Take out finance or save up and just buy outright
Discussion
Countdown said:
Devil2575 said:
Cash allows people to buy cars they cannot afford to run.
At least they can afford to buy them outright in the first place which puts them in a better situation than those using credit.Redundancy, unexpected bills, car explodes in a ball of fire...... in every situation you will be safer (in financial terms) if you'd saved up / bought outright than if you use credit.
- person A sells the car to get back whatever value it has, plus whatever has been resaved from not repaying a monthly finance amount
- person B sells the car and pays off what is owed on finance and keeps the balance
For a given resale value (or loss value, if we're talking catastrophe), the outcome is only going to differ by the interest paid and cancellation terms, less whatever interest accrued on the saved amount.
The advantage of cash (for those people not great at maths) is transparency. If we imagine a world without the concept of credit, it is clearer what can be afforded, because either the money is in the purchaser's possession or it isn't. The problem is people with no savings (and crap at maths) who think the finance repayments are affordable - if they're not saving already, then they're not managing income against outgoings well already, and a further monthly payment won't help, so they don't have a security fund if things go tits up.
Savings in the bank and taking out finance isn't bad, but it is unlikely to be cheaper (compare AER to APR, tells you all you need to know).
Devil2575 said:
No I never said it was free money, just that it isn't as simple as borrowing = bad, paying with cash = good. How many companies invest using finance rather than cash?
I completely agree, it's not as simple as that, and many posters on PH just think in those polarising terms.However, I don't think businesses investing money is a good parallel; a business is an investment as it uses the cash to facilitate revenue-generating activities. Again, it's not as simple as borrowing = good, cash = bad or vice versa. Cash flow is all important. A business could finance or be cash rich, but if it doesn't do anything with the the profitability isn't going to be good. A cash rich company that pays for a lot of e.g. sales training for staff and time-saving technology is going to generate more profit in the longer term than the cash rich company that keeps its reserves and carries on with inefficient business practices.
Say a £30k brand new car depreciates by £5k per annum.
With finance, Sarah the hairdresser or Daz the factory worker on £25k a year can expose themselves to £5k per year of depreciation as they can afford the £200 per month payment.
Without finance, they would have bought a £3 or 5k car car and had very little exposure to depreciation they can't really afford.
Numbers just for example.
With finance, Sarah the hairdresser or Daz the factory worker on £25k a year can expose themselves to £5k per year of depreciation as they can afford the £200 per month payment.
Without finance, they would have bought a £3 or 5k car car and had very little exposure to depreciation they can't really afford.
Numbers just for example.
xRIEx said:
Not really. Assuming two people in the same situation (e.g. £10k in the bank), one pays for a £10k car in cash, the other keeps it in the bank and finances a £10k car, if both are made redundant then they're likely both in the same situation:
- person A sells the car to get back whatever value it has, plus whatever has been resaved from not repaying a monthly finance amount
- person B sells the car and pays off what is owed on finance and keeps the balance
I was referring to somebody using finance when they didn't have the money in the bank. I appreciate that potentially it can make more financial sense to invest money and use credit but I would be surprised if you couldnt get a better discount for offering cash.- person A sells the car to get back whatever value it has, plus whatever has been resaved from not repaying a monthly finance amount
- person B sells the car and pays off what is owed on finance and keeps the balance
Countdown said:
xRIEx said:
Not really. Assuming two people in the same situation (e.g. £10k in the bank), one pays for a £10k car in cash, the other keeps it in the bank and finances a £10k car, if both are made redundant then they're likely both in the same situation:
- person A sells the car to get back whatever value it has, plus whatever has been resaved from not repaying a monthly finance amount
- person B sells the car and pays off what is owed on finance and keeps the balance
I was referring to somebody using finance when they didn't have the money in the bank. I appreciate that potentially it can make more financial sense to invest money and use credit but I would be surprised if you couldnt get a better discount for offering cash.- person A sells the car to get back whatever value it has, plus whatever has been resaved from not repaying a monthly finance amount
- person B sells the car and pays off what is owed on finance and keeps the balance
Not read the whole thread but my main question would be why would you want to buy a 1.2 Fabia if living 1 mile from work and not using it much.
Walk to work, spend half what you were planning to on something interesting that's not going to depreciate massively and have a nice weekend car.
I got into the finance cycle, changing cars pretty much every year extending for another year to keep payments the same. Stopped when I sold my car and bought a much older one and haven't financed a car since. Once you stop paying that a month it becomes very appealing not to ever start again.
Walk to work, spend half what you were planning to on something interesting that's not going to depreciate massively and have a nice weekend car.
I got into the finance cycle, changing cars pretty much every year extending for another year to keep payments the same. Stopped when I sold my car and bought a much older one and haven't financed a car since. Once you stop paying that a month it becomes very appealing not to ever start again.
Save up and buy would always be the sensible option. However some of the high rollers here probably aren't able to appreciate how difficult it can be to save money at the lower end of the scale & how finance can screw you over if you're not earning a lot of money. If I could share my experiences it might open some eyes and put some people off taking out credit. This wasn't necessarily related to purchasing a car but I think there are similarities.
On lower salaries, with everything getting more expensive and wages staying the same, it's becoming increasingly difficult to save money. Even saving £50 a month would cripple some people. It becomes a choice between paying for petrol to get to work to earn some money or buying certain foods. Forget luxury items, they're not even an option.
I've been in this situation. Earning approx £1200 a month after tax (£17.5k a year gross salary), fixed outgoings of around £900 - rent, council tax, electricity, gas, etc, leaving around £300 for petrol, food, clothes, any unexpected bills, car tax/maintenance, etc etc. The problem is you never feel like you have £300 left to pay for all these things because you had an unexpected bill a few months back.
You can't get a credit card to pay for it due to already having too much credit to pay back (hence - poor credit rating) so you have to borrow from friends/family and pay them back. Meanwhile you're barely able to pay for your transport to work and eat beans on toast 6 days a week. And so the cycle continues.
Then if your car breaks down, you're screwed. Nobody wants to lend you money again. So you dip into your overdraft, again. The bank charges you fees and you're constantly towing the line between black & red. It's almost impossible to break out of without a payrise, even if you manage to reduce your outgoings a bit by cancelling the gym, phone contract and any other unnecessary expenses. You spend every evening sitting in your house, trying to not use excess electricity or spend any money on.. anything. Unfortunately your company is also struggling from 'the recession' and has a freeze on payrises. You're lucky to even have a job at this point.
Now you've reduced your outgoings to the absolute minimum, you have around £380 to last you 4 weeks and pay for everything. But the council recently decided that your council tax goes up by £25 a month, the DVLA have increased your car tax by £10, petrol is always going up, food is more expensive, so you're back where you started despite thinking you have a bit more spare cash. You're still wearing clothes from several years ago because you can't afford to buy new ones.
Then your best mate invites you to his wedding. You can't miss that. As you haven't spent money on clothes for ages, you haven't got a suit to wear. So you have to rent or buy a suit - £60 gone. You have to travel to Dorset for some reason, even though you lift shared it cost you £50. That'll be another few weeks of eating beans on toast. skipping breakfast and trying to save money by turning lights off and using a duvet instead of the heating, just because you tried to maintain a social life of some sort and be there for your friend.
There's nobody to blame but yourself. You got into debt by wanting nice things. It was only £200 a month! Then £33 a month for that thing from the catalogue, £40 a month for that nice phone, etc. Reasonably affordable when you did all the sums. You'd have about £3-400 left over. More than enough to cover everything. You didn't think your situation would change that much over the 3 year term for the loan but it did.
Now you're buggered and left with an unreliable old car that is costing you more than you can afford to keep on the road. Without it you can't get to work. You can't buy a new car because you haven't any savings to use. Even if you swap (px) it for another car, you'll end up with another unreliable, old car. You can't get any credit, rightly so. You can't move nearer to work as your rent would be more expensive. You can't seem to get a better job as the market is so saturated and everyone else is looking for a higher paying job too. Your company has no overtime. Getting a 2nd job would perhaps be an option but you already work hard and see nothing for it. Plus you get taxed so much that it hardly seems worth it to do another 16hours a week to barely get £100 a month. You're in a cycle of depression anyway and just want to go home and sleep, only to live another day of hell. And so it continues..
So, don't get finance/loans unless you KNOW you will be ok in a few years time. I've been there and it's taken me a long time to get close to being comfortable money wise.
On lower salaries, with everything getting more expensive and wages staying the same, it's becoming increasingly difficult to save money. Even saving £50 a month would cripple some people. It becomes a choice between paying for petrol to get to work to earn some money or buying certain foods. Forget luxury items, they're not even an option.
I've been in this situation. Earning approx £1200 a month after tax (£17.5k a year gross salary), fixed outgoings of around £900 - rent, council tax, electricity, gas, etc, leaving around £300 for petrol, food, clothes, any unexpected bills, car tax/maintenance, etc etc. The problem is you never feel like you have £300 left to pay for all these things because you had an unexpected bill a few months back.
You can't get a credit card to pay for it due to already having too much credit to pay back (hence - poor credit rating) so you have to borrow from friends/family and pay them back. Meanwhile you're barely able to pay for your transport to work and eat beans on toast 6 days a week. And so the cycle continues.
Then if your car breaks down, you're screwed. Nobody wants to lend you money again. So you dip into your overdraft, again. The bank charges you fees and you're constantly towing the line between black & red. It's almost impossible to break out of without a payrise, even if you manage to reduce your outgoings a bit by cancelling the gym, phone contract and any other unnecessary expenses. You spend every evening sitting in your house, trying to not use excess electricity or spend any money on.. anything. Unfortunately your company is also struggling from 'the recession' and has a freeze on payrises. You're lucky to even have a job at this point.
Now you've reduced your outgoings to the absolute minimum, you have around £380 to last you 4 weeks and pay for everything. But the council recently decided that your council tax goes up by £25 a month, the DVLA have increased your car tax by £10, petrol is always going up, food is more expensive, so you're back where you started despite thinking you have a bit more spare cash. You're still wearing clothes from several years ago because you can't afford to buy new ones.
Then your best mate invites you to his wedding. You can't miss that. As you haven't spent money on clothes for ages, you haven't got a suit to wear. So you have to rent or buy a suit - £60 gone. You have to travel to Dorset for some reason, even though you lift shared it cost you £50. That'll be another few weeks of eating beans on toast. skipping breakfast and trying to save money by turning lights off and using a duvet instead of the heating, just because you tried to maintain a social life of some sort and be there for your friend.
There's nobody to blame but yourself. You got into debt by wanting nice things. It was only £200 a month! Then £33 a month for that thing from the catalogue, £40 a month for that nice phone, etc. Reasonably affordable when you did all the sums. You'd have about £3-400 left over. More than enough to cover everything. You didn't think your situation would change that much over the 3 year term for the loan but it did.
Now you're buggered and left with an unreliable old car that is costing you more than you can afford to keep on the road. Without it you can't get to work. You can't buy a new car because you haven't any savings to use. Even if you swap (px) it for another car, you'll end up with another unreliable, old car. You can't get any credit, rightly so. You can't move nearer to work as your rent would be more expensive. You can't seem to get a better job as the market is so saturated and everyone else is looking for a higher paying job too. Your company has no overtime. Getting a 2nd job would perhaps be an option but you already work hard and see nothing for it. Plus you get taxed so much that it hardly seems worth it to do another 16hours a week to barely get £100 a month. You're in a cycle of depression anyway and just want to go home and sleep, only to live another day of hell. And so it continues..
So, don't get finance/loans unless you KNOW you will be ok in a few years time. I've been there and it's taken me a long time to get close to being comfortable money wise.
jdw1234 said:
Say a £30k brand new car depreciates by £5k per annum.
With finance, Sarah the hairdresser or Daz the factory worker on £25k a year can expose themselves to £5k per year of depreciation as they can afford the £200 per month payment.
Without finance, they would have bought a £3 or 5k car car and had very little exposure to depreciation they can't really afford.
Numbers just for example.
Your numbers don't work - £200 per month is 2400 per year and is enough to lease (not buy) a 15k car. With finance, Sarah the hairdresser or Daz the factory worker on £25k a year can expose themselves to £5k per year of depreciation as they can afford the £200 per month payment.
Without finance, they would have bought a £3 or 5k car car and had very little exposure to depreciation they can't really afford.
Numbers just for example.
For a 30k car on PCP, something like this might be more realistic;
Model Representative Example
BMW 318d Sport Saloon
Monthly payments of £293.96
Term of agreement 48 MONTHS
On the road cash price* £28,675.00
Annual mileage 10000
Customer deposit £3,999.00
Dealer deposit contribution £1,969.90
BMW UK deposit contribution £2,500.00
Total deposit £8,468.90
Amount of credit £20,206.10
Credit arrangement fee** £0.00
Credit completion fee** £0.00
Option to purchase fee^ £10.00
Optional final payment^ £9,238.37
Excess mileage charge 5.25 pence per mile
Total amount payable £31,533.39
Rate of interest 4.89% Fixed
APR 4.9% APR Representative
So they are looking at four grand down, £300 a month for four years and then either hand it back or find another 9 grand. They will need to pay £14110 over the four years and, assuming that they wish to repeat the process and hand it back, they will need to save another four grand. So £18,000 If they had instead spent their four grand on something that will do for four years, they would be likely to have 18-20k available for their next car. Rinse and repeat, and next time their budget will be closer to that 30k car that you don't think they can afford.
Replying to acehood, you're absolutely correct. If your disposable income constitutes such a low percentage of your whole income and such a small amount then there is a real danger that some months it won't be that disposable and as such financing anything is not a good idea.
My only challenge about your post is taxation. Earning ~£20k a 2nd job wouldn't be taxed silly. Not that anyone should have work 2 jobs just to exist of course.
My only challenge about your post is taxation. Earning ~£20k a 2nd job wouldn't be taxed silly. Not that anyone should have work 2 jobs just to exist of course.
Countdown said:
Devil2575 said:
Cash allows people to buy cars they cannot afford to run.
At least they can afford to buy them outright in the first place which puts them in a better situation than those using credit.Redundancy, unexpected bills, car explodes in a ball of fire...... in every situation you will be safer (in financial terms) if you'd saved up / bought outright than if you use credit.
Lets be honest, if you're made redundant chances are you'll have another job in three months, so all you've to do is pay a couple of payments - from your savings which you havent got tied up in a car.
Whereas if you've bought your car with cash and have no savings then you could be forced to sell the car to raise cash.
Unless of course your making the wild assumption that someone with a car on finance doesnt have ANY savings?
xRIEx said:
Countdown said:
Devil2575 said:
Cash allows people to buy cars they cannot afford to run.
At least they can afford to buy them outright in the first place which puts them in a better situation than those using credit.Redundancy, unexpected bills, car explodes in a ball of fire...... in every situation you will be safer (in financial terms) if you'd saved up / bought outright than if you use credit.
- person A sells the car to get back whatever value it has, plus whatever has been resaved from not repaying a monthly finance amount
- person B sells the car and pays off what is owed on finance and keeps the balance
xRIEx said:
For a given resale value (or loss value, if we're talking catastrophe), the outcome is only going to differ by the interest paid and cancellation terms, less whatever interest accrued on the saved amount.
The advantage of cash (for those people not great at maths) is transparency. If we imagine a world without the concept of credit, it is clearer what can be afforded, because either the money is in the purchaser's possession or it isn't. The problem is people with no savings (and crap at maths) who think the finance repayments are affordable - if they're not saving already, then they're not managing income against outgoings well already, and a further monthly payment won't help, so they don't have a security fund if things go tits up.
Savings in the bank and taking out finance isn't bad, but it is unlikely to be cheaper (compare AER to APR, tells you all you need to know).
I think we're speaking for a very small minority of people who are dumb enough - using cash or finance - to buy a car they cant afford.The advantage of cash (for those people not great at maths) is transparency. If we imagine a world without the concept of credit, it is clearer what can be afforded, because either the money is in the purchaser's possession or it isn't. The problem is people with no savings (and crap at maths) who think the finance repayments are affordable - if they're not saving already, then they're not managing income against outgoings well already, and a further monthly payment won't help, so they don't have a security fund if things go tits up.
Savings in the bank and taking out finance isn't bad, but it is unlikely to be cheaper (compare AER to APR, tells you all you need to know).
That of course is a very different scenario from people who buy a car on finance and who are managing their income against outgoings.
daemon said:
The person with a car on finance has another option - make the monthly payments until such times as they get another job.
Yes, to clarify, I was working on the premise that the car is disposable and the equity is required for e.g. mortgage payments, other costs that take priority.daemon said:
I think we're speaking for a very small minority of people who are dumb enough - using cash or finance - to buy a car they cant afford.
That of course is a very different scenario from people who buy a car on finance and who are managing their income against outgoings.
Yes true, it was more about highlighting the danger in the scenario rather than commenting on its prevalence.That of course is a very different scenario from people who buy a car on finance and who are managing their income against outgoings.
jdw1234 said:
Say a £30k brand new car depreciates by £5k per annum.
With finance, Sarah the hairdresser or Daz the factory worker on £25k a year can expose themselves to £5k per year of depreciation as they can afford the £200 per month payment.
Without finance, they would have bought a £3 or 5k car car and had very little exposure to depreciation they can't really afford.
Numbers just for example.
If you're financing a car on a PCP deal, then you are removing yourself totally from the exposure to depreciation.With finance, Sarah the hairdresser or Daz the factory worker on £25k a year can expose themselves to £5k per year of depreciation as they can afford the £200 per month payment.
Without finance, they would have bought a £3 or 5k car car and had very little exposure to depreciation they can't really afford.
Numbers just for example.
Simply pay £200 a month for three years then hand the car back - if it depreciates above or below whats expected, it doesnt matter.
Countdown said:
xRIEx said:
Not really. Assuming two people in the same situation (e.g. £10k in the bank), one pays for a £10k car in cash, the other keeps it in the bank and finances a £10k car, if both are made redundant then they're likely both in the same situation:
- person A sells the car to get back whatever value it has, plus whatever has been resaved from not repaying a monthly finance amount
- person B sells the car and pays off what is owed on finance and keeps the balance
I was referring to somebody using finance when they didn't have the money in the bank. I appreciate that potentially it can make more financial sense to invest money and use credit but I would be surprised if you couldnt get a better discount for offering cash.- person A sells the car to get back whatever value it has, plus whatever has been resaved from not repaying a monthly finance amount
- person B sells the car and pays off what is owed on finance and keeps the balance
Thus, you've less chance of getting discount with a cash purchase.
daemon said:
If you're financing a car on a PCP deal, then you are removing yourself totally from the exposure to depreciation.
Simply pay £200 a month for three years then hand the car back - if it depreciates above or below whats expected, it doesnt matter.
I think that description is one of the dangers - it doesn't remove exposure to depreciation, it fixes the level of depreciation; so often I hear or read "PCP/leasing means I avoid depreciation" - no, all you're paying is the depreciation (if you don't/can't keep the car), it's just a known amount rather than unknown.Simply pay £200 a month for three years then hand the car back - if it depreciates above or below whats expected, it doesnt matter.
Thinking in terms of total cost of ownership would be more useful (one calculation where PCP/leasing allows far less uncertainty).
Affordability.
If you don't have a chance in hell of saving £10k but can 'afford' £300 PCM on car payments, you probably shouldn't order that car.
The next car for me will probably be an LCI 530d. £10k.
I have that in cash but have no intention of spending it on a car.
I take out a £10k loan over 3 years at 4%. That to me is affordable.
Would I finance a car at £500 PCM when that was 25% of my net?
Hell no.
If you don't have a chance in hell of saving £10k but can 'afford' £300 PCM on car payments, you probably shouldn't order that car.
The next car for me will probably be an LCI 530d. £10k.
I have that in cash but have no intention of spending it on a car.
I take out a £10k loan over 3 years at 4%. That to me is affordable.
Would I finance a car at £500 PCM when that was 25% of my net?
Hell no.
daemon said:
jdw1234 said:
Say a £30k brand new car depreciates by £5k per annum.
With finance, Sarah the hairdresser or Daz the factory worker on £25k a year can expose themselves to £5k per year of depreciation as they can afford the £200 per month payment.
Without finance, they would have bought a £3 or 5k car car and had very little exposure to depreciation they can't really afford.
Numbers just for example.
If you're financing a car on a PCP deal, then you are removing yourself totally from the exposure to depreciation.With finance, Sarah the hairdresser or Daz the factory worker on £25k a year can expose themselves to £5k per year of depreciation as they can afford the £200 per month payment.
Without finance, they would have bought a £3 or 5k car car and had very little exposure to depreciation they can't really afford.
Numbers just for example.
Simply pay £200 a month for three years then hand the car back - if it depreciates above or below whats expected, it doesnt matter.
I.e. without finance, someone on a low salary would not be exposed to the depreciation of a brand new £30k car.
Tonberry said:
Affordability.
If you don't have a chance in hell of saving £10k but can 'afford' £300 PCM on car payments, you probably shouldn't order that car.
The next car for me will probably be an LCI 530d. £10k.
I have that in cash but have no intention of spending it on a car.
I take out a £10k loan over 3 years at 4%. That to me is affordable.
Would I finance a car at £500 PCM when that was 25% of my net?
Hell no.
Well put. Thats what I am getting at.If you don't have a chance in hell of saving £10k but can 'afford' £300 PCM on car payments, you probably shouldn't order that car.
The next car for me will probably be an LCI 530d. £10k.
I have that in cash but have no intention of spending it on a car.
I take out a £10k loan over 3 years at 4%. That to me is affordable.
Would I finance a car at £500 PCM when that was 25% of my net?
Hell no.
jdw1234 said:
Say a £30k brand new car depreciates by £5k per annum.
With finance, Sarah the hairdresser or Daz the factory worker on £25k a year can expose themselves to £5k per year of depreciation as they can afford the £200 per month payment.
Without finance, they would have bought a £3 or 5k car car and had very little exposure to depreciation they can't really afford.
Numbers just for example.
Or they could have saved up their cash for a number of years instead and exposed themselves to the same risk. Also how do you know they can't afford 5k a year depreciation? Unless you know their personal circumstances then you can't really comment. Also would anyone lend £30k to someone on 25k a year? How much finance a lender is willing to give someone on £25k a year is a good question. With a take home of around £1600 a month they are not likely to pass the affordability test on a loan with repayments of close to £500 a month if taken over 5 years, unless they live with their parents. With finance, Sarah the hairdresser or Daz the factory worker on £25k a year can expose themselves to £5k per year of depreciation as they can afford the £200 per month payment.
Without finance, they would have bought a £3 or 5k car car and had very little exposure to depreciation they can't really afford.
Numbers just for example.
It's also worth remembering that if Sarah and Daz didn't have access to finance to buy cars like this then the car industry would be a lot smaller, the flash cars that the PH heros can buy with cash would be more expensive, due to lower sales volumes, and there would be less choice.
The car industry like so much of today's consumer society is built on consumers having access to credit.
For the large majority of people this isn't an issue and it works well. My father spent 40 or so years of his life using finance to buy his cars. It's only since he retired that he's been in a position to pay cash. He's never overstretched himself, never defaulted and never bought a flash car. By some peoples reckoning he probably shouldn't have been driving because he couldn't really afford a car, but his bank manager (yes in the old days he used to go and talk to his bank manager) would have disagreed with you.
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