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So you want a new car?

These days when most people make a large purchase such as a car, they're in the habit of borrowing the money, rather than saving for it.

Debt is sometimes unavoidable, but the next time you decide to make a large purchase, have a think about the figures before signing on the dotted line.

Let's assume you want to buy a new car for £10,000.

There are two ways you could finance the purchase. You could borrow the money (let's say at 7.8% as that's a reasonable rate for a loan in this day and age), or you could save until you've got enough.

If you borrowed the money at 7.8% over 5 years, your monthly payment would be just over £200 (assuming you don't take out loan protection). By the end of the loan you will have paid a total of £12,108 which means that that lovely new car (which is now 5 years old) has cost you not £10,000, but over £12,000.

But what if you saved up for the car? Let's look at the figures again. This time, you save just over £200 each month for 5 years. After 5 years you have £12,000 in the bank. Every bit of it is yours and you haven't paid a penny interest.

Not only that, but rather than paying interest, you're earning it. And thanks to the magic of compound interest, that £12,000 has turned into £13,000 (assuming a net interest rate of 3.2%).

So, you now have £13,000 in the bank. You buy a car, and still have £3,000 change.

So who's the fool? The guy who pays £12,000 for the £10,000 car, or the guy who pays £10,000 for the £10,000 car and has £3,000 in the bank?

That's a different of £5,000. 50% of the cost of the car.

Of course the advantage of the loan is that you get what you want "now", whereas it takes time to save money. In which case, you'd better start saving now.

(c) Copyright 2006, Adam Stevens. All rights reserved.

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