I’m reluctant to accuse someone flat out of lying. For one thing all I have to go on is their own words. I have no way of knowing whether they intend to mislead me, or whether they are doing so unintentionally. So I’ll give the protagonist in this post the benefit of the doubt and say that he’s either lying, or he’s really stupid and actually believes what he’s saying.
You can make up your own mind. Based on the fact that he holds a senior position in a bank I’m guessing he understands what he’s saying just fine. Whatever you think of his motives, read on and see how to avoid spending over €800 that you don’t need to spend.
I’ve just read the most misleading piece of financial advice I’ve personally ever come across, courtesty of Stephen Dargan of Bank of Scotland (Ireland), via Donal Buckley in the Irish Independant.
As the SSIA’s start to mature the banks face the very real possibility that people may actually spend their savings and continue saving into the future, greatly reducing the need for loans. If you read my Addicted to Debt post then think of this as the equivalent of a great national methadone scheme for debt addiction.
This is not good news for lenders. Yes, there are still pleanty of addicts out there, and even some of the SSIA holders will fall off the wagon and back into the clutches of debt. But the banks can’t take any chances, so Donal Buckley’s piece served as essentially an advertisement for borrowing, even when you have savings.
First some facts. It almost never makes financial sense to have any short to medium term high interest debt while also holding savings. The reason for this is that debt costs more in interest than savings earn.
If you can find a debt that’s cheaper than the return you’ll get on saving or investing, then by all means borrow as much as you can and earn a profit on the deal. Such deals can be hard to find. A simple savings account as suggested by Stephen Dargan isn’t one of those deals.
Mr Dargan suggests keeping €18000 in a savings account, while at the same time borrowing €18000 to buy a car. What he tries to claim is that it makes financial sense to leave yourself out of pocket. I.e. it makes sense to pay your bank interest on a loan you don’t need, while earning less interest on savings you could have used instead. The amount he says you’ll pay in unneccesary interest is “only” €821.25.
You read that right. Stephen Dargan of Bank of Scotland is effectively advising you to write a cheque to his bank for €821.25 and stick it in the post, no questions asked, no strings attached, and expect nothing in return. And that word “only” suggests you’re getting a bargain.
I’ll admit it here, I once broke the law by setting fire to a €5 note (yes I do regret not giving it to someone who would have appreciated it, no comments please). But even I would bawk at flushing €800 down the loo, although I’d prefer to flush it down the loo than give it to Stephen Dargan and Bank of Scotland (Ireland). At least the toilet isn’t telling me It’s a good thing to do.
Here’s how Mr Dargan claims it works. You have €18000 of an SSIA sitting in a savings account. And you want a car that costs €18000.
Say the person borrows €18,000 over 36 months at an APR (annual percentage rate) of 8.5pc. With monthly payments of €565.60 this will mean €65.60 per month in interest payable across the full term of the agreement. In addition, a documentation fee of €75 is payable with an initial direct debit.
So, instead of paying for the car out of cash that you have, you borrow from Mr Dargan, and commit to €565.50 a month for 3 years. He cleverly shortens the term here from the usual 4 or 5 years to 3. This reduces the amount of interest you pay, but still comes nowhere near to having this swindle make sense.
Incidently €565.50 is more than twice the maximum contribution to an SSIA, so Mr Dargan’s scheme leaves you with larger out of pocket expense per month. If he was being honest he’d have used an 8 year loan in his example, or at least the more usual 5 year loan. But if he did that the interest paid would have been so much that everyone would have seen through the enormous hole in his scheme. Aparently an €821 hole is small enough to catch people. What’s €821 in a booming economy like Ireland?
Anyhow, back to his scheme. While you are paying 8.5% on this loan, your €18000 savings is earning you 3.5%, dropping to 3.25% in the third year.
Mr Dargan’s premise seems to be that if you spend your SSIA on a Car you won’t keep up the discipline of saving. That may be the case, but that’s your choice. It still doesn’t make his scheme work.
Now let’s look at the alternative reality. The one where people are not taken in by what amounts to at best gross stupidity, at worse a deliberate attempt to misead people about how to manage their finances.
Let’s pretend you get your SSIA, and spend it on the CAR. Benefit number one, you have not just committed to €565.50 a month for the next 3 years in loan repayments. If you had that kind of money to spend on a loan, you can now direct it to savings, pay down your mortgage, or spend it on bubblegum, you have that choice, you have that freedom.
Benefit number two, If you don’t put €565.50 into savings in a particular month because the kids need school uniforms, or because you need dental work done, then it won’t show up as a missed loan payment on your credit report. You are in control.
Benefit number three, you’ll be earning interest on the €565.50 a month savings, without paying it all and more back in interest on a loan you don’t need.
Benefit number four, you’ll have gotten ahead of the debt rat race. In 3 years time you’ll have saved enough to buy another car, or take a holiday, or whatever, without needing to resort to borrowing at ever increasing interest rates. If you hold off getting a car for 5 or 6 years you’ll have enough to get a car and have lots of cash still in savings.
Paying interest on loans while you have cash sitting in savings is like calling a cab every morning, paying him to drive to your office on his own, while you jump in your car and drive there yourself. It makes no sense.
Here’s the final piece of Stephan Dargan’s swindle. The position you’ll be in at the end of the 3 years:
the saver will still have their €18,000 lump sum plus their car worth approx €9,000 depending on the make/condition/depreciation etc.
Dargan concludes: “In contrast, if you use your SSIA to buy the same car you may only be left with the car worth about €9,000.”
He is conveniently forgetting the fact that the person over the 3 years paid a fortune in loan repayments which could have been put aside into savings, or even if you’re not disciplined, given you a hell of a good time for 3 years.
You will not be left with only the car worth about €9,000. That’s a deliberate attempt to mislead you. Don’t let him away with it. If he want’s to assume you aren’t disciplined enough to continue saving, then he should also assume that you aren’t disciplined enough to keep the €18000 in the bank under his scheme.
As for Donal Buckley. Shame on you for allowing this advise to make it’s way into a national newspaper under your name. Shame on you. The only redeeming aspect of the column is that it briefly mentions the possibility of putting the SSIA money into a pension.
Doing that, might make sense even if you borrow for a new car, because the tax savings and the return you’ll earn from the money in the pension might be worth more than the interest you’ll pay.
Donal Buckley has kindly replied to an email I sent him about this, which is more than can be said for Bank of Scotland. I don’t know if we’ll hear any more about it from Donal in future columns, but I appreciate his reply.
There’s definitely a story here about the banker who can’t add. Now that I’d like to read.