Financing high value, low depreciation, used cars?
Discussion
Having gone down a bit of a Youtube hole recently, it started me thinking about some of these vloggers who clearly all (and most admit they do) finance their cars and whether they are simply absorbing the silly high monthly payments for some of these cars or whether there is a product out there that factors in low depreciation, to result in low monthly payments?
Take, for example, a 2011/2012 Porsche 911 GTS, which have sat around the 50-60k mark, spec dependent, for the last couple of years. In reality, you could own one of these for a year and, mileage dependent, sell it at the end of that year for what you paid or very slightly less, probably around £1500-3000 in depreciation. Depending on the market, you may even gain.
So, in this scenario, is there a finance option ala PCP that would factor this low depreciation in to give a 'normal' monthly payment (recognising that interest will be a large factor) - or are these people just doing a hire purchase over say a 5 year term and sustaining the £1000 monthly cost in the hope that they will regain that money when they sell the car?
Clearly the market isn't easy to predict and therefore a significant chunk of the risk would be with the finance broker (rather than solely on the individual with a straight HP), but then that element of market-predicting risk is how a number of high end used car dealers work their stuff...
Take, for example, a 2011/2012 Porsche 911 GTS, which have sat around the 50-60k mark, spec dependent, for the last couple of years. In reality, you could own one of these for a year and, mileage dependent, sell it at the end of that year for what you paid or very slightly less, probably around £1500-3000 in depreciation. Depending on the market, you may even gain.
So, in this scenario, is there a finance option ala PCP that would factor this low depreciation in to give a 'normal' monthly payment (recognising that interest will be a large factor) - or are these people just doing a hire purchase over say a 5 year term and sustaining the £1000 monthly cost in the hope that they will regain that money when they sell the car?
Clearly the market isn't easy to predict and therefore a significant chunk of the risk would be with the finance broker (rather than solely on the individual with a straight HP), but then that element of market-predicting risk is how a number of high end used car dealers work their stuff...
Edited by Bordtea on Saturday 22 December 18:31
Bordtea said:
Having gone down a bit of a Youtube hole recently, it started me thinking about some of these vloggers who clearly all (and most admit they do) finance their cars and whether they are simply absorbing the silly high monthly payments for some of these cars or whether there is a product out there that factors in low depreciation, to result in low monthly payments?
Take, for example, a 2011/2012 Porsche 911 GTS, which have sat around the 50-60k mark, spec dependent, for the last couple of years. In reality, you could own one of these for a year and, mileage dependent, sell it at the end of that year for what you paid or very slightly less, probably around £1500-3000 in depreciation. Depending on the market, you may even gain.
So, in this scenario, is there a finance option ala PCP that would factor this low depreciation in to give a 'normal' monthly payment (recognising that interest will be a large factor) - or are these people just doing a hire purchase over say a 5 year term and sustaining the £1000 monthly cost in the hope that they will regain that money when they sell the car?
There’s plenty of YouTube stuff about this, latest being by fellow forum member who did this one.Take, for example, a 2011/2012 Porsche 911 GTS, which have sat around the 50-60k mark, spec dependent, for the last couple of years. In reality, you could own one of these for a year and, mileage dependent, sell it at the end of that year for what you paid or very slightly less, probably around £1500-3000 in depreciation. Depending on the market, you may even gain.
So, in this scenario, is there a finance option ala PCP that would factor this low depreciation in to give a 'normal' monthly payment (recognising that interest will be a large factor) - or are these people just doing a hire purchase over say a 5 year term and sustaining the £1000 monthly cost in the hope that they will regain that money when they sell the car?
In effect though you generally are unlikely to get a finance company whom will give you a really ‘high’ balloon as that is obviously their risk. So, you do make the monthlies and ‘re-coup’ at the point of (re-)sale, having paid the interest over the period.
[just remembered that SOL is doing some vids with the finance company he uses which gives some examples around the £50k mark you cite.]
SL22 said:
There’s plenty of YouTube stuff about this, latest being by fellow forum member who did this one.
In effect though you generally are unlikely to get a finance company whom will give you a really ‘high’ balloon as that is obviously their risk. So, you do make the monthlies and ‘re-coup’ at the point of (re-)sale, having paid the interest over the period.
[just remembered that SOL is doing some vids with the finance company he uses which gives some examples around the £50k mark you cite.]
Will check those out - cheers. I suppose yes ultimately it comes down to the finance company giving that high balloon which presents risk. In effect though you generally are unlikely to get a finance company whom will give you a really ‘high’ balloon as that is obviously their risk. So, you do make the monthlies and ‘re-coup’ at the point of (re-)sale, having paid the interest over the period.
[just remembered that SOL is doing some vids with the finance company he uses which gives some examples around the £50k mark you cite.]
However, the more risk they are prepared to take on, the more 'affordable' some of these cars become and therefore the more people they will have taking out those sort of finance packages. High risk, high reward I suppose...
anonymous said:
[redacted]
In order to get more people to be able to 'afford' higher end cars, therefore more people coming through them for finance and so on. Agreed to an extent I wasn't necessarily talking about them increasing in value, more turning an expensive car into one that's got low depreciation similar in fixed value terms to say a £10k car. Swampy1982 said:
Personal loan?
Yes although you then get the same high monthly cost as hire purchase, so you don't get the 'low monthly' outcome. Most would probably struggle to be accepted for £50k+ of unsecured debt as wellBordtea said:
Having gone down a bit of a Youtube hole recently, it started me thinking about some of these vloggers who clearly all (and most admit they do) finance their cars and whether they are simply absorbing the silly high monthly payments for some of these cars or whether there is a product out there that factors in low depreciation, to result in low monthly payments?
Take, for example, a 2011/2012 Porsche 911 GTS, which have sat around the 50-60k mark, spec dependent, for the last couple of years. In reality, you could own one of these for a year and, mileage dependent, sell it at the end of that year for what you paid or very slightly less, probably around £1500-3000 in depreciation. Depending on the market, you may even gain.
So, in this scenario, is there a finance option ala PCP that would factor this low depreciation in to give a 'normal' monthly payment (recognising that interest will be a large factor) - or are these people just doing a hire purchase over say a 5 year term and sustaining the £1000 monthly cost in the hope that they will regain that money when they sell the car?
Clearly the market isn't easy to predict and therefore a significant chunk of the risk would be with the finance broker (rather than solely on the individual with a straight HP), but then that element of market-predicting risk is how a number of high end used car dealers work their stuff...
Your issue with that concept of a 5 year PCP style deal on a used vehicle is that as the lender you have to firstly price in the risk of lending over 5 years which is much higher than pricing someone up over say 2 years. For example, most borrowers can manage to hold down a reliable income generation for 24 months but once you go beyond that the number drops quite dramatically. So to reflect that significantly increased risk you need to levy a higher interest rate. Take, for example, a 2011/2012 Porsche 911 GTS, which have sat around the 50-60k mark, spec dependent, for the last couple of years. In reality, you could own one of these for a year and, mileage dependent, sell it at the end of that year for what you paid or very slightly less, probably around £1500-3000 in depreciation. Depending on the market, you may even gain.
So, in this scenario, is there a finance option ala PCP that would factor this low depreciation in to give a 'normal' monthly payment (recognising that interest will be a large factor) - or are these people just doing a hire purchase over say a 5 year term and sustaining the £1000 monthly cost in the hope that they will regain that money when they sell the car?
Clearly the market isn't easy to predict and therefore a significant chunk of the risk would be with the finance broker (rather than solely on the individual with a straight HP), but then that element of market-predicting risk is how a number of high end used car dealers work their stuff...
Edited by Bordtea on Saturday 22 December 18:31
The next bit is the projection of the value of the asset in 5 years time. This suffers from a similar problem. Finance deals that incorporate a reduced capital repayment element by gambling on future value at X date in the future are much more accurate to model when firstly that period is short, again, 24-36 months is the sweet spot really and when the asset is new. New assets have pretty stable depreciation curves. Plus, suspiciously sound curves since the manufacturers took control of the dealers, the finance and the used supply. So, a 5 year deal means you have to calculate the likely value in 60 months time. It won’t be in the segment that has manufacturer used supply tinkering, it’s only holding its value now because it is a ‘fashion’ good and it a product that takes longer to sell. The risk on pricing in a possible price in 5 years time is big so that all needs to be passed on to the consumer. The price could be higher than today but it could be more than half so that massive range potential has to be priced in. You also need to price in the fact that it will take much longer for you to sell on than a generic, 2 yr old utility box.
In short, if I was pricing up a PCP type deal over a 5 year period on a used car that is currently fashionable and you wanted me to carry that risk then I would be f
king you into next week on the funding and your balloon would be smaller than at a Lilliputian’s birthday party. In other words you would have to be retarded to take the deal and that would confirm that you weren’t remotely suitable to be leant to. Look at a 'Lease Purchase' (sometimes called a HP/conditional sale with balloon) product from someone such as Clydesdale Bank.
It's similar to a PCP, but the balloon isn't a GFV, just a deferred payment, so they tend to be higher values. The important thing to note here is that becasue the Balloon on a Lease Purchase is not a guaranteed future value then the end of the term if your car is worth less than the balloon you have to find the difference. You also can't hand the car back at any point to settle the deal, the car is yours, even at the end of the agreement when the balloon is due the only way you can get rid of the car is to sell it if you don't have the money for the balloon.
It's similar to a PCP, but the balloon isn't a GFV, just a deferred payment, so they tend to be higher values. The important thing to note here is that becasue the Balloon on a Lease Purchase is not a guaranteed future value then the end of the term if your car is worth less than the balloon you have to find the difference. You also can't hand the car back at any point to settle the deal, the car is yours, even at the end of the agreement when the balloon is due the only way you can get rid of the car is to sell it if you don't have the money for the balloon.
@DA - Thanks for the view on that. I always enjoy reading your financial insights. I had never factored in the risk of the borrower changing income profile as time moved on.
Can I ask you, do the manufacturers or finance companies offer a worse APR on a normal 4 or 5 year finance deal because of this?
Can I ask you, do the manufacturers or finance companies offer a worse APR on a normal 4 or 5 year finance deal because of this?
Julian Thompson said:
@DA - Thanks for the view on that. I always enjoy reading your financial insights. I had never factored in the risk of the borrower changing income profile as time moved on.
Can I ask you, do the manufacturers or finance companies offer a worse APR on a normal 4 or 5 year finance deal because of this?
I’ve never lent against cars so I cannot categorically say but it would be extremely odd for it not to be a factor. Ultimately the size of the loan v wealth (assets/income/track record) of the borrower is the big driver but the two core risks after that are change in income (including key commitments that soak up that income) and change in asset value from what is anticipated. Can I ask you, do the manufacturers or finance companies offer a worse APR on a normal 4 or 5 year finance deal because of this?
Over a five year period someone’s income risk does change dramatically. Lots of workers have periods of no income in their working life so modelling that risk over a 5 year period contains more risk than a 2. Also, even if income remains constant or grows the risk of sudden draws on that income widens considerably such as risk of divorce or risk of another kid. Both of which take priority and increase the risk of consumer debt default.
There is also the aspect of arrangement fees which are buried in the deal. On a 2 year there are 2.5x more fees to be generated so in a 5 year you want to be charging more to reflect that loss.
Generally speaking, rollover fees and the ever growing risk profile of consumers as they spend more and more and save less and less are the main drivers behind the ever shortening debt contract periods.
If you look at the mortgage market that has shifted very rapidly from 25 year deals to rolling over and re-margining borrowers every 2 years. That generates huge fees as well as allowing you to easily reprice a borrower so reducing your risk while increasing your rerward.
Bordtea said:
Take, for example, a 2011/2012 Porsche 911 GTS, which have sat around the 50-60k mark, spec dependent, for the last couple of years. In reality, you could own one of these for a year and, mileage dependent, sell it at the end of that year for what you paid or very slightly less, probably around £1500-3000 in depreciation. Depending on the market, you may even gain.
So, in this scenario, is there a finance option ala PCP that would factor this low depreciation in to give a 'normal' monthly payment (recognising that interest will be a large factor) ?
Clearly the market isn't easy to predict and therefore a significant chunk of the risk would be with the finance broker (rather than solely on the individual with a straight HP), but then that element of market-predicting risk is how a number of high end used car dealers work their stuff...
Great news for the OPSo, in this scenario, is there a finance option ala PCP that would factor this low depreciation in to give a 'normal' monthly payment (recognising that interest will be a large factor) ?
Clearly the market isn't easy to predict and therefore a significant chunk of the risk would be with the finance broker (rather than solely on the individual with a straight HP), but then that element of market-predicting risk is how a number of high end used car dealers work their stuff...
Edited by Bordtea on Saturday 22 December 18:31
I've got a 997 GTS for sale at the lower end of his price range.
I can arrange finance with a minimum 10% deposit and pretty much any residual value / balloon that you want to give a "bargain" monthly payment
But just to be clear the risk is absolutely not with the dealer / finance company / broker in these situations, it's with the person who borrowed the money.
In return for the brave residual the finance company will offer you an unregulated agreement, not subject to the Consumer Credit Act 1974 on the basis that you are either a high net worth individual or a business user. What that means is that all the protections in terms of rebate of interest for early termination, voluntary termination after you have paid 50% and the option to return the car at the end of the agreement are all forfeited.
In other words you WILL be paying all of the amounts due under the agreement even if you settle early or the market crashes.
If you can afford to take the risk then you CAN get the car for a very sensible payment. But if you are stretching yourself then it may end in tears if the market doesnt go the way you want.
kambites said:
If I was going to do such a thing (which I wouldn't), I'd probably do it by extending my mortgage to cover the cost, then paying it back at the end of the ownership. I doubt I could beat my mortgage's interest rate on any other sort of loan.
As with any funding decision it's a balance between the interest payable, the affordability of the payments and the rate at which you pay down the capital.In his example the OP isn't too bothered about paying down the capital so paying it off over 20 years or so could be a good way. Depends on your mortgage term and whether you have the equity in your house.
kambites said:
If I was going to do such a thing (which I wouldn't), I'd probably do it by extending my mortgage to cover the cost, then paying it back at the end of the ownership. I doubt I could beat my mortgage's interest rate on any other sort of loan.
This is my route. Offset mortgage that I had massively overpaid (to provide the facility) and <2% interest means I have a 458 in the garage for a base payment of around £250 a month. Relatively low depreciation means if I don't find the means to repay the capital over however many years I want to keep it then I only need to find the depreciated amount (not a problem).To be honest, this is what is so potent about the offset mortgage type of debt facility. Unfortunately, it’s the nature of humans that it is the minority who have the ability to use the facility to better their lives for the long term. It does work better for most to bury cash more deeply into the property or wrappers such as pensions and even ISAs. A good offset mortgage is an amazing thing but only if you’re honest with yourself and act accordingly.
Gassing Station | Car Buying | Top of Page | What's New | My Stuff