Calculating depreciation with discounts
Discussion
I'm thinking of getting a Volvo XC60 and I'm trying to work out the best way of funding it - buy new/used with a bank loan vs PCP Vs leasing.
I've found a fairly reasonable deal on lease but there are pros and cons to that and I'm try to work out how it compares to buying / PCP over a 3-year period. I've also got the option of a reasonable discount on a new car through the Volvo Affinity scheme or one of the websites like Car Wow or DTD.
I have looked at a few depreciation calculators online (e.g. https://www.themoneycalculator.com/vehicle-finance... but I'm not sure about the base figure to enter or how accurate they are. Should the starting figure be the list price for a new car or the price after discount and/or the price after any dealer contribution? It makes quite a difference - I can get a new XC60 discounted by about £5k before any dealer contributions. Should I be factoring in the discount on the basis most people can get some discount though Car Wow or DTD or similar or should I put closer to the list price?
I also noticed that the value after 3 years using a calculator like the above seems to be much higher than the MFV / balloon payment given on a PCP - the calculator reckons the car (£40kish after discounts before dealer contribution of £2750 on PCP) will be worth about £29k after 3 years (around 25% or £11kish depreciation), but the MFV quoted on the PCP is about £18k (around 45% depreciation or £22kish depreciation). Which of these figures is more likely to be accurate? If you start from the undiscounted price, the depreciation on both is naturally a lot less as well because you have around £5k "free" of depreciation I guess.
I've seen a similar lease deal for just under £13k over three years, so based on the above figures it could either be marginally more expensive than buying or significantly cheaper...
Very grateful to anyone for any thoughts on the above!
I've found a fairly reasonable deal on lease but there are pros and cons to that and I'm try to work out how it compares to buying / PCP over a 3-year period. I've also got the option of a reasonable discount on a new car through the Volvo Affinity scheme or one of the websites like Car Wow or DTD.
I have looked at a few depreciation calculators online (e.g. https://www.themoneycalculator.com/vehicle-finance... but I'm not sure about the base figure to enter or how accurate they are. Should the starting figure be the list price for a new car or the price after discount and/or the price after any dealer contribution? It makes quite a difference - I can get a new XC60 discounted by about £5k before any dealer contributions. Should I be factoring in the discount on the basis most people can get some discount though Car Wow or DTD or similar or should I put closer to the list price?
I also noticed that the value after 3 years using a calculator like the above seems to be much higher than the MFV / balloon payment given on a PCP - the calculator reckons the car (£40kish after discounts before dealer contribution of £2750 on PCP) will be worth about £29k after 3 years (around 25% or £11kish depreciation), but the MFV quoted on the PCP is about £18k (around 45% depreciation or £22kish depreciation). Which of these figures is more likely to be accurate? If you start from the undiscounted price, the depreciation on both is naturally a lot less as well because you have around £5k "free" of depreciation I guess.
I've seen a similar lease deal for just under £13k over three years, so based on the above figures it could either be marginally more expensive than buying or significantly cheaper...
Very grateful to anyone for any thoughts on the above!
Your best guide would be to see what 3 year old examples of your intended car are selling for with similar spec and mileage to what yours would have.
Assuming that that will be somewhere in the twenty thousands, deduct £3-4000 for the difference between retail price and what you might get as a trade in.
I don't know what model XC60 you are looking at or what your intended mileage would be but I bet the resulting number will be just a little higher than the £18000 Final Payment on the agreement. They're not daft
If you really want to over-think this you could consider what might happen in the wider economy in the next 3 years.
Anything that happens that might cause new cars to become more expensive will also cause used cars already on the road to depreciate more slowly as cars only depreciate to maintain a price difference between new and nearly new, nearly new and 1 year old, 1 year old and 2 years old etc.
So things like retail price inflation, tariffs on new cars, an increase in interest rates and a decrease in the availability of consumer credit will all cause your used car to be worth more than today's projections.
On the other hand if nobody has a job, and those few who do are sitting on their money in case they suddenly don't any more, then your Volvo won't be worth a reindeer's carrot.
Guaranteed future value / handback never looked more attractive
Assuming that that will be somewhere in the twenty thousands, deduct £3-4000 for the difference between retail price and what you might get as a trade in.
I don't know what model XC60 you are looking at or what your intended mileage would be but I bet the resulting number will be just a little higher than the £18000 Final Payment on the agreement. They're not daft
If you really want to over-think this you could consider what might happen in the wider economy in the next 3 years.
Anything that happens that might cause new cars to become more expensive will also cause used cars already on the road to depreciate more slowly as cars only depreciate to maintain a price difference between new and nearly new, nearly new and 1 year old, 1 year old and 2 years old etc.
So things like retail price inflation, tariffs on new cars, an increase in interest rates and a decrease in the availability of consumer credit will all cause your used car to be worth more than today's projections.
On the other hand if nobody has a job, and those few who do are sitting on their money in case they suddenly don't any more, then your Volvo won't be worth a reindeer's carrot.
Guaranteed future value / handback never looked more attractive
Thanks very much for your comments, which are very helpful. I have definitely been considering what future car values might be in view of the current apparent rapid pace of car technology - I can easily see a situation where EVs become very popular within around 3-5 years and petrol/diesel engine values drop like a stone. Any sort of macroeconomic shocks or tax changes could easily exacerbate this, although I guess if Brexit makes cars more expensive to import or manufacture then that might support the used car market. This is why I was originally leaning towards leasing as an option to insulate myself against this risk, and taking the view that it seemed better than PCP if I were going to hand the car back anyway...
But the apparent availability of some good discounts and PCP %r ates on new XC60s to buy got me thinking again... Looking at second hand 3-year old versions, they seem to range from around £20k to £28k. Ones with more options added, like I'm looking at, seem to be closer to the £28k mark. So I was thinking if I could get the car new for about £36k new with the options I want, and if the use value would be around £28k after 3 years, then the depreciation would be only around £8k, which seems less than the lease payments of about £13k (not factoring in tax). This would also be higher spec car than the lease model with some options I'd like added (sunroof, 360 degree camera, adaptive cruise control, etc).
But on the other hand, I was thinking if the value is closer to £18k (like the MFV) then I would be paying around £18k in depreciation, even based on the discounted price, which is quite a lot more than the lease and with having my capital tied up in the car for 3 years.
All seems a bit of a gamble really! If it helps, I'm looking at a Momentum or Edition trim with Xenium, Intellisafe Pro and Family packs plus Android Auto/Carplay as added options and metallic paint. Mileage is not high - around 5,000 per year.
Edit: A supplementary question: do the dealers deliberately set the MFV lower because it means they can extract more monthly payments (with interest on top) from customers? It seems like a lower figure might be a good thing from the customer's perspective because they can either get "equity" in the vehicle at the end and/or buy the car then sell it for more than the MFV to recoup some of the cost.
But the apparent availability of some good discounts and PCP %r ates on new XC60s to buy got me thinking again... Looking at second hand 3-year old versions, they seem to range from around £20k to £28k. Ones with more options added, like I'm looking at, seem to be closer to the £28k mark. So I was thinking if I could get the car new for about £36k new with the options I want, and if the use value would be around £28k after 3 years, then the depreciation would be only around £8k, which seems less than the lease payments of about £13k (not factoring in tax). This would also be higher spec car than the lease model with some options I'd like added (sunroof, 360 degree camera, adaptive cruise control, etc).
But on the other hand, I was thinking if the value is closer to £18k (like the MFV) then I would be paying around £18k in depreciation, even based on the discounted price, which is quite a lot more than the lease and with having my capital tied up in the car for 3 years.
All seems a bit of a gamble really! If it helps, I'm looking at a Momentum or Edition trim with Xenium, Intellisafe Pro and Family packs plus Android Auto/Carplay as added options and metallic paint. Mileage is not high - around 5,000 per year.
Edit: A supplementary question: do the dealers deliberately set the MFV lower because it means they can extract more monthly payments (with interest on top) from customers? It seems like a lower figure might be a good thing from the customer's perspective because they can either get "equity" in the vehicle at the end and/or buy the car then sell it for more than the MFV to recoup some of the cost.
Edited by Crispy Pigeon on Sunday 2nd February 20:10
The reason to choose leasing ( and I'm not saying that you should or shouldn't ) is because your costs are known costs rather than the least cost.
If you choose PCP or outright purchase then your actual costs are unknown until you actually sell the car at the end of your period of usage.
So you look at the £13000 lease cost and if I have understood correctly then for the PCP to work out cheaper then the car would have to be worth £23000 when you come to sell it.
Will it / won't it? Honest answer is that no one knows. So do you want a known cost or are you feeling lucky?
Unforeseen issue with looking at current Autotrader prices with this model is that the car was facelifted and moved upmarket mid way through 2017. This means that late 2016 / early 2017 cars offer a harsh comparison with yours as they were cheaper to begin with, but the ones at high £20k s are often 67 plates so late 2017 and so barely 2 years old.
Manufacturers usually intend MFVs to be very slightly under their best forecast of the car's actual value.
Low monthly payments sell cars, not high ones, so it benefits them to offer a high MFV. But set it too high and it makes it difficult to re-deal the customer before the end of the agreement since they won't have paid down the capital fast enough, and the manufacturer ( or finance company ) will take a hit on every car returned at the end of the agreement .
If you choose PCP or outright purchase then your actual costs are unknown until you actually sell the car at the end of your period of usage.
So you look at the £13000 lease cost and if I have understood correctly then for the PCP to work out cheaper then the car would have to be worth £23000 when you come to sell it.
Will it / won't it? Honest answer is that no one knows. So do you want a known cost or are you feeling lucky?
Unforeseen issue with looking at current Autotrader prices with this model is that the car was facelifted and moved upmarket mid way through 2017. This means that late 2016 / early 2017 cars offer a harsh comparison with yours as they were cheaper to begin with, but the ones at high £20k s are often 67 plates so late 2017 and so barely 2 years old.
Manufacturers usually intend MFVs to be very slightly under their best forecast of the car's actual value.
Low monthly payments sell cars, not high ones, so it benefits them to offer a high MFV. But set it too high and it makes it difficult to re-deal the customer before the end of the agreement since they won't have paid down the capital fast enough, and the manufacturer ( or finance company ) will take a hit on every car returned at the end of the agreement .
It might be worth remembering that it is very likely that you could buy a leased car at the end of the period. Obviously the value for purchasing is not known at outset and does not always represent good vale, but could be an option.
How you wish to spec a car is a very personal thing and probably requires more thought if you are buying rather than leasing. It is very easy to keep ticking boxes and adding ‘must have items’ leasing helps to focus the mind from a cost perspective. Is that option worth £80 per month or 25% of the month lease cost? It might be that’s up to the individual.
If you buy new and every 3/4 years a vehicle upwards of £25K most sources suggest a 45/50% residual value is the higher end of expectations. Therefore if your leasing cost is similar, what is the benefit of taking the risk?
How you wish to spec a car is a very personal thing and probably requires more thought if you are buying rather than leasing. It is very easy to keep ticking boxes and adding ‘must have items’ leasing helps to focus the mind from a cost perspective. Is that option worth £80 per month or 25% of the month lease cost? It might be that’s up to the individual.
If you buy new and every 3/4 years a vehicle upwards of £25K most sources suggest a 45/50% residual value is the higher end of expectations. Therefore if your leasing cost is similar, what is the benefit of taking the risk?
Thanks all (sorry, couldn't reply for a while as the forum was stopping posts by new members).
Your comments convinced me that my original plan of leasing is the more sensible option for me. In addition, I jumped on a deal that came up on a Peugeot 3008 1.2 GT Line Premium for £263.99 per month over 2 years instead. 10k miles p.a. as well, which I probably won't need.
It didn't feel as posh, big or fast as the Volvo XC60 and my wife is a bit prejudiced against Peugeots and French cars generally, but it has a better spec and is £100pm cheaper over 2 years instead of 3, so seemed like the sensible choice... I test drove and quite liked it. £6,335.76 with admin fee works out at 18.78% of the £33,745 retail price, so is definitely going to be cheaper than the depreciation on buying that one and it's a much smaller financial commitment.
Fingers crossed it turns up next week when it's supposed to and my wife takes to it!
Cheers all
Your comments convinced me that my original plan of leasing is the more sensible option for me. In addition, I jumped on a deal that came up on a Peugeot 3008 1.2 GT Line Premium for £263.99 per month over 2 years instead. 10k miles p.a. as well, which I probably won't need.
It didn't feel as posh, big or fast as the Volvo XC60 and my wife is a bit prejudiced against Peugeots and French cars generally, but it has a better spec and is £100pm cheaper over 2 years instead of 3, so seemed like the sensible choice... I test drove and quite liked it. £6,335.76 with admin fee works out at 18.78% of the £33,745 retail price, so is definitely going to be cheaper than the depreciation on buying that one and it's a much smaller financial commitment.
Fingers crossed it turns up next week when it's supposed to and my wife takes to it!
Cheers all
Gassing Station | Car Buying | Top of Page | What's New | My Stuff