Buying a car on finance
For as long as I remember we have always paid cash when buying cars. But now I'm starting to wonder if these finance arrangements are a good idea instead and wondered what people's experience is like?
My concern with paying cash is that we pay a huge lump of savings out and then watch the car devalue from day one. Three years later and about half its value has gone. And at some point, we have to find another huge lump of cash.
But how is it with a PCP type plan?
I understand that, even with a finance arrangement, it's still important to get the best possible purchase price for the car and also the lowest possible interest rate. I understand that you pay a deposit (maybe use your existing car) and then the rest of the price is effectively a loan that you partly repay over maybe three years.
At the end, you are left owing a lump sum - maybe half the price of the car (I think they call this a 'bubble'). You then have the option to pay the lump sum and keep the car, or give the car back to (hopefully) pay off the balance of the loan.
Here is my concern.
How do you then progress to getting another new car? Do you have to find another big deposit from savings and start all over again? If so, I'm not sure what has been gained.
What if the dealer decides that the value of the three year old car doesn't cover the balance outstanding?
Comments
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I once purchased a car on a PCP basis and vowed never to do so again. This was a few years ago. The idea then was that the car would be worth more than the outstanding part of the loan which would give you a deposit on the next car. The trouble is the value of a car at three years old is often not predictable especially if there is a model update/change between buying and the end of the agreement. In my case the amount left over for the deposit was so small as not to be really worthwhile so I ended up taking out a loan to buy the balance of the car which locked me into six years of ownership. I think the whole idea of the PCP schemes is to make new cars appear more affordable although I am not convinced that is the reality?
I purchased a new car last September. It was the same model car that I had before but with an upgraded spec. The manufacturers were doing interest free finance so I opted for that. I could have paid cash but it would have dented my savings so the interest free option seem the best way forward. I suppose if you were buying a new tow car which would cost much more than mine you have to be happy that the monthly payments are manageable.
David
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We had a variation on finance deals.
Like you, Ian, we have always bought our new vehicles by paying off, whatever the balance after trade in, in one lump sum. However, when we bought our new car last year the salesman offered us a substantial discount if we took the manufacturers finance which he assured us could be settled in full with them after just 2 monthly payments. We thought it too good to be true but after studying the T&C couldn't see a catch. (We also know the salesmans Aunt and promised to rat on him if he was conning us!). So after paying 2 instalments we rang the finance company for a final settlement figure and it was true! No penalties and a big discount of the list price.
First time we've had finance for ages. When you're out of the loop for a while you become rusty with whats available.
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No such thing as a free lunch. The finance deal has to have something in to cover the finance, despite the fancy wordings. Cash is king. Just changed my Suzuki and whilst there was a finance deal available I got a much better deal but had to haggle hard and left the garage only for them to return two days later to meet my offer. With interest rates so low not worth keeping the cash.
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We've always used loans, usually looking around for the best deal (the car dealer may not have the best deal), and always over 3 years, never longer, and we always did well and never any bother with it. Its always good if you mean to keep the car. I've never had experience with lease type paperwork, so can't comment on that, but with that you do get a car every few years, the car was never yours and you paid out for ever. Don't go down the route of re-mortgaging your house to afford a brand new car, as remember, you pay for that car over the next 25 years or whatever you have left of your mortgage, so you could basically still be paying for that car when you've sold it years back
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I agree with a lot of the above and I've never been happy with paying interest. Like David, when we bought our curent tow car, Volvo were doing interest free credit. We were all ready to pay cash in full, but after checking and re-checking the t&c's we decided to use the free credit for a chunk of the price......and just paid it back from our savings, which stayed invested.
But here's another consideration though.
I've been looking to see what discounts are currently available. Most dealers quote two discounts - one for cash and another if taking finance. The second one is always a higher amount of discount.
It appears that this extra 'discount' is often actually a 'manufacturers contribution' towards the deposit.
With VW this is currently £5 to £6,000 extra discount - more than the amount of interest payable over three years! So it seems that they effectively pay your interest and give you a bit of extra discount as well.
I need to do more research on this, but some of the comments above have confirmed my fears that the amount outstanding at the end of the three years (typically) might not leave enough for another deposit and might not even cover the outstanding balance.
I'd be very interested in any more opinions.
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I thank you all for buying new cars ..... never had a new one & never likely to have .... I don't like what I could afford new and have usually bought top spec large cars a few years old, letting someone else take the hit on initial depreciation
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Although I have never gone down this route, I did look at it at one stage and seem to recall that the dealer offered a guaranteed trade in value in three years time, which would enable renewal of the contract with a new car.
Do they no longer do that?
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When we changed the wife's car back in 2012 she picked the car she wanted but found an ex demo model which was 3 months old when all sorted I asked I asked what discount they would give us for paying cash, the reply was nothing we would have to pay the price they wanted. after sorting everything out he told us if we had taken the car on through their finance company he would have been able to do a deal on the price. so not all dealers offer two discounts.
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When we bought the Smart, 3+ years back, we were set to pay cash, as we have always done. However things have changed since our last car purchase in 2006.
The Merc dealer worked out for us that it was cheaper overall to take the minimum finance for the minimum period.
By doing this we got the manufacturers contribution to the deposit.
We paid a £3000 deposit, they paid whatever, and the rest was borrowed. The minimum loan period was 6 months, so after that we got the settlement amount and paid it off. There was no extra charge for doing this.
When we got the new VW recently, we looked at the finance options, but they all meant paying more in total, so we just paid cash.
Luckily we had enough cash in the bank to do so.
S-I-L got a new VW 18 months back, he had to borrow the dosh as he did not have the cash. DD looked at the dealer offerings and then checked out a bank loan. In the end, as a good HSBC account holder, she borrowed the required amount at 3.19%. Not a bad rate overall.
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When we bought the OH's Yaris 2 years ago, it was a no brainer. To buy on a 3 year plan worked out cheaper. I asked about paying outright, as we had the cash but they would not entertain giving me the equivalent of the manufactures contribution. That and the fact the finance over three years was 0% meant we went with the plan. As you say there is a value attached to the car after 3 years, which is dependant on mileage, condition etc. However, this only matters if you want to trade in or give it back. We will pay the final sum and keep it another 2 years, as it has a five year warranty.
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We've never bought new, but got a "registered" car with about 60 miles on it. Its then classed as "used". If you buy a brand new car, it loses value by a couple of thousand pounds and that's before you've put your first 50 miles on it. You get a far better deal with "registered". AND DO REMEMBER FOLKS, FROM APRIL NEW CARS ARE GOING TO BE TAXED BY THE OLD SYSTEM, DEPENDING HOW LARGE YOUR CAR IS YOU PAY MORE TAX. We have a Peugeot 508 that costs us £20 pa, when new in April it will be £130(+/-)
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I have never come across one that guarantees a value whatever the condition. It is always dependant on mileage at the very least. Plus if you have scuffed the alloys, or suffered a supermarket trolley ding they would want to knock it down,
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If buying on HP in addition to the Consumer Rights Act 2015 you have the backing and protection of the finance company if something goes wrong with the car. Interest rates can be negotiated to a more favourable APR than initially proposed by the dealership.
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The new amount from April is a flat rate of £140 for all cars other than electric/hydrogen, an increased first year amount depending on the car, and an additional £310 per year for the first 5 years for cars with a list price over £40k.
This only applies for new cars bought from April.
Other cars will remain on whatever regime they are already on.
The new car we bought recently was also "pre-registered" but not used other than it was driven from the dealership that had it to the dealership nearest us, so 45 miles on the clock. Discount on list price was £10k, so we were happy.
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PCPs can be a good way to buy a new car, so long as you have both eyes wide open and know what you are getting in to. They are designed to lock you into a brand of vehicle. What usually happens is that before your contract expires you will be offered a new vehicle at a very good monthly rate. Most people take up this offer and get a new car every 3 years and there is nothing wrong with that. The sting is when you want to get out of the deal. You either have to refinance the vehicle, or pay cash, to buy the vehicle at the agreed value (plus any extra for damage and excess mileage) or you just hand it back and walk away with nothing. So, if you are happy with your chosen brand of vehicle it can be a good way to get a new car every 3 years, just keep making the payments, but remember you never actually own it.
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Firstly most car salesmen work on commission. They increase this by selling as many extras as possible and not just accessories. So they will give a better discount for finance agreements as this bumps up their commission. However, in the end there is little difference in the total cost to own whether you use any form of payment. For me I pay the difference between the old car sales price and that of the new car by cash. Then I set up a standing order for the monthly amount I would have paid with a finance plan to go into a savings account ready for the next cash purchase. My reckoning is that the interest I lose on the initial cash, is far less than it would cost me for that of finance. Just remember the salesman knows the lowest selling price and if you bargain hard enough that is the price you should get.
Lastly, I am particular on choosing the new car. Picking a car, with a sound resale value ideally with a 5 or 7 year warranty helps maximise it's selling price. I then sell it privately using the remaining warranty as a selling point.
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You either have to refinance the vehicle, or pay cash, to buy the vehicle at the agreed value (plus any extra for damage and excess mileage) or you just hand it back and walk away with nothing.
Thats back to front to how I understand my agreement peegeenine. The value of the car was agreed at time of purchase. Since which time we have been paying money off at 0% interest. After 3 years I can either pay off the residual, about £6000, or return the vehicle. That's where the any extra for damage and mileage comes in. You cannot just simply hand it in. At purchase there was an agreed minimum value based on mileage and condition. If you had say exceeded the mileage condition, they would want the car and some more money off you.
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Just changed my Suzuki Jimny. for a 5 yr old same model. First haggled offer was P/E £7K against list price. Knew they had a new untaxed in stock. Made an offer of £4500 cash(f urther almost £2K off list price) to change and walked away. They came back 2 days later and agreed with car unregistered but done on 18/1. I knew they had to register by 28/2 to meet Suzuki requirements. Paid cash so you need to look at the whole deal by doing a lot of research before going to the dealer. and not get caught out by the sales talk. In the end my old vehicle cost me some £3500 in depreciation over 5 years and with no costs apart from servicing and MOT.
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