Simple (ha!) man maths on car purchase
Discussion
Assuming I keep a given car for two years then sell/hand it back...
If a depreciation calculator suggests that a given vehicle will depreciate by around £450 per month over a 2 year period then:
If I pay cash for it, it is still costing me (if prediction is correct) £450 x 24 = £10,800. (And I've locked up cash and there is a risk if used values tank, etc).
If I finance all/part of that cost and that finance costs me £300 per month, it's costing me an additional £7,200, so £18,000 in total.
If I get a lease, I have no concern with depreciation (assuming I stick within mileage range). If I pay £700 per month over the same period for the same car then I'm actually spending less, even though to my reluctant wife it appears I am spending more as £700 per month is "more than £300 per month". She is neglecting to take into account the cost of depreciation in her summary.
Am I missing something or are my sums/justifications correct?
If a depreciation calculator suggests that a given vehicle will depreciate by around £450 per month over a 2 year period then:
If I pay cash for it, it is still costing me (if prediction is correct) £450 x 24 = £10,800. (And I've locked up cash and there is a risk if used values tank, etc).
If I finance all/part of that cost and that finance costs me £300 per month, it's costing me an additional £7,200, so £18,000 in total.
If I get a lease, I have no concern with depreciation (assuming I stick within mileage range). If I pay £700 per month over the same period for the same car then I'm actually spending less, even though to my reluctant wife it appears I am spending more as £700 per month is "more than £300 per month". She is neglecting to take into account the cost of depreciation in her summary.
Am I missing something or are my sums/justifications correct?
Aren't you neglecting to take into account the fact that you've spent £40k or whatever of your money in the first place?
With leasing you have to look at the total cost over 3 years for example plus insurance and maintenance against the amount of depreciation a car bought for 'cash' will suffer during 3 years plus tax, insurance and maintenance.
This is assuming you are buying a new car.
With leasing you have to look at the total cost over 3 years for example plus insurance and maintenance against the amount of depreciation a car bought for 'cash' will suffer during 3 years plus tax, insurance and maintenance.
This is assuming you are buying a new car.
Matt Clay said:
Loan shark financing? Or is the "cost of finance" you describe recouped on sale?
I don't follow, sorry. I may be being spectacularly simple, I realise.Say it's a £30K purchase price. If I had £30K cash, I pay that and over two years I lose the £450 per month, so £10,800.
If I only have £15K cash, I need finance for £15K, so let's say £300 per month. £450 per month depreciation + £300 per month finance for 24 months = £18,000?
Obviously that assumes I sell/trade the car for the predicted future value of £19,200, of course.
A lease for a vehicle like that may be, e.g. £400p/m + upfront, therefore an amortised £700 (probably less). All I'm trying to understand is the balance between depreciation and lease costs, as many people seem to see lease costs as lost value "and you don't own the car at the end of it!", which seems to neglect the cost of depreciation. I realise that buying an older car at the shallower slope of depreciation means that you lose less in depreciation over the same period, but I'm talking new/nearly new.
GreatGranny said:
Aren't you neglecting to take into account the fact that you've spent £40k or whatever of your money in the first place?
With leasing you have to look at the total cost over 3 years for example plus insurance and maintenance against the amount of depreciation a car bought for 'cash' will suffer during 3 years plus tax, insurance and maintenance.
This is assuming you are buying a new car.
No, as I'm spending £30k (or £40k, whatever) then selling it and recouping a portion of that outlay. In simpler numbers, if buying a £30K car that loses £20K, I start with £30K in my account and two years later I have £20K (and two years of driving experience in said car). It's early and I had my covid booster yesterday so all faculties are not functioning perfectly. I fully appreciate I may be missing something really obvious, but apart from flexibility I can't see how (for new/nearly new) anything other than leasing works out as the cheapest option.With leasing you have to look at the total cost over 3 years for example plus insurance and maintenance against the amount of depreciation a car bought for 'cash' will suffer during 3 years plus tax, insurance and maintenance.
This is assuming you are buying a new car.
RayPike said:
No, as I'm spending £30k (or £40k, whatever) then selling it and recouping a portion of that outlay. In simpler numbers, if buying a £30K car that loses £20K, I start with £30K in my account and two years later I have £20K (and two years of driving experience in said car). It's early and I had my covid booster yesterday so all faculties are not functioning perfectly. I fully appreciate I may be missing something really obvious, but apart from flexibility I can't see how (for new/nearly new) anything other than leasing works out as the cheapest option.
Well, cheapest is not getting a car. But anyway
It all works out the same in the end. Ish. Leasing companies, car companies, banks, rental companies, finance companies, they all want a return on THEIR money of 5 to 7%. If you borrow (which includes leasing - you are borrowing their car), then you are still giving them a 5 to 7% return.
How they achieve that 5 to 7% is smoke and mirrors around their particular scheme, deposit size, length of term, depreciation etc etc.
But it all works out to 5 to 7% in the end.
Hence the endless leasing, renting, buying argument threads that never go anywhere or reach a conclusion.
RayPike said:
apart from flexibility I can't see how (for new/nearly new) anything other than leasing works out as the cheapest option.
I concur with your sums.If you have £40k sat in a bank account earning 0.00001% interest, then the cost of buying the car for two years is just the depreciation, and not the financing cost. So that's one case in which buying makes more sense.
The other way buying or PCP can be better is if the value of the car ends up being higher than predicted at the end of the term.
In an extreme example, consider two drivers of 2019 Honda Civic Type Rs who got them new two years ago, one on a 2yr lease, one purchased outright. The former driver is handing it back having paid the full lease cost. The latter driver is laughing, his car is probably worth what he paid for it, so potentially saving £10k compared to the lease cost.
Now of course this is a classic example of hindsight being 20/20 - no-one would have predicted the pandemic. And if prices fall more than expected, the outright owner loses out more.
You’re always going to be paying a little more with finance, as what you are paying is depreciation and interest.
Take two very simplistic scenarios:
1. Buy the car for £30,000, sell it in two years for £19,200. You are down £10,800, very straightforward.
2. Buy on finance, 10% deposit (£3,000), £15,000 final value and let’s say for simplicity, interest is £2,000 over that period. So you’re paying £17,000 (£3,000 deposit and 24 monthly payments of £583). But assuming your depreciation calculator is right, and you can get £19,200 for the car at the end of the term, rather than the £15,000 final value, you sell it and pay back the finance you owe; you’ve made back £4,200 so total cost is £12,800. The difference is your £2,000 interest.
Obviously, if your calculator is wrong and it depreciates more then you are worse off in both cases, but with finance there’s a floor of £15,000 value, which some people like to have for security. I suppose it comes down to a) do you have the cash to pay up front, and b) could you put that cash to better use and make more than £2,000 in two years?
Take two very simplistic scenarios:
1. Buy the car for £30,000, sell it in two years for £19,200. You are down £10,800, very straightforward.
2. Buy on finance, 10% deposit (£3,000), £15,000 final value and let’s say for simplicity, interest is £2,000 over that period. So you’re paying £17,000 (£3,000 deposit and 24 monthly payments of £583). But assuming your depreciation calculator is right, and you can get £19,200 for the car at the end of the term, rather than the £15,000 final value, you sell it and pay back the finance you owe; you’ve made back £4,200 so total cost is £12,800. The difference is your £2,000 interest.
Obviously, if your calculator is wrong and it depreciates more then you are worse off in both cases, but with finance there’s a floor of £15,000 value, which some people like to have for security. I suppose it comes down to a) do you have the cash to pay up front, and b) could you put that cash to better use and make more than £2,000 in two years?
RayPike said:
Say it's a £30K purchase price. If I had £30K cash, I pay that and over two years I lose the £450 per month, so £10,800.
If I only have £15K cash, I need finance for £15K, so let's say £300 per month. £450 per month depreciation + £300 per month finance for 24 months = £18,000?
Sorry, it may just be misunderstanding what you consider a cost.If I only have £15K cash, I need finance for £15K, so let's say £300 per month. £450 per month depreciation + £300 per month finance for 24 months = £18,000?
Simplistically, the finance cost over 24 months is not £300pm but rather just the interest on the loan. If you could finance the £15k at 0% APR then you'd be in the same position as buying cash.
The figure of £750 per month is irrelevant. You'll have £300pm outgoing, and you can account for the depreciation if you wish.
To go beyond simplicity, you then have the opportunity cost "lost" from spending £15k or £30k in one chunk. Without that, you can no longer invest that and you're losing out on that as an income (not insignificant).
Again, simplistically, lease cost needs to be less than depreciation + finance cost (interest) + RFL + 3rd year MOT.
If you’re into spreadsheets do one and compare costs. I did and found that leasing cars is like throwing money down the drain, and that’s coming from someone that leased cars for nearly 6 years.
There are pitfalls buying secondhand and it’s like a lottery if you get lumbered with a dodgy one, but one invariably gets something back at the end. With leasing you don’t and are more likely to be lumbered with end of lease costs.
There are pitfalls buying secondhand and it’s like a lottery if you get lumbered with a dodgy one, but one invariably gets something back at the end. With leasing you don’t and are more likely to be lumbered with end of lease costs.
RayPike said:
If I only have £15K cash, I need finance for £15K, so let's say £300 per month. £450 per month depreciation + £300 per month finance for 24 months = £18,000.
Wait where are you getting £15k for £300pm over 24 months?
Edited by mholt1995 on Thursday 16th December 10:12
maz8062 said:
If you’re into spreadsheets do one and compare costs. I did and found that leasing cars is like throwing money down the drain, and that’s coming from someone that leased cars for nearly 6 years.
There are pitfalls buying secondhand and it’s like a lottery if you get lumbered with a dodgy one, but one invariably gets something back at the end. With leasing you don’t and are more likely to be lumbered with end of lease costs.
Kind of interested to hear more on this. Why is it money wasted unless you move towards bangernomics? The car will depreciate anyway (yes, at present they're not so much, but that's artificial and will change in future) so how is buying better than leasing?There are pitfalls buying secondhand and it’s like a lottery if you get lumbered with a dodgy one, but one invariably gets something back at the end. With leasing you don’t and are more likely to be lumbered with end of lease costs.
Matt Clay said:
Sorry, it may just be misunderstanding what you consider a cost.
Simplistically, the finance cost over 24 months is not £300pm but rather just the interest on the loan. If you could finance the £15k at 0% APR then you'd be in the same position as buying cash.
The figure of £750 per month is irrelevant. You'll have £300pm outgoing, and you can account for the depreciation if you wish.
To go beyond simplicity, you then have the opportunity cost "lost" from spending £15k or £30k in one chunk. Without that, you can no longer invest that and you're losing out on that as an income (not insignificant).
Again, simplistically, lease cost needs to be less than depreciation + finance cost (interest) + RFL + 3rd year MOT.
Can't see this. It still depreciates by £10,800 over that period regardless of where the non-financed money (or non-zero-percent financed money) comes from, surely?Simplistically, the finance cost over 24 months is not £300pm but rather just the interest on the loan. If you could finance the £15k at 0% APR then you'd be in the same position as buying cash.
The figure of £750 per month is irrelevant. You'll have £300pm outgoing, and you can account for the depreciation if you wish.
To go beyond simplicity, you then have the opportunity cost "lost" from spending £15k or £30k in one chunk. Without that, you can no longer invest that and you're losing out on that as an income (not insignificant).
Again, simplistically, lease cost needs to be less than depreciation + finance cost (interest) + RFL + 3rd year MOT.
I know there are variables and sometimes it'll depreciate more, etc, but given a hypothetical situation in which the numbers all turn out as predicted, it would seem that the lease will come out cheaper - particularly as I'm obviously way out with finance costs in my hypothetical example and it's more like £600 p/m for £15k over 2 years!
RayPike said:
Say it's a £30K purchase price. If I had £30K cash, I pay that and over two years I lose the £450 per month, so £10,800.
If I only have £15K cash, I need finance for £15K, so let's say £300 per month. £450 per month depreciation + £300 per month finance for 24 months = £18,000?
You're double dipping on the depreciation in your 2nd example. The loan you take out is effectively to finance the depreciation.If I only have £15K cash, I need finance for £15K, so let's say £300 per month. £450 per month depreciation + £300 per month finance for 24 months = £18,000?
Let's use at least some real world figures:
1. You pay £30k cash. Depreciation is £450/month over 2 years = car value is £19,200 after 2 years.
£30,000 - £19,200 = £10,800 cost to you over 2 years.
2. You pay £15k cash. You take a £15k loan from Sainsbury's bank at 2.8% = £643.16/month = £15,435.84 cost to you over 2 years. Then you've got the difference between your initial £15k and the now value of £19,200 = £4,200 positive equity.
£15435.84 - £4,200 = £11,235.84 cost to you over 2 years (or £468.16/month amortised)
3. You look for a 2 year lease. Assuming you can afford every scenario, the lease will ideally be at or below £450/month amortised to work out the cheapest. There are benefits of leasing however like free car tax, breakdown assistance etc that could add value. Equally mileage and wear & tear penalties could reduce value
RayPike said:
Can't see this. It still depreciates by £10,800 over that period regardless of where the non-financed money (or non-zero-percent financed money) comes from, surely?
I know there are variables and sometimes it'll depreciate more, etc, but given a hypothetical situation in which the numbers all turn out as predicted, it would seem that the lease will come out cheaper - particularly as I'm obviously way out with finance costs in my hypothetical example and it's more like £600 p/m for £15k over 2 years!
If the basic calculation is cost of car ownership = depreciation + interest, then in both cases (cash and 0% finance) will be £10,800 + £0.I know there are variables and sometimes it'll depreciate more, etc, but given a hypothetical situation in which the numbers all turn out as predicted, it would seem that the lease will come out cheaper - particularly as I'm obviously way out with finance costs in my hypothetical example and it's more like £600 p/m for £15k over 2 years!
Basically this is the way I see it:
1. Cash purchase you will pay depreciation, how much is dependant on market forces.
2. PCP your depreciation has a limit, but for that security, and the ability to spread the cost, you pay a premium (interest).
3. Leasing you agree how much the cost is at the outset. There is no chance of reducing the amount of depreciation if used markets move in your favour, but everything is a known quantity. Presumably (never done this) the finance cost is slightly cheaper to compensate.
maz8062 said:
If you’re into spreadsheets do one and compare costs. I did and found that leasing cars is like throwing money down the drain, and that’s coming from someone that leased cars for nearly 6 years.
There are pitfalls buying secondhand and it’s like a lottery if you get lumbered with a dodgy one, but one invariably gets something back at the end. With leasing you don’t and are more likely to be lumbered with end of lease costs.
Wow, i never realised that a simple spreadsheet could denounce the whole industry of leasing cars with 10 minutes of excel.....There are pitfalls buying secondhand and it’s like a lottery if you get lumbered with a dodgy one, but one invariably gets something back at the end. With leasing you don’t and are more likely to be lumbered with end of lease costs.
Why hasn't anyone else ever realised it?
JagYouAre said:
3. Leasing you agree how much the cost is at the outset. There is no chance of reducing the amount of depreciation if used markets move in your favour, but everything is a known quantity. Presumably (never done this) the finance cost is slightly cheaper to compensate.
Leasing finance can be more helpful in various other ways.If you take a £30k loan to buy a car, the full £30k debt goes onto your credit report. If you lease a car only the total cost of the lease goes on your credit report - say in the OP example you'd have the same car with only £10,800 on your credit file vs someone else with £30k, even though you both walk away equal at the end.
Could mean people with poorer scores get access to the same car that they might otherwise miss out on. Also if you're buying a house etc you'll have less debt on your file which can be handy for mortgage applications.
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