Car Finance - How? What? Why?
Discussion
So hypothetical question on buying a decent car:
I’ve never bought a car on any kind of finance – always bought older cars privately and paid cash, no warranty, all very simple. “If you can’t afford it, don’t buy it” has been my motto for everything apart from the house. However, by the end of the year - touch wood - the mortgage should be paid off early, after over-paying and saving all I/we could over the years. I’m not getting any younger, and I’m increasingly thinking I should enjoy what money I earn a bit more, rather than saving it for who know’s what. I’d really like a nice car like a Jaguar XF; not brand new, maybe a couple of years old.
My rather naive question is: How do people do it? With all my previous and current cars, I do my own maintenance, but I’d not want to risk buying a newer car without a good warranty, preferably a dealer warranty. In fact ideally I don’t want to mess about working on my daily driver any more. The question is, finance. I couldn’t afford to buy outright, and I’d be looking at spending about £350/month. Honestly - no idea what I’d get for this.
I get the impression that once people start buying fairly expensive cars this way, they are on an endless conveyer belt of monthly payments and having to get a newer car after the warranty period expires. How much do you lose on deals like this? I had a quick look at Jaguar, and the difference between buying it on finance from them new vs. sourcing your own finance on an older car wasn’t that much. I totally accept that you have to pay for the privilege of driving a decent, new-ish car, but there are limits to how far I’m willing to go; I’m not the kind of person who needs to be seen in the latest model, but I just fancied a bit of a treat after saving to pay the mortgage (and for the house deposit before that).
I honestly don’t have a clue about finance or how much money you lose through buying this was versus outright.
Any advice? Cheers.
I’ve never bought a car on any kind of finance – always bought older cars privately and paid cash, no warranty, all very simple. “If you can’t afford it, don’t buy it” has been my motto for everything apart from the house. However, by the end of the year - touch wood - the mortgage should be paid off early, after over-paying and saving all I/we could over the years. I’m not getting any younger, and I’m increasingly thinking I should enjoy what money I earn a bit more, rather than saving it for who know’s what. I’d really like a nice car like a Jaguar XF; not brand new, maybe a couple of years old.
My rather naive question is: How do people do it? With all my previous and current cars, I do my own maintenance, but I’d not want to risk buying a newer car without a good warranty, preferably a dealer warranty. In fact ideally I don’t want to mess about working on my daily driver any more. The question is, finance. I couldn’t afford to buy outright, and I’d be looking at spending about £350/month. Honestly - no idea what I’d get for this.
I get the impression that once people start buying fairly expensive cars this way, they are on an endless conveyer belt of monthly payments and having to get a newer car after the warranty period expires. How much do you lose on deals like this? I had a quick look at Jaguar, and the difference between buying it on finance from them new vs. sourcing your own finance on an older car wasn’t that much. I totally accept that you have to pay for the privilege of driving a decent, new-ish car, but there are limits to how far I’m willing to go; I’m not the kind of person who needs to be seen in the latest model, but I just fancied a bit of a treat after saving to pay the mortgage (and for the house deposit before that).
I honestly don’t have a clue about finance or how much money you lose through buying this was versus outright.
Any advice? Cheers.
I sell cars, so I'm probably fairly well qualified to advise on this.
There are 2 main ways to buy a car on finance - Hire Purchase (HP) and Personal Contract Plan (PCP). Hire purchase is exceptionally straightforward, it is simply a loan secured on the vehicle for whatever your required balance is. So say, you were looking at a car for £20,000 and you've got a car worth £5,000 you want to exchange and £2,000 cash you want to pay then it is a loan for £13,000. The vast majority of reputable dealers will charge an APR broadly in line with what you'd get from your bank. And that's that. You only 'lose' interest and depreciation (which you would have lost anywhere). You own the car outright at the end of the loan.
PCP is more complicated. The way it works is the finance company will take details of the car as it is now and will check what you expect your annual mileage to be whilst you have the car. They will use that information to calculate what your car will be worth at the end of a specific period of time (generally speaking between 12 and 48 months. This value is call the Guaranteed Future Value (GFV). You then pay the depreciation, so the difference between the price of the car today and the GFV, in the form of monthly payments. At the end of the term you may then hand the car back and walk away or make a cash payment in the amount of the GFV and the car is yours outright or you can part exchange the car. Part exchanging is complicated - if the dealer you part exchange the car to values it as worth more than the GFV then the difference between the dealer valuation and the GFV is equity you have in the car as a deposit. If the dealer values it as less that the GFV then you will need to add sufficient cash into the deal to meet the GFV. The finance company must either receive the car or a payment equal to the GFV at the end of the term.
Again, the loan you take out under a PCP agreement should be at a rate broadly in line with what you'd get from your bank.
Some cars are far more suitable for PCP than others. Ideally the car should be less that 36 months old and have strong residuals as that way the depreciation will be lower and the amount you have to borrow will be smaller. I meet a lot of customers who feel 'trapped' in a PCP deal however as it is very rare that people at the end of the term have sufficient funds to pay the GFV and keep the car. They also probably won't have much equity in the car either, so to keep driving a car of the same quality they take out a new PCP on a new car and will change their car every few years.
Reading your post I suspect that you intend to keep the car for some time, in which case PCP would not be an appropriate route for you to take.
There are 2 main ways to buy a car on finance - Hire Purchase (HP) and Personal Contract Plan (PCP). Hire purchase is exceptionally straightforward, it is simply a loan secured on the vehicle for whatever your required balance is. So say, you were looking at a car for £20,000 and you've got a car worth £5,000 you want to exchange and £2,000 cash you want to pay then it is a loan for £13,000. The vast majority of reputable dealers will charge an APR broadly in line with what you'd get from your bank. And that's that. You only 'lose' interest and depreciation (which you would have lost anywhere). You own the car outright at the end of the loan.
PCP is more complicated. The way it works is the finance company will take details of the car as it is now and will check what you expect your annual mileage to be whilst you have the car. They will use that information to calculate what your car will be worth at the end of a specific period of time (generally speaking between 12 and 48 months. This value is call the Guaranteed Future Value (GFV). You then pay the depreciation, so the difference between the price of the car today and the GFV, in the form of monthly payments. At the end of the term you may then hand the car back and walk away or make a cash payment in the amount of the GFV and the car is yours outright or you can part exchange the car. Part exchanging is complicated - if the dealer you part exchange the car to values it as worth more than the GFV then the difference between the dealer valuation and the GFV is equity you have in the car as a deposit. If the dealer values it as less that the GFV then you will need to add sufficient cash into the deal to meet the GFV. The finance company must either receive the car or a payment equal to the GFV at the end of the term.
Again, the loan you take out under a PCP agreement should be at a rate broadly in line with what you'd get from your bank.
Some cars are far more suitable for PCP than others. Ideally the car should be less that 36 months old and have strong residuals as that way the depreciation will be lower and the amount you have to borrow will be smaller. I meet a lot of customers who feel 'trapped' in a PCP deal however as it is very rare that people at the end of the term have sufficient funds to pay the GFV and keep the car. They also probably won't have much equity in the car either, so to keep driving a car of the same quality they take out a new PCP on a new car and will change their car every few years.
Reading your post I suspect that you intend to keep the car for some time, in which case PCP would not be an appropriate route for you to take.
Excellent summary there!!
I bought a 3 yr old XF 3.0D on a 4yr PCP, it cost me £350 a month and it was brilliant!! Your personal circumstances are relevant too though - I moved to self-employment and bailed out of my PCP after 2 yrs (broke even) to lease something because I could write off the full lease payment.
All that's missing from the PCP vs HP payment debate is to point out the obvious - PCP is cheaper to service in terms of monthly payments, I was happy to pay the depreciation and interest but didn't want to try and "buy" any more of the car personally because I preferred to keep the free income to save towards the next deposit/toy. It was as close as I could get to leasing a used car!
I bought a 3 yr old XF 3.0D on a 4yr PCP, it cost me £350 a month and it was brilliant!! Your personal circumstances are relevant too though - I moved to self-employment and bailed out of my PCP after 2 yrs (broke even) to lease something because I could write off the full lease payment.
All that's missing from the PCP vs HP payment debate is to point out the obvious - PCP is cheaper to service in terms of monthly payments, I was happy to pay the depreciation and interest but didn't want to try and "buy" any more of the car personally because I preferred to keep the free income to save towards the next deposit/toy. It was as close as I could get to leasing a used car!
Thanks very much for the replies - I really appreciate that information.
In terms of warranty and service costs on a used car, say a BMW or Jaguar: Are there clear cut advantages (or disadvantages) to buying fairly low mileage cars from a main dealer in terms of warranty - in fact, do main dealers do competitive finance deals at all on cars like that?
Regarding how long I'd keep the car - I suppose it depends entirely on how long the warranty was. A friend of mine bought a Used Jaguar convertible a few years ago (main dealer) and the hood & mechanism needed replacing. The cost to him would have been astronomical if it hadn't been covered, and I'm talking several 1000's of £.
Thanks.
In terms of warranty and service costs on a used car, say a BMW or Jaguar: Are there clear cut advantages (or disadvantages) to buying fairly low mileage cars from a main dealer in terms of warranty - in fact, do main dealers do competitive finance deals at all on cars like that?
Regarding how long I'd keep the car - I suppose it depends entirely on how long the warranty was. A friend of mine bought a Used Jaguar convertible a few years ago (main dealer) and the hood & mechanism needed replacing. The cost to him would have been astronomical if it hadn't been covered, and I'm talking several 1000's of £.
Thanks.
You mention nearly-new, but you will get better interest rates if you go for a new car. We looked at a nearly-new M135i recently, under a year old and up for around 24k, but it worked out cheaper for us to buy a new one from them, as the rates were lower and they had more incentive to sell the newer car, manufacturer deposits, that sort of thing.
Other option, if you've nearly paid off the mortgage would be to draw down the required equity from there....
With rates where they are it makes far more sense, <60% LTV mortgages can be had at rates that will be far less than those offered by any garage, you then able to do whatever you want with the car following purchase.
may be something to look at?
ETA - even if it means taking the dealer finance to get the manufacturer discount (if offered) and then settling after a month or so...
With rates where they are it makes far more sense, <60% LTV mortgages can be had at rates that will be far less than those offered by any garage, you then able to do whatever you want with the car following purchase.
may be something to look at?
ETA - even if it means taking the dealer finance to get the manufacturer discount (if offered) and then settling after a month or so...
Steve Evil said:
You mention nearly-new, but you will get better interest rates if you go for a new car. We looked at a nearly-new M135i recently, under a year old and up for around 24k, but it worked out cheaper for us to buy a new one from them, as the rates were lower and they had more incentive to sell the newer car, manufacturer deposits, that sort of thing.
Yes, as I mentioned in the o/p, that appeared to be the case with Jaguar for some models. I thought I'd misunderstood something, but it seems to be right.kiethton said:
Other option, if you've nearly paid off the mortgage would be to draw down the required equity from there....
With rates where they are it makes far more sense, <60% LTV mortgages can be had at rates that will be far less than those offered by any garage, you then able to do whatever you want with the car following purchase.
may be something to look at?
ETA - even if it means taking the dealer finance to get the manufacturer discount (if offered) and then settling after a month or so...
I'd forgotten that option, and in fact it's something that our friendly building society manager suggested we did many years ago (I wonder why?).With rates where they are it makes far more sense, <60% LTV mortgages can be had at rates that will be far less than those offered by any garage, you then able to do whatever you want with the car following purchase.
may be something to look at?
ETA - even if it means taking the dealer finance to get the manufacturer discount (if offered) and then settling after a month or so...
Ours was a self-build mortgage, where you draw down set amounts of money in blocks, up to a percentage of the then current value of the house as it's being built. There is no point at which more money can't be requested, even though the house was completed 10 years ago. I'll have to check on interest rates...
I guess the downside is that the mortgage wouldn't then get paid off (which is one of the reasons I wanted to treat myself in the first place!).
Good idea worth further investigation though.
You only get 0% on new cars because the margin on a new car is substantially more than on a used car, so essentially you're paying a higher sticker price to cover the loss being made on the finance. In my opinion 0% apr offers on new cars simply amount to smoke and mirrors.
You're best off finding the car you want at the price you want. Take dealer finance if you're happy with the rate or use a bank loan if you can get a better rate from them. Don't get lured into a more expensive car simply by having the 0% carrot dangled in your face, especially considering that depreciation will hit a brand new car harder than nearly new.
Whenever I have a customer with a car they bought on 0% and they're looking to change cars they are ALWAYS in a significant amount of negative equity.
The other thing to remember, a lot of people still believe 'cash is king' when negotiating. I can't state strongly enough how untrue this is. I, like all people who sell cars, make money by arranging loans. There is absolutely no benefit to being a cash customer (no matter what James Corden may say in his adverts!). So if you want to negotiate a deal make it clear that you will be using their finance and not settling it early (we get money taken back off us if finance is settled early). Then, if the dealer is foolish enough to do a deal entirely reliant on finance commission to be profitable you will have got an excellent deal. You can always settle the finance early and should be able to do so with no penalty.
You're best off finding the car you want at the price you want. Take dealer finance if you're happy with the rate or use a bank loan if you can get a better rate from them. Don't get lured into a more expensive car simply by having the 0% carrot dangled in your face, especially considering that depreciation will hit a brand new car harder than nearly new.
Whenever I have a customer with a car they bought on 0% and they're looking to change cars they are ALWAYS in a significant amount of negative equity.
The other thing to remember, a lot of people still believe 'cash is king' when negotiating. I can't state strongly enough how untrue this is. I, like all people who sell cars, make money by arranging loans. There is absolutely no benefit to being a cash customer (no matter what James Corden may say in his adverts!). So if you want to negotiate a deal make it clear that you will be using their finance and not settling it early (we get money taken back off us if finance is settled early). Then, if the dealer is foolish enough to do a deal entirely reliant on finance commission to be profitable you will have got an excellent deal. You can always settle the finance early and should be able to do so with no penalty.
tomglibbery said:
There is absolutely no benefit to being a cash customer (no matter what James Corden may say in his adverts!). So if you want to negotiate a deal make it clear that you will be using their finance and not settling it early (we get money taken back off us if finance is settled early). Then, if the dealer is foolish enough to do a deal entirely reliant on finance commission to be profitable you will have got an excellent deal. You can always settle the finance early and should be able to do so with no penalty.
100% agree, we've always bought our car with cash, but this time round have gone down the finance route - simply because you get a better deal. We than settle the finance with-in about 1-2 months of starting the payment plan. I think finance companies are catching up to this, one dealer even told me if I settled early the manufacture would chase me up to claim back their 'contribution'.......Which turns out to be total rubbish, since the law on early payment penalties are quite clear, and I've yet to see any contract where it states the manufacture/dealer has a right to 'retract' any 'contributions' if you settle early. BUT buy through cash/finance/lease, your still paying for deprecation - It's just with lease hire, you don't have to commit a large lump sum up front, but the downside is you have no option due to take up another lease deal in 24-46 months time, which over 5 years + will work out more expensive than just buying up front and keeping the car for 5 years+.
For our next round of car buying, I think we'll go back to buying used (up-to 3 years old).
Edited by gangzoom on Wednesday 8th July 21:04
So, taking all that into account (and assuming I wouldn't be paying cash for an outright purchase) - what's the deal with, say, 3 year old cars, where I guess the bulk of the depreciation has gone? For example, this car would do me just fine:
http://used.jaguar.co.uk/search#/details/2619117
TBH potential repair costs (as opposed to running costs) scare me more than what I'd potentially be paying in interest to drive the car...extended warranties etc... at what point do they become more cost than they're worth?
I recently spent over £1500 in parts for my '52 BMW 330i M-Sport, which I accept becasue it's a 100,000 mile car. How do you rationalise extended warranty benefits/cost vs car value for an older car such as the one I just linked?
All comments are extremely interesting by the way - thanks again.
http://used.jaguar.co.uk/search#/details/2619117
TBH potential repair costs (as opposed to running costs) scare me more than what I'd potentially be paying in interest to drive the car...extended warranties etc... at what point do they become more cost than they're worth?
I recently spent over £1500 in parts for my '52 BMW 330i M-Sport, which I accept becasue it's a 100,000 mile car. How do you rationalise extended warranty benefits/cost vs car value for an older car such as the one I just linked?
All comments are extremely interesting by the way - thanks again.
Be aware that, for given a loan amount and a given interest rate, a PCP is more expensive than HP in total (the monthly payments may be lower but the total of deposit, payments and final payment will be higher).
This is because you borrow more money for longer - the balloon payment or GFV is not paid off as you go (as it is with straight HP) but sits there on the balance sheet accruing interest.
Some of the above posts imply that you don't pay interest on the GFV, but trust me you do!!
However, it is often the case on a new car that a manufacturer deposit contribution can offset this to some extent and it CAN work out to be a cheap way to buy a new car...
This is because you borrow more money for longer - the balloon payment or GFV is not paid off as you go (as it is with straight HP) but sits there on the balance sheet accruing interest.
Some of the above posts imply that you don't pay interest on the GFV, but trust me you do!!
However, it is often the case on a new car that a manufacturer deposit contribution can offset this to some extent and it CAN work out to be a cheap way to buy a new car...
Having recently sold my much loved BMW 335i I can understand your concerns about reliability. Before I got the 335i all my previous cars were 3 year old+ Nissan/Hondas, so I simply didn't understand why anyone bothered with an extended warranty....4 years of BMW ownership, and about £2.5k spent on repairs keeping the thing in the road I know better than to buy a BMW without a warranty 
We looked at a XF for the wife but the reviews seems to suggest Jags are even less reliable than BMWs, hence we ended up going back to a Japnese car, and now have a Nissan and Lexus on the driveway....No more worries about extended warranties
So I think you don't have much choice but to get a warranty with a used Jag, but any warranty costs will be much less than deprecation on a brand new car. However you wouldn't get any good finance / PCP deals on used cars, so in that situation cash (or prearranged loan) may still be king. Alternative is to get handy with a spanner and do anymore your self, but if Jags are anything like BMW, it's the parts that's often expensive...Labour you can always get around by using a cheap local garage.
We looked at a XF for the wife but the reviews seems to suggest Jags are even less reliable than BMWs, hence we ended up going back to a Japnese car, and now have a Nissan and Lexus on the driveway....No more worries about extended warranties
So I think you don't have much choice but to get a warranty with a used Jag, but any warranty costs will be much less than deprecation on a brand new car. However you wouldn't get any good finance / PCP deals on used cars, so in that situation cash (or prearranged loan) may still be king. Alternative is to get handy with a spanner and do anymore your self, but if Jags are anything like BMW, it's the parts that's often expensive...Labour you can always get around by using a cheap local garage.
Edited by gangzoom on Thursday 9th July 07:00
toon10 said:
The only other thing I would say is that I tend to get a normal loan rather than car finance. I've not seen many car finance deals that work out cheaper than going to a general loan provider.
Halifax now do car finance that is actually cheaper than their Clarity loan. For example, to borrow £10,000 over 5 years would only cost £900 in interest! They also do PCP for cars up to 7 years old at the end of the agreement. Definitely something I'll be looking into in the futuretomglibbery said:
timbo999 said:
Some of the above posts imply that you don't pay interest on the GFV, but trust me you do!!
You don't. It is entirely separate the the finance agreement. Source? I sell cars for a living and arrange finance every day.You are suggesting you just take out a loan for the depreciation on the car?
That sounds like utter b
ks to me.My understanding is the following:
The interest part of a £50k car is the SAME in every instance (since you are borrowing £50k each time!)
If the car has high residuals, your PCP payments will be lower since the depreciation part of the PCP payment will be lower.
e.g. GFV of £32k after 3 years means a monthly depreciation payment of £500 (500*12*3 = £18k).
But GFV of just £23k after 3 years means monthly depreciation payment of £750.
THE INTEREST YOU PAY IS ON TOP AND IS ON THE WHOLE £50k - NOTHING TO DO WITH THE GFV.
You don't just pay interest on the depreciation - you pay it on the £50k you are borrowing.
Unless I am going mad.
tomglibbery said:
timbo999 said:
Some of the above posts imply that you don't pay interest on the GFV, but trust me you do!!
You don't. It is entirely separate the the finance agreement. Source? I sell cars for a living and arrange finance every day.If you are informing customers that there is no interest element on the deferred amount (GFV), then you are misleading them.
Mastiff said:
tomglibbery said:
timbo999 said:
Some of the above posts imply that you don't pay interest on the GFV, but trust me you do!!
You don't. It is entirely separate the the finance agreement. Source? I sell cars for a living and arrange finance every day.If you are informing customers that there is no interest element on the deferred amount (GFV), then you are misleading them.
Nah. I refuse to believe it.
You can go out and buy a £1m LaFerrari on PCP which since it is so rare will only depreciate say £50k over a couple of years.
So your total cost to borrow the £1m price is just £50k/2.
There is no interest to pay on the £950k GFV.
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