Educate me about car finance
Discussion
Hi
Talking to a car dealer, he said I was mad to be putting over £50k cash into any car and instead I should finance it.
When I pointed out the cost of the financing didn't seem worthwhile, he mentioned that:
I'd be best taking as long a term as possible - e.g. 4 years
Have as low monthly repayments as possible
When I'm done with the car after (hypothetically) 2 years, sell the car, take an early settlement and pay it off.
Thoughts?
I'm struggling to see how paying for finance makes financial sense.
Thanks
EDIT (as below)
Sounds like more information is needed
Car is a early noughties Ferrari.
Depreciation hopefully is minimal.
I don't have £100k lying around, so this is a considerable outlay.
If I lost £50k entirely, I'd be very very angry, financially worse off (who wouldn't?) but I'd still be living the same standard of life as I live right now. It wouldn't impact that.
If I spent £50k on something else?
The mortgage is my sole debt, we're in London, so it's sizeable (£400k). But I'd rather spend the money on something fun! I could also probably stop spending thousands on holidays each year, but I'd rather go on holiday, drive a nice car, go to nice restaurants...rather than have a smaller mortgage.
EDIT 2 (as below)
With one addition... The 'insulation' might end up costing you; Some, All or More than your final value increase (should it increase). Thereby nullifying your gain.
Essentially in MY SCENARIO, finance would be an insurance policy against future value being Below What I Paid, but there is a cost to such an insurance policy - Finance cost.
You then offset part of the finance cost against, (1) liquidity, and, (2) earnings made by saving that money. More so the former than the latter, as interest rates are non-existent.
Putting the money in a Pension is entirely illiquid, so in my view not comparable, and getting a higher return than interest rates would mean 'gambling' the money.
Trying to get a PCP on an older car, unsurprisingly, Finance Cost is more expensive than a new run of the mill car.
As the cost of finance is more expensive, the 'value' placed on liquidity becomes very much about personal circumstances.
Further, the chances of being able to offset the relatively high cost of finance by investment, would require an investment as risky as....buying an old Ferrari!!!
Have I answered my own question in the scenario that I've set?
Talking to a car dealer, he said I was mad to be putting over £50k cash into any car and instead I should finance it.
When I pointed out the cost of the financing didn't seem worthwhile, he mentioned that:
I'd be best taking as long a term as possible - e.g. 4 years
Have as low monthly repayments as possible
When I'm done with the car after (hypothetically) 2 years, sell the car, take an early settlement and pay it off.
Thoughts?
I'm struggling to see how paying for finance makes financial sense.
Thanks
EDIT (as below)
Sounds like more information is needed
Car is a early noughties Ferrari.
Depreciation hopefully is minimal.
I don't have £100k lying around, so this is a considerable outlay.
If I lost £50k entirely, I'd be very very angry, financially worse off (who wouldn't?) but I'd still be living the same standard of life as I live right now. It wouldn't impact that.
If I spent £50k on something else?
The mortgage is my sole debt, we're in London, so it's sizeable (£400k). But I'd rather spend the money on something fun! I could also probably stop spending thousands on holidays each year, but I'd rather go on holiday, drive a nice car, go to nice restaurants...rather than have a smaller mortgage.
EDIT 2 (as below)
nikaiyo2 said:
I think the reason most people (speculators in particular) would PCP this type of car is slightly different to more normal cars.
You can be certain that a normal 3 series will be worth massively less than the purchase price in 3 years.
A 20 year old Ferrari is clearly a discretionary purchase with quite a limited market so the market has the potential to be quite volatile compared to a more “white goods” car.
It would not be beyond belief that in 3 or 5 years this car could be worth £130k, £100k or £70k, PCP gives insulation against any potential value loss whilst allowing you to benefit from any value increase.
This might not have been the only helpful response, but it is the only one that made sense to me You can be certain that a normal 3 series will be worth massively less than the purchase price in 3 years.
A 20 year old Ferrari is clearly a discretionary purchase with quite a limited market so the market has the potential to be quite volatile compared to a more “white goods” car.
It would not be beyond belief that in 3 or 5 years this car could be worth £130k, £100k or £70k, PCP gives insulation against any potential value loss whilst allowing you to benefit from any value increase.
With one addition... The 'insulation' might end up costing you; Some, All or More than your final value increase (should it increase). Thereby nullifying your gain.
Essentially in MY SCENARIO, finance would be an insurance policy against future value being Below What I Paid, but there is a cost to such an insurance policy - Finance cost.
You then offset part of the finance cost against, (1) liquidity, and, (2) earnings made by saving that money. More so the former than the latter, as interest rates are non-existent.
Putting the money in a Pension is entirely illiquid, so in my view not comparable, and getting a higher return than interest rates would mean 'gambling' the money.
Trying to get a PCP on an older car, unsurprisingly, Finance Cost is more expensive than a new run of the mill car.
As the cost of finance is more expensive, the 'value' placed on liquidity becomes very much about personal circumstances.
Further, the chances of being able to offset the relatively high cost of finance by investment, would require an investment as risky as....buying an old Ferrari!!!
Have I answered my own question in the scenario that I've set?
Edited by TCruise on Tuesday 5th November 08:15
I have to agree with you and am looking forward to hearing arguments that say otherwise. I have heard reasoning such as you can invest the money but this is assuming you can make greater return than the cost of the interest. Also in my case it may help negate a huge tax bill withdrawing money from the business. Despite that I also fail to see the benefits of financing it.
imho fnance only makes sense if:
You can't afford it in cash.
You can invest the money elsewhere at a guaranteed rate beating the interest payments on the loan.
You buy a dog of a car that otherwise might be difficult to get shot of.
Now is possibly not the most stable time to invest, certainly in the UK.
You can't afford it in cash.
You can invest the money elsewhere at a guaranteed rate beating the interest payments on the loan.
You buy a dog of a car that otherwise might be difficult to get shot of.
Now is possibly not the most stable time to invest, certainly in the UK.
Are you saying you have £50k sitting in the bank, so to speak, which you could use to buy the car outright?
If you didn't use it, and went with the finance option, what would you do with the cash instead? Pay off a mortgage? Invest?
What rate of interest is the dealer offering?
Too many variables...
If you didn't use it, and went with the finance option, what would you do with the cash instead? Pay off a mortgage? Invest?
What rate of interest is the dealer offering?
Too many variables...
Few things to consider
How much is £50K to you, I'd think if you are considering it, it's not your last £50K?
Are you looking to keep the car a couple of years or for a lot longer 8 years or so?
Is it a model with a history or harsh depreciation to solid residuals?
If it's not your last £50K and you are thinking of keeping it 8 years and it's a model with solid residuals then I think cash could be fine/sensible.
If you are using most of your savings, wanted it for only two years, and it's residuals are bad/unknown then finance or even a lease might be a better option?
How much is £50K to you, I'd think if you are considering it, it's not your last £50K?
Are you looking to keep the car a couple of years or for a lot longer 8 years or so?
Is it a model with a history or harsh depreciation to solid residuals?
If it's not your last £50K and you are thinking of keeping it 8 years and it's a model with solid residuals then I think cash could be fine/sensible.
If you are using most of your savings, wanted it for only two years, and it's residuals are bad/unknown then finance or even a lease might be a better option?
Leasing deals are often cheaper over the entire period that the depreciation the car will suffer. And with no risk. And without factoring the opportunity cost of the cash you hold.
EG.1
My car will cost me £29,000 over 4 years and 60,000. The car is a Alfa Quadrifoglio, new price was £67,000. Paying cash, I could have got 3% discount, but by leasing, I save 450/yr on RFL, so cancelling that out....
There is no way on hell that car will be worth £38,000 at 4yrs old and with 60,000 miles on the clock.
If I'd paid cash, I'd be well out of pocket.
EG.2
Mrs Ares got into a 1-series earlier this year. List price, £33k, best cash deal (without spec adjustment) would have been £25.5k.
She is paying (or rather I am paying) coppers over £200/mth. In the 4 years it's leased for, that car will cost us less than £10,000, and we'll save £145/yr road tax (RFL).
For us to have been better off paying cash, that car would have to have been worth £16k at 4yrs old. Identical 4yr old cars today at are advertised now for £12k from trade sellers. Private 'selling' values are only just above £10k.
And thats before the value of money/opportunity cost is factored in.
EG.1
My car will cost me £29,000 over 4 years and 60,000. The car is a Alfa Quadrifoglio, new price was £67,000. Paying cash, I could have got 3% discount, but by leasing, I save 450/yr on RFL, so cancelling that out....
There is no way on hell that car will be worth £38,000 at 4yrs old and with 60,000 miles on the clock.
If I'd paid cash, I'd be well out of pocket.
EG.2
Mrs Ares got into a 1-series earlier this year. List price, £33k, best cash deal (without spec adjustment) would have been £25.5k.
She is paying (or rather I am paying) coppers over £200/mth. In the 4 years it's leased for, that car will cost us less than £10,000, and we'll save £145/yr road tax (RFL).
For us to have been better off paying cash, that car would have to have been worth £16k at 4yrs old. Identical 4yr old cars today at are advertised now for £12k from trade sellers. Private 'selling' values are only just above £10k.
And thats before the value of money/opportunity cost is factored in.
Assuming you're not concerned about depreciation ( private car that you intend to keep long-term etc ):
Don't just accept whatever rate the dealer is offering, look at unsecured bank loan rates too.
And don't forget that compound interest on that 50k left in an account will exceed the raw interest rate.
Unless you are sufficiently wealthy that you can handle home and life emergencies without that 50k then I'd recommend a loan. Consider the interest payable as a form of risk insurance.
Don't just accept whatever rate the dealer is offering, look at unsecured bank loan rates too.
And don't forget that compound interest on that 50k left in an account will exceed the raw interest rate.
Unless you are sufficiently wealthy that you can handle home and life emergencies without that 50k then I'd recommend a loan. Consider the interest payable as a form of risk insurance.
Dealer makes money on debt, the more the debt the longer the period the higher the APR the more they pocket, they get nothing on cash payments
watch the APR most you should be paying atm is 3% IMO
do the cost of ownership based on how long you are going to keep the car, compare outright v loan
how much the finance will cost plus any early settlement fees and interest
watch the APR most you should be paying atm is 3% IMO
do the cost of ownership based on how long you are going to keep the car, compare outright v loan
how much the finance will cost plus any early settlement fees and interest
hornmeister said:
imho fnance only makes sense if:
You can't afford it in cash.
You can invest the money elsewhere at a guaranteed rate beating the interest payments on the loan.
You buy a dog of a car that otherwise might be difficult to get shot of.
Now is possibly not the most stable time to invest, certainly in the UK.
And don't forget that a car dealer wants to sell that finance deal, makes them extra money. So it's far from an independent advice.You can't afford it in cash.
You can invest the money elsewhere at a guaranteed rate beating the interest payments on the loan.
You buy a dog of a car that otherwise might be difficult to get shot of.
Now is possibly not the most stable time to invest, certainly in the UK.
"You buy a dog of a car that otherwise might be difficult to get shot of." ???
Only makes sense if it's a operational lease agreement obviously.
hornmeister said:
imho fnance only makes sense if:
You can't afford it in cash.
You can invest the money elsewhere at a guaranteed rate beating the interest payments on the loan.
You buy a dog of a car that otherwise might be difficult to get shot of.
Now is possibly not the most stable time to invest, certainly in the UK.
Sorry, that's wrong. What if the total finance cost is lower than the depreciation the car will suffer from.You can't afford it in cash.
You can invest the money elsewhere at a guaranteed rate beating the interest payments on the loan.
You buy a dog of a car that otherwise might be difficult to get shot of.
Now is possibly not the most stable time to invest, certainly in the UK.
There is a reason mega wealthy don't buy assets anymore.
Your final sentence proves the point. Why tie capital up in a depreciating asset that is exceptionally volatile to market forces when you could eradicate risk for zero penalty?
Ares said:
Leasing deals are often cheaper over the entire period that the depreciation the car will suffer. And with no risk. And without factoring the opportunity cost of the cash you hold.
EG.1
My car will cost me £29,000 over 4 years and 60,000. The car is a Alfa Quadrifoglio, new price was £67,000. Paying cash, I could have got 3% discount, but by leasing, I save 450/yr on RFL, so cancelling that out....
There is no way on hell that car will be worth £38,000 at 4yrs old and with 60,000 miles on the clock.
If I'd paid cash, I'd be well out of pocket.
EG.2
Mrs Ares got into a 1-series earlier this year. List price, £33k, best cash deal (without spec adjustment) would have been £25.5k.
She is paying (or rather I am paying) coppers over £200/mth. In the 4 years it's leased for, that car will cost us less than £10,000, and we'll save £145/yr road tax (RFL).
For us to have been better off paying cash, that car would have to have been worth £16k at 4yrs old. Identical 4yr old cars today at are advertised now for £12k from trade sellers. Private 'selling' values are only just above £10k.
And thats before the value of money/opportunity cost is factored in.
Key subtext to the above.... EG.1
My car will cost me £29,000 over 4 years and 60,000. The car is a Alfa Quadrifoglio, new price was £67,000. Paying cash, I could have got 3% discount, but by leasing, I save 450/yr on RFL, so cancelling that out....
There is no way on hell that car will be worth £38,000 at 4yrs old and with 60,000 miles on the clock.
If I'd paid cash, I'd be well out of pocket.
EG.2
Mrs Ares got into a 1-series earlier this year. List price, £33k, best cash deal (without spec adjustment) would have been £25.5k.
She is paying (or rather I am paying) coppers over £200/mth. In the 4 years it's leased for, that car will cost us less than £10,000, and we'll save £145/yr road tax (RFL).
For us to have been better off paying cash, that car would have to have been worth £16k at 4yrs old. Identical 4yr old cars today at are advertised now for £12k from trade sellers. Private 'selling' values are only just above £10k.
And thats before the value of money/opportunity cost is factored in.
Don't buy dealer finance, almost never the cheapest. Go via an independent broker.
I’d be asking the dealer how I should invest in order to earn net interest to offset the interest on the car finance.
Would you not be able to negotiate a discount equivalent to their finance contribution?
It’s a shame that you weren’t an FCA mystery shopper when he was spinning you that financial advice.
Would you not be able to negotiate a discount equivalent to their finance contribution?
It’s a shame that you weren’t an FCA mystery shopper when he was spinning you that financial advice.
TCruise said:
Hi
Do talking to a car dealer, he said I was mad to be putting over £50k cash into any car and instead I should finance it.
When I pointed out the cost of the financing didn't seem worthwhile, he mentioned that:
I'd be best taking as long a term as possible - e.g. 4 years
Have as low monthly repayments as possible
When I'm done with the car after 2 years, sell the car, take an early settlement and pay it off.
Thoughts?
I'm struggling to see how paying for finance makes financial sense.
Thanks
Take finance for 4 years and "pay if off" after 2.Do talking to a car dealer, he said I was mad to be putting over £50k cash into any car and instead I should finance it.
When I pointed out the cost of the financing didn't seem worthwhile, he mentioned that:
I'd be best taking as long a term as possible - e.g. 4 years
Have as low monthly repayments as possible
When I'm done with the car after 2 years, sell the car, take an early settlement and pay it off.
Thoughts?
I'm struggling to see how paying for finance makes financial sense.
Thanks
Don't go back to that dealer he's trying to f
k you !DeltonaS said:
"You buy a dog of a car that otherwise might be difficult to get shot of." ???
Personal experience had a dog of a car with issues which dragged on after the warranty period. If I'd have leased I would have returned the keys at the end of the lease period.couldn't have sold it as the buyer would have come back agaisnt me. In the end had to threaten legal action to get the dealer to buy the car back off me.
Said car has been up for sale 5 times in the 2 years since I got shot.
Sounds like more information is needed
Car is a early noughties Ferrari.
Depreciation hopefully is minimal.
I don't have £100k lying around, so this is a considerable outlay.
If I lost £50k entirely, I'd be very very angry, financially worse off (who wouldn't?) but I'd still be living the same standard of life as I live right now. It wouldn't impact that.
If I spent £50k on something else?
The mortgage is my sole debt, we're in London, so it's sizeable (£400k). But I'd rather spend the money on something fun! I could also probably stop spending thousands on holidays each year, but I'd rather go on holiday, drive a nice car, go to nice restaurants...rather than have a smaller mortgage.
Car is a early noughties Ferrari.
Depreciation hopefully is minimal.
I don't have £100k lying around, so this is a considerable outlay.
If I lost £50k entirely, I'd be very very angry, financially worse off (who wouldn't?) but I'd still be living the same standard of life as I live right now. It wouldn't impact that.
If I spent £50k on something else?
The mortgage is my sole debt, we're in London, so it's sizeable (£400k). But I'd rather spend the money on something fun! I could also probably stop spending thousands on holidays each year, but I'd rather go on holiday, drive a nice car, go to nice restaurants...rather than have a smaller mortgage.
FA57REN said:
Assuming you're not concerned about depreciation ( private car that you intend to keep long-term etc ):
Don't just accept whatever rate the dealer is offering, look at unsecured bank loan rates too.
And don't forget that compound interest on that 50k left in an account will exceed the raw interest rate.
Unless you are sufficiently wealthy that you can handle home and life emergencies without that 50k then I'd recommend a loan. Consider the interest payable as a form of risk insurance.
And also factor in the interest on the money you can put back into the account if you aren't paying lease payments.Don't just accept whatever rate the dealer is offering, look at unsecured bank loan rates too.
And don't forget that compound interest on that 50k left in an account will exceed the raw interest rate.
Unless you are sufficiently wealthy that you can handle home and life emergencies without that 50k then I'd recommend a loan. Consider the interest payable as a form of risk insurance.
TCruise said:
Sounds like more information is needed
Car is a early noughties Ferrari.
Depreciation hopefully is minimal.
I don't have £100k lying around, so this is a considerable outlay.
If I lost £50k entirely, I'd be very very angry, financially worse off (who wouldn't?) but I'd still be living the same standard of life as I live right now. It wouldn't impact that.
If I spent £50k on something else?
The mortgage is my sole debt, we're in London, so it's sizeable (£400k). But I'd rather spend the money on something fun! I could also probably stop spending thousands on holidays each year, but I'd rather go on holiday, drive a nice car, go to nice restaurants...rather than have a smaller mortgage.
What's the APR?Car is a early noughties Ferrari.
Depreciation hopefully is minimal.
I don't have £100k lying around, so this is a considerable outlay.
If I lost £50k entirely, I'd be very very angry, financially worse off (who wouldn't?) but I'd still be living the same standard of life as I live right now. It wouldn't impact that.
If I spent £50k on something else?
The mortgage is my sole debt, we're in London, so it's sizeable (£400k). But I'd rather spend the money on something fun! I could also probably stop spending thousands on holidays each year, but I'd rather go on holiday, drive a nice car, go to nice restaurants...rather than have a smaller mortgage.
For me it would depend on what you intend to do with the car, if you have no intention of keeping it long term then potentially consider finance. A 50k Ferrari at a dealer is probably 43k, is it likely to appreciate ? if not will it maintain its current value.
I guess if i had 50k in the bank and wanted it as a bit of an investment i would be buying it outright, the risk of financing the car and investing the money (and losing on the investment) has the potential to hurt.
I guess if i had 50k in the bank and wanted it as a bit of an investment i would be buying it outright, the risk of financing the car and investing the money (and losing on the investment) has the potential to hurt.
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