Understanding Car Finance??
Discussion
Evening,
So I won’t beat around the bush, for some reason I can’t get m my head around the different types of car finance, different interest rates, balloons, terms etc.
During my car buying history I have never ‘owned’ a car, they have been bought using a loan from a High Street lender and sold before term is up, loan settled and onto the next one. I have been lucky that nearly all of my purchases when sold have generated enough to settle the loan.
Some might wince at this but for various reasons it’s just how it’s played out.
So fast forward to 2020 and I am looking to make another purchase but this time I need to make it a bit more ‘informed’ and ensure it’s the best way of doing it.
I am looking to buy something circa £25k and ideally would like a term of 3 years (I will be 40 in 3 years) so would be nice to tie it in. I watch all these YouTune channels where they are chopping and changing cars all the time, in and out of finance deals and pcp’s. The draw of the High Street loan for me was always the flexibility it offered, if I needed out then I could sell the car pay off the loan and job done.
Now time has moved on a little and I would like to treat myself, I am wondering if I can achieve something better by financing on a pcp or similar??? Would really like to hear people’s advice or experiences on this, clearly don’t want to stitch myself up; on that note I have a secure job as does my wife, we own our own home with about £120k equity in it and life is pretty settled, I don’t drink/smoke and have no other hobbies or pursuits other than cars.
What do people think, should I be looking to the High Street again or should I be using my 10% and entering into some sort of regulated PCP?
Si
So I won’t beat around the bush, for some reason I can’t get m my head around the different types of car finance, different interest rates, balloons, terms etc.
During my car buying history I have never ‘owned’ a car, they have been bought using a loan from a High Street lender and sold before term is up, loan settled and onto the next one. I have been lucky that nearly all of my purchases when sold have generated enough to settle the loan.
Some might wince at this but for various reasons it’s just how it’s played out.
So fast forward to 2020 and I am looking to make another purchase but this time I need to make it a bit more ‘informed’ and ensure it’s the best way of doing it.
I am looking to buy something circa £25k and ideally would like a term of 3 years (I will be 40 in 3 years) so would be nice to tie it in. I watch all these YouTune channels where they are chopping and changing cars all the time, in and out of finance deals and pcp’s. The draw of the High Street loan for me was always the flexibility it offered, if I needed out then I could sell the car pay off the loan and job done.
Now time has moved on a little and I would like to treat myself, I am wondering if I can achieve something better by financing on a pcp or similar??? Would really like to hear people’s advice or experiences on this, clearly don’t want to stitch myself up; on that note I have a secure job as does my wife, we own our own home with about £120k equity in it and life is pretty settled, I don’t drink/smoke and have no other hobbies or pursuits other than cars.
What do people think, should I be looking to the High Street again or should I be using my 10% and entering into some sort of regulated PCP?
Si
SiT said:
During my car buying history I have never ‘owned’ a car, they have been bought using a loan from a High Street lender and sold before term is up, loan settled and onto the next one. I have been lucky that nearly all of my purchases when sold have generated enough to settle the loan.
But you're forgetting the chunk you pay every month to rent it. They're making money out of you; if they didn't they wouldn't be doing it.I buy my cars for cash. Possibly because for much of the time I was self-employed and never knew when the next cheque was coming in, so if it didn't I had an asset I could sell. Or because I can smell a middleman and they need to be paid as well. You have rent, I have depreciation. Do the maths and see which is worse!
In very simple terms, if you pump in a reasonable deposit then you should avoid negative equity going forward however you finance the rest.
Personal loan gives you max flexibility and no ties to the vehicle.
Finance through the dealer can protect you from excessive depreciation in extreme cases, the newer the purchase the more this may help. You normally don't have to put in a big deposit either so can be nicer on your cash flow.
With any agreement you can do the simple maths of, adding the deposit to the monthly payments and working out a total cost of ownership (some guesstimating of future values may be required) that's the monetary side covered then you have the flexibility, depreciation risk etc to consider on top
Personal loan gives you max flexibility and no ties to the vehicle.
Finance through the dealer can protect you from excessive depreciation in extreme cases, the newer the purchase the more this may help. You normally don't have to put in a big deposit either so can be nicer on your cash flow.
With any agreement you can do the simple maths of, adding the deposit to the monthly payments and working out a total cost of ownership (some guesstimating of future values may be required) that's the monetary side covered then you have the flexibility, depreciation risk etc to consider on top
I suppose I was considering other options of financing another purchase really, when I started out buying cars (20 years ago) PCP and suchlike was never really a thing.
Banks were happy to lend, it worked for me but always limited myself to what I would borrow. Time has moved on, my salary increased and feel like I should perhaps now be in something the ‘next rung up’ if you like.
My buying has always been sub £20k and to be fair only 1 of those was over £15k so relatively ‘low end’ compared to most on PH. My circle of friends is car based, we enjoy drives out, shows, trips etc. so I feel at my point in life I should be able to afford something a bit smarter.
I don’t know if there is some magic formula for how was earnings should be split amongst commitments, but I felt perhaps PCP would allow me to buy something a bit nicer than High Street lending would?
I think also looking at the current state of the world, there has never been a better demonstration of not knowing what life has in store? My father-in-law (ex bank manager) is very much a save for the future type, I on the other other hand, much to his dismay, am more of a love for the day type. I am not reckless by any stretch of the imagination and would never jeopardise what we as a family have built around us.
Just exploring I guess, trying to work out if what we see on YouTube, Readers Cars forums and suchlike is achievable without sleepless nights.
Si
Banks were happy to lend, it worked for me but always limited myself to what I would borrow. Time has moved on, my salary increased and feel like I should perhaps now be in something the ‘next rung up’ if you like.
My buying has always been sub £20k and to be fair only 1 of those was over £15k so relatively ‘low end’ compared to most on PH. My circle of friends is car based, we enjoy drives out, shows, trips etc. so I feel at my point in life I should be able to afford something a bit smarter.
I don’t know if there is some magic formula for how was earnings should be split amongst commitments, but I felt perhaps PCP would allow me to buy something a bit nicer than High Street lending would?
I think also looking at the current state of the world, there has never been a better demonstration of not knowing what life has in store? My father-in-law (ex bank manager) is very much a save for the future type, I on the other other hand, much to his dismay, am more of a love for the day type. I am not reckless by any stretch of the imagination and would never jeopardise what we as a family have built around us.
Just exploring I guess, trying to work out if what we see on YouTube, Readers Cars forums and suchlike is achievable without sleepless nights.
Si
I don't think there's a straight forward answer to this. Setting an arbitrary '£25k' number on it doesn't mean much given the different ways of financing car ownership/renting/'custodianship' or whatever pedantic term people want to call it.
For example £25k could buy you a used M4 coupe outright (maybe you choose to get a low rate loan from your bank or maybe from savings or big deposit and then monthly payments on hire purchase).
Or (I know you mentioned ideally a 3 year term, but humour me as an example) the BMW 840i lease deals that were around recently worked out at £13k (maybe even less) over 2 years. In this case you were renting a brand new £70k car at effectively £540ish a month. You would have paid out £13k over 2 years which is well below your '£25k' number to run a brand new high end car.
The M4 bought outright could depreciate to £12k in 2 years (I don't think they will) which would be the same £13k 'outflow' (assuming 0 opportunity cost on the capital or a 0% loan for the initial £25k)
How much are you willing to spend in terms of monthly payments? What kind of car are you looking for? Either:
1) Look for the best deal around for the particular car you want or
2) Decide on the cost of ownership over a period that is comfortable/acceptable to you and then see what kind of car you could get.
In your case I'd probably look at the 2nd process as you might happen across some amazingly cheap PCP/PCH deal that you otherwise wouldn't have considered.
For example £25k could buy you a used M4 coupe outright (maybe you choose to get a low rate loan from your bank or maybe from savings or big deposit and then monthly payments on hire purchase).
Or (I know you mentioned ideally a 3 year term, but humour me as an example) the BMW 840i lease deals that were around recently worked out at £13k (maybe even less) over 2 years. In this case you were renting a brand new £70k car at effectively £540ish a month. You would have paid out £13k over 2 years which is well below your '£25k' number to run a brand new high end car.
The M4 bought outright could depreciate to £12k in 2 years (I don't think they will) which would be the same £13k 'outflow' (assuming 0 opportunity cost on the capital or a 0% loan for the initial £25k)
How much are you willing to spend in terms of monthly payments? What kind of car are you looking for? Either:
1) Look for the best deal around for the particular car you want or
2) Decide on the cost of ownership over a period that is comfortable/acceptable to you and then see what kind of car you could get.
In your case I'd probably look at the 2nd process as you might happen across some amazingly cheap PCP/PCH deal that you otherwise wouldn't have considered.
In terms of monthly payment and probably interest rate yes but in terms of interest paid in total it will be the most expensive.
No matter what it is just down to doing simple sums. Do not try and compare apples with chickens. It has to be the whole picture and don't leave out things like arrangement fees or excess mileage charges.
You pays your money and you make your choice.
Perhaps worth looking at the PCP payment holiday thread as not taking contingencies in to account may have big consequences.
No matter what it is just down to doing simple sums. Do not try and compare apples with chickens. It has to be the whole picture and don't leave out things like arrangement fees or excess mileage charges.
You pays your money and you make your choice.
Perhaps worth looking at the PCP payment holiday thread as not taking contingencies in to account may have big consequences.
To be fair I don’t plan on doing anything until the current situation has passed us by; whenever that will be.
I am looking at M2, M3, M4 and Focus RS at present so my £25k will be a used car purchase as opposed to a new lease deal such as the mentioned 8 Series further up.
I need to keep the monthlies sensible, that was what appealed about a PCP deal as deferring a chunk to the end meant the monthlies were lower so could potentially get into something nicer than the monthlies would allow with a regular loan if that makes sense?
Taking money out the house to buy a car isn’t an option, we have worked hard to make our way up the ladder and take some comfort that we have built a good buffer in that respect.
The comment about the flat rate of 3% being equivalent of 6% is where I start to get confused - I am sure it’s simple but having dealt with a personal loan APR in my car buying history, introducing a different type of rare does confuse me in some respects. I guess like has already been mentioned it’s a case of adding up the numbers over the term to work out what is best.
Si
I am looking at M2, M3, M4 and Focus RS at present so my £25k will be a used car purchase as opposed to a new lease deal such as the mentioned 8 Series further up.
I need to keep the monthlies sensible, that was what appealed about a PCP deal as deferring a chunk to the end meant the monthlies were lower so could potentially get into something nicer than the monthlies would allow with a regular loan if that makes sense?
Taking money out the house to buy a car isn’t an option, we have worked hard to make our way up the ladder and take some comfort that we have built a good buffer in that respect.
The comment about the flat rate of 3% being equivalent of 6% is where I start to get confused - I am sure it’s simple but having dealt with a personal loan APR in my car buying history, introducing a different type of rare does confuse me in some respects. I guess like has already been mentioned it’s a case of adding up the numbers over the term to work out what is best.
Si
SiT said:
To be fair I don’t plan on doing anything until the current situation has passed us by; whenever that will be.
I am looking at M2, M3, M4 and Focus RS at present so my £25k will be a used car purchase as opposed to a new lease deal such as the mentioned 8 Series further up.
I need to keep the monthlies sensible, that was what appealed about a PCP deal as deferring a chunk to the end meant the monthlies were lower so could potentially get into something nicer than the monthlies would allow with a regular loan if that makes sense?
Taking money out the house to buy a car isn’t an option, we have worked hard to make our way up the ladder and take some comfort that we have built a good buffer in that respect.
The comment about the flat rate of 3% being equivalent of 6% is where I start to get confused - I am sure it’s simple but having dealt with a personal loan APR in my car buying history, introducing a different type of rare does confuse me in some respects. I guess like has already been mentioned it’s a case of adding up the numbers over the term to work out what is best.
Si
As you have noted, a PCP will have lower monthlies than a standard hire purchase/personal loan as it allows for a 'Guaranteed Future Value' which is what you'll have to pay at the end of the period to own/keep the car beyond the original period. I am looking at M2, M3, M4 and Focus RS at present so my £25k will be a used car purchase as opposed to a new lease deal such as the mentioned 8 Series further up.
I need to keep the monthlies sensible, that was what appealed about a PCP deal as deferring a chunk to the end meant the monthlies were lower so could potentially get into something nicer than the monthlies would allow with a regular loan if that makes sense?
Taking money out the house to buy a car isn’t an option, we have worked hard to make our way up the ladder and take some comfort that we have built a good buffer in that respect.
The comment about the flat rate of 3% being equivalent of 6% is where I start to get confused - I am sure it’s simple but having dealt with a personal loan APR in my car buying history, introducing a different type of rare does confuse me in some respects. I guess like has already been mentioned it’s a case of adding up the numbers over the term to work out what is best.
Si
The hire purchase/personal loan route wouldn't have a balloon to pay (because the monthlies are higher) but you'd own the car without any more to pay (the 'optional final payment' in the PCP) at the end of the term.
Do you know for certain if you'll keep whatever you choose beyond the 3 years? Or know you'll definitely change car in 3 years? - This will help decide if personal loan/hire purchase could work out better than PCP.
The reason I ask is PCPs on used cars are usually at much higher APRs than on new cars. There are scenarios where a brand new car on a PCP could work out very similar over 3 years as a used equivalent IF(and only IF) you were planning on handing it back at 3 years (ie you don't choose to pay the optional final payment) because of the extortionate APRs charged on used cars.
There are 3rd party car finance providers as well - hopefully someone else can advise if there are competitive APR rates on used car PCPs
Ok so good house buffer, suspect you have some savings are careful/sensible (perhaps not bank manager sensible but that's a high bar!) have a history of managing the bank loan route ok and are asking questions here so in conclusion you're not in anyway reckless!
So you need to consider the financial position you'll be in by each method when you'll want to sell or want to change/get bored. I'd also consider an emergency scenario where you imagine you have to sell the week after purchase.
Finance from the dealer with lower monthlies will I suspect only be lower if you're comparing to a bank loan of a shorter term? If you wanted to keep the car as a forever car it'll cost you £25k + interest one way or another, so that makes it easier to work out overall costs.
I was like you and used bank loans for my lower priced cars as I tended to buy privately which limits other forms of borrowing.
I have stayed in the sub £10k bracket for years now though, so interesting, quick but old (risky) stuff. I get the allure of quick and newer, or niche older and your budget range (say exige evora etc) but never quite done it for some reason. I think it's my perception that other than being newer/tighter/better they won't give me 'that' much more for the significant extra money.
I'm probably missing out but I feel comfortable about it and might pick up something your considering in say 4-6 years when you're thinking of moving on, despite the inherent risks of an old leggy performance car!?
So you need to consider the financial position you'll be in by each method when you'll want to sell or want to change/get bored. I'd also consider an emergency scenario where you imagine you have to sell the week after purchase.
Finance from the dealer with lower monthlies will I suspect only be lower if you're comparing to a bank loan of a shorter term? If you wanted to keep the car as a forever car it'll cost you £25k + interest one way or another, so that makes it easier to work out overall costs.
I was like you and used bank loans for my lower priced cars as I tended to buy privately which limits other forms of borrowing.
I have stayed in the sub £10k bracket for years now though, so interesting, quick but old (risky) stuff. I get the allure of quick and newer, or niche older and your budget range (say exige evora etc) but never quite done it for some reason. I think it's my perception that other than being newer/tighter/better they won't give me 'that' much more for the significant extra money.
I'm probably missing out but I feel comfortable about it and might pick up something your considering in say 4-6 years when you're thinking of moving on, despite the inherent risks of an old leggy performance car!?
If you look at the dealer cars on auto trader they have a finance example (near the price) you can click on and see deposit, monthly payments and final balloon and the total payable.
Two such examples for £25k dealer cars.
£394 per month for 4 years, £1k deposit, £9,927 final payment. Total payable £29,457
£603 per month for 4 years, no deposit, no final payment. Total payable £29,930
Compared to bank loans
£363 per month for 7 years, Total payable £30,500 6% Apr
£585 per month for 4 years, Total payable £28,095 6% Apr
So not a huge amount in it (depends what bank loan interest rates you can secure) the 7 year bank loan appears worse than the first dealer deal, however the dealers deal total payable amount assumes you have the £9,927 to hand over after 4 years. If you had to get a loan for that for say 3 more years the total payable would creep up.
Two such examples for £25k dealer cars.
£394 per month for 4 years, £1k deposit, £9,927 final payment. Total payable £29,457
£603 per month for 4 years, no deposit, no final payment. Total payable £29,930
Compared to bank loans
£363 per month for 7 years, Total payable £30,500 6% Apr
£585 per month for 4 years, Total payable £28,095 6% Apr
So not a huge amount in it (depends what bank loan interest rates you can secure) the 7 year bank loan appears worse than the first dealer deal, however the dealers deal total payable amount assumes you have the £9,927 to hand over after 4 years. If you had to get a loan for that for say 3 more years the total payable would creep up.
Scootersp said:
I have stayed in the sub £10k bracket for years now though, so interesting, quick but old (risky) stuff. I get the allure of quick and newer, or niche older and your budget range (say exige evora etc) but never quite done it for some reason. I think it's my perception that other than being newer/tighter/better they won't give me 'that' much more for the significant extra money.
This tends to be my lane too. Max I ever spent was £5k on a car but will have a £10k budget for next car and hoping once things are a bit better in terms of restrictions due to Covid, can take advantage of market prices for the 3-6yr old cars (assuming prices will move to buyers favour i.e: lower) and buy cash but I will likely use either a combo of 0 % CC and cash or cash + small loan or all 3. I don't chop and change as much as the OP so can justify 'buying' and holding onto cars with all the depreciation that comes with rather than leasing or PCPCouple of things to add here - I’m new but this is kind of my specialist subject as I’m a broker.
If you’re looking to change cars often the PCP is not the way forward. There are generally penalties for early repayment. HP is the method with most consumer protection and can be exited early, and usually with an interest rebate. HP can also be structured with a balloon payment at the end to reduce the monthlies, just like PCP. I change my car every 12-18 months and I structure my HP in such a way that I always have loads of equity to move on to the next purchase.
3% flat is good, as is 6% APR. It’s unlikely that a bank would be any less than that, never mind half! Motor dealers at the moment are doing anything from 6.9% APR up to 8.9%. A personal loan would be unsecured so could be potentially higher, although rates from some banks are actually very good at the moment.
If you’re looking to change cars often the PCP is not the way forward. There are generally penalties for early repayment. HP is the method with most consumer protection and can be exited early, and usually with an interest rebate. HP can also be structured with a balloon payment at the end to reduce the monthlies, just like PCP. I change my car every 12-18 months and I structure my HP in such a way that I always have loads of equity to move on to the next purchase.
3% flat is good, as is 6% APR. It’s unlikely that a bank would be any less than that, never mind half! Motor dealers at the moment are doing anything from 6.9% APR up to 8.9%. A personal loan would be unsecured so could be potentially higher, although rates from some banks are actually very good at the moment.
Edited by Gordon - FinanceGuy on Saturday 4th April 09:18
Gordon - FinanceGuy said:
Couple of things to add here - I’m new but this is kind of my specialist subject as I’m a broker.
If you’re looking to change cars often the PCP is not the way forward. There are generally penalties for early repayment. HP is the method with most consumer protection and can be exited early, and usually with an interest rebate. HP can also be structured with a balloon payment at the end to reduce the monthlies, just like PCP. I change my car every 12-18 months and I structure my HP in such a way that I always have loads of equity to move on to the next purchase.
3% flat is good, as is 6% APR. It’s unlikely that a bank would be any less than that, never mind half! Motor dealers at the moment are doing anything from 6.9% APR up to 8.9%. A personal loan would be unsecured so could be potentially higher, although rates from some banks are actually very good at the moment.
TSB offering 2.9% APR, AA offering 3.1% APR.If you’re looking to change cars often the PCP is not the way forward. There are generally penalties for early repayment. HP is the method with most consumer protection and can be exited early, and usually with an interest rebate. HP can also be structured with a balloon payment at the end to reduce the monthlies, just like PCP. I change my car every 12-18 months and I structure my HP in such a way that I always have loads of equity to move on to the next purchase.
3% flat is good, as is 6% APR. It’s unlikely that a bank would be any less than that, never mind half! Motor dealers at the moment are doing anything from 6.9% APR up to 8.9%. A personal loan would be unsecured so could be potentially higher, although rates from some banks are actually very good at the moment.
Oldscottishgit said:
TSB offering 2.9% APR, AA offering 3.1% APR.
Yes as I said, some banks are doing low rates at the moment as market rates are depressed. However are they really offering that rate in real life? I suspect that would creep up as the process moved along. I have a lender who talk about rates “from 1.9%” but in real life their rates are very different.
Gordon - FinanceGuy said:
Yes as I said, some banks are doing low rates at the moment as market rates are depressed.
What you actually said was:Gordon - FinanceGuy said:
3% flat is good, as is 6% APR. It’s unlikely that a bank would be any less than that, never mind half!
Which was incorrect, given a simple search provided two firms providing much lower rates, Plus of course, let's not forget that 'flat rate' is meaningless.Edited by Oldscottishgit on Saturday 4th April 09:59
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