to be more accurate based upon your repayments.

 

[solarmanking2]

@agear69 The problem with a high interest rate on a decent amount with low repayments is the overall amount won’t come down that much.

At the end of the 3 years you might be surprised by how much is still left.

 

[agear69]

@solarmanking2 But that’s the thing I’m not planning to pay the final amount left, that’s my reason for being unbothered by the high interest rate

 

[solarmanking2]

@agear69 In the scenario where you suggest that you have cash to buy it outright you will find you have more to pay off than expected.

Sorry if I’m misunderstanding your original post.

The prudent approach would be to decide now on what gives you the most options in the future. That typically is having cash in your pocket and not debt against your name… to explain why the general consensus is to go cheap on a car and not borrow for it.

 

[agear69]

@solarmanking2 My approach is at the end of the PCP I don’t play to pay off the final amount to buy the car. I plan to either just give the car back at the end of the 3 years and buy something else in cash/with a bank loan if rates are better by that point in the future. OR use it as equity towards a new PCP if again rates and the car market are better by that point

I’m basically tiding myself over for 3 years with a nice car at £220 essentially like a lease

Hope that make sense haha maybe it doesn’t in which case that’s the whole reason I’ve made this post