I’m saving to buy my first car, putting away between €200-500 per month depending on other factors such as birthdays, etc. I know if I want to buy something sooner rather than later, I will have to take out some finance to cover the remainder of the car (aiming for about €5K-€7K in additional finance) but should have a very healthy deposit of 60 per cent-ish to put down to cover at least some of the cost.
I have a good amount of this saved currently, but I also have about €1,200 on my credit card balance that I’m paying off at about €150 a month, including an interest payment of roughly €15 per month, with no additional charges being placed on the card at this time.
My question is, am I best continuing to save and paying the payment on the credit card as I currently am, or am I best to use some of the funds I have saved to clear the card, and borrowing more to finance the car?
I cannot guarantee that the €150 CC payment will go into savings, but it is a possibility.
For reference, my credit card’s standard interest rate is 14 per cent variable and typical annual percentage rate (APR) is 22.7 per cent variable.
Mr C.L.
Good luck with the purchase of your first car. It’s always a special moment – probably because, for most people, it will be the biggest single investment they have made up to that point in their lives.
I still remember details about my first car that are lost in the mists of time when it comes to any other car I have owned.
On the more central point of your query, I suspect you know the answer already but let’s work through it.
Saving is always a good habit to have but it really does depend on where you put it and your personal financial circumstances.
You don’t say where you are putting the money you are saving but, on the basis that you are looking to buy the car “sooner rather than later”, I’ll assume it is in a demand deposit account.
Depending on which bank that is with, you are earning anything from a giddy (I jest) 0.25 per cent at AIB to 0.1 per cent at Bank of Ireland and a tenth of that, 0.01 per cent, at PTSB.
In other words, next to nothing.
Yes, you can get 1.76 per cent, and up to 2.51 per cent, right now with online bank Bunq’s free account but that is still likely to be well below anything you will pay for car finance.
N26 also offers 2.5 per cent but that’s only on its Metal account, which will cost you €16.90 a month in fees. On its free account, you’re in line for a far more modest 0.8 per cent.
And while you’re getting rates around those levels on your hard-earned savings, you are paying an APR of 22.7 per cent on your outstanding credit card debt.
That’s close to 10 times the best rate you can get on your savings and closer to 100 times what any of the mainstream Irish banks is offering.
It’s just a no-brainer. Until it is fully paid off, all your energy should be going on paying down your credit card debt.
On the plus front, you are making sure not to add to the credit card debt pile while you pay down your balance. That’s good thinking. It’s all too easy to see credit cards as a flexible friend until the bill comes in.
We should all aim to live within our monthly income, with credit cards reserved purely for exceptional spending. You should also, as a rule, be looking to pay off the full credit card balance each month by direct debit.
If the exceptional costs are more than that will allow, you really should be looking at getting a personal loan where the interest rates are significantly lower.
Which brings us neatly to car finance.
Clearly, the cheapest way to pay for a car is out of savings but, as with most of us, that is not possible in your case.
The headline monthly repayments on personal contract plans (PCP) and hire purchase can look attractive but they come with a sting in the tail with a final balloon payment and, with PCPs, can also involve restrictions on mileage and other things.
As a result, after savings, the next best option is a personal loan. It’s worth doing your homework here as there can be some foibles in the market.
Bank of Ireland, for instance, charges a lower interest rate to customers looking for a bigger car loan. Someone like you, seeking up to €7,000, will get a rate of 8.3 per cent where a person in the market for a car requiring a loan of more than €20,000 can secure funding at 7.1 per cent, according to their website.
Over at PTSB, which is not competitive on any front in car loans, you will pay a higher rate of interest for an older car. Buy something registered since 2023 and you will pay an APR of 8.8 per cent. That rises to 9.3 per cent APR (8.9 per cent headline rate) for cars bought earlier this decade and to 10.4 per cent APR (9.9 per cent headline rate) if purchasing anything registered before 2020, its website calculator says.
And if you are buying an electric vehicle, you can get even better value as you might qualify for a green loan.
At Bank of Ireland, that will give you access to a 6.5 per cent rate and save you hundreds of euro in interest – if you can find a reliable second-hand EV with the funding you have.
But, generally, for a petrol or diesel vehicle, you can expect a headline interest rate in the middle 8 per cent range and an APR of closer to 9 per cent.
What you really need to look at is how monthly repayments compare and the total cost of the credit you are borrowing.
For loans of €7,000, you can expect to pay about €316-€322 across the banks and credit unions if you are looking to repay the loan over two years – though some credit unions are noticeably higher.
That’s in line with the amount you are saving at the moment and so should be doable. If you want more wriggle room, repaying that same loan over three years will cost you €219-€223.50 a month.
But taking that extra year means you will be paying the lender more than €300 in extra interest over the course of the loan, money that you could have saved for something else or spent treating yourself.
And who is cheapest right now? Surprisingly perhaps – but then again maybe not – it is An Post, where you can borrow your €7,000 for a monthly repayment of €316.27 over two years or €219.03 over three.
Next comes Avant Money, assuming you meet their criteria.
The bottom line is it makes no sense to be saving at derisory rates when you are paying 22.7 per cent APR on your credit card debt. Better to pay down the debt even it means borrowing slightly more on the car loan at a rate of somewhere between 8 and 9 per cent. And good luck with it.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com with a contact phone number. This column is a reader service and is not intended to replace professional advice
