Car finance question...!!!

[Dave3166]

Hi.
I was watching a programme tonight about hyper cars & super cars, Bugatti Veyron , McLaren Senna, Ferrari Enzo etc etc & how people go about buying such expensive cars.
Then, I found myself asking the question, why, if you have millions in your bank account would you finance such a purchase rather than just pay for it and drive it away.
If I had 40,50 million in my bank, the last thing I would be doing is financing a car like that.
I’m only asking this out of interest really, curious some would say.
Thanks for any replies.
👍

[kiethton]

At that budget it’s all about wealth preservation (rather than generation).

If you could buy something knowing it’s going to cost a fixed amount over the period (limiting to downside) why wouldn’t you?

[Chestrockwell]

If I had that money, I’d rather finance a car like a Senna, put a deposit and pay it off monthly than put 1 million pounds in the car. You could use that million on other things while you’re paying a small (relative to the million) monthly payment to have the car.

[Testaburger]

As above. For most, it’ll either be about making better use of their 1m, or in some cases it could be cash-flow; perhaps having lots of wealth but not necessarily 1m in liquid assets to stump up.

[Dave3166]

Interesting, thanks for the replies👍

[SV_WDC]

Equity release is a big thing in some of the hyper cars/ collector cars too.

[I 8 a 4RE]

Testaburger said:

As above. For most, it’ll either be about making better use of their 1m, or in some cases it could be cash-flow; perhaps having lots of wealth but not necessarily 1m in liquid assets to stump up.

Mainly this ... which is another way of saying: Most people that drive these cars cannot afford to buy it.

When people tell you they allocate the capital differently, please read: they do not have the capital.

Paying a finance premium of 5%< (on a depreciating asset, mostly, few exceptions aside) is always a bad deal.
Considering a balanced portfolio after fees and taxes will max between 8-10% ... your Risk Meter would have to be broken if you will take the risk on <5% considering the downside.

And for those smart cookies saying Warren Buffett said: If it rolls, floats or flies; lease it. He never said that. In every shareholder letter he actually says he hates leverage...

[DonkeyApple]

Dave3166 said:

Hi.
I was watching a programme tonight about hyper cars & super cars, Bugatti Veyron , McLaren Senna, Ferrari Enzo etc etc & how people go about buying such expensive cars.
Then, I found myself asking the question, why, if you have millions in your bank account would you finance such a purchase rather than just pay for it and drive it away.
If I had 40,50 million in my bank, the last thing I would be doing is financing a car like that.
I’m only asking this out of interest really, curious some would say.
Thanks for any replies.
??

You’re not likely to have that wealth in a bank account but rather as value in your business of invested in property etc. For those people, they have a high net worth and a high income but not millions in cash so renting toys makes sense.

In addition, at that level you would almost certainly not have your wealth onshore so you’d make onshore purchases by borrowing from yourself and at that point it’s probably cheaper to just borrow from someone else.

[selmahoose]

Game of strategy.

I buy cheap flats and let them out. A £50k one rents for £500 a month.

So instead of spending £250k on the car I spend £250k on 5 flats.

The flats bring in £2.5k per month which pays for the lease purchase of the car.

When I'm bored I give back the car which has "cost" me the profit from the flats for as long as I keep it, but because I've still got the flats it is easy to convince myself that the car has cost nothing. Which, in a way, it has done.

[I 8 a 4RE]

selmahoose said:

Game of strategy.

I buy cheap flats and let them out. A £50k one rents for £500 a month.

So instead of spending £250k on the car I spend £250k on 5 flats.

The flats bring in £2.5k per month which pays for the lease purchase of the car.

When I'm bored I give back the car which has "cost" me the profit from the flats for as long as I keep it, but because I've still got the flats it is easy to convince myself that the car has cost nothing. Which, in a way, it has done.

Until one of the flats is empty for a prolonged period of time, the boiler goes out, your tenants don’t pay, etc, etc

End of the day you don’t have the net worth to afford a car. By definition if you need to put it on finance you can’t afford it.

It’s fine, I’m genuinely happy you can do it, power to you. But please don’t advocate as a smart money strategy...

[Dr Jekyll]

selmahoose said:

Game of strategy.

I buy cheap flats and let them out. A £50k one rents for £500 a month.

So instead of spending £250k on the car I spend £250k on 5 flats.

The flats bring in £2.5k per month which pays for the lease purchase of the car.

When I'm bored I give back the car which has "cost" me the profit from the flats for as long as I keep it, but because I've still got the flats it is easy to convince myself that the car has cost nothing. Which, in a way, it has done.

So you start with £250K, you borrow another £250K making £500K, then spend half on flats and half on a car. Is that it?

[selmahoose]

I 8 a 4RE said:

Until one of the flats is empty for a prolonged period of time, the boiler goes out, your tenants don’t pay, etc, etc

End of the day you don’t have the net worth to afford a car. By definition if you need to put it on finance you can’t afford it.

It’s fine, I’m genuinely happy you can do it, power to you. But please don’t advocate as a smart money strategy...

Let's start with understanding the concept of 'analogy'.....

[selmahoose]

Dr Jekyll said:

So you start with £250K, you borrow another £250K making £500K, then spend half on flats and half on a car. Is that it?

Erm......no.

[I 8 a 4RE]

selmahoose said:

Let's start with understanding the concept of 'analogy'.....

Ok then use an analogy that actually works..?

[Dr Jekyll]

I don't think analogies are relevant. We all appreciate that if you borrow money then hypothetically manage to invest it at a higher after tax return than the APR on the loan you end up better off. Irrespective of whether that loan takes the form of car finance while the savings that would otherwise go on the car go on the investment.

The controversy is over whether in practice such returns are available with sufficiently low risk.

[selmahoose]

I 8 a 4RE said:

End of the day you don’t have the net worth to afford a car. By definition if you need to put it on finance you can’t afford it.

Funnily enough, reality is almost the exact opposite of this. (I'll leave it to someone else to explain).

[selmahoose]

Dr Jekyll said:

I don't think analogies are relevant. We all appreciate that if you borrow money then hypothetically manage to invest it at a higher after tax return than the APR on the loan you end up better off. Irrespective of whether that loan takes the form of car finance while the savings that would otherwise go on the car go on the investment.

The controversy is over whether in practice such returns are available with sufficiently low risk.

Okay.

Imagine a world where people get involved and invest in businesses.

And imagine someone (likely with huge experience and expertise behind them) who gets involved or invests in a business which costs them £250k from their bank account and pays them back a minimum of £2.5k per month

Now, it's a fairly safe assumption that an individual who does this is a HNW individual. Who can easily pass the HNW and affordability checks required by those who set them up with high cost lease purchase deals.

Next, imagine that a couple of years later at balloon time they choose the 'hand back the car' option.

They still have the business they bought, dont they?

So the 'cost' of the car has been the sacrifice of some or all of the profit from the business they bought whilst they kept the car.

But they still have the business they bought and its value which keeps profiting and which they wouldn't have had if they'd bought the car with cash.

Is that clearer? Or more realistic?

[I 8 a 4RE]

It’s plenty clear, but the massive assumptions you make are the business pays you dividend of 12% per annum (after tax, fees, etc) without any challenges, slow quarters, additional investments needed etc.

That is a very high assumption and not in line with what typical money managers work on.

What if the business is suddenly subject to Brexit, a Ford plant closing and thus losing its biggest client, or dependent solely on clients working at Deutsche Bank...

The maths works IN THEORY, but it’s not prudent financial advice.

[JaredVannett]

DonkeyApple said:

Dave3166 said:

Hi.
I was watching a programme tonight about hyper cars & super cars, Bugatti Veyron , McLaren Senna, Ferrari Enzo etc etc & how people go about buying such expensive cars.
Then, I found myself asking the question, why, if you have millions in your bank account would you finance such a purchase rather than just pay for it and drive it away.
If I had 40,50 million in my bank, the last thing I would be doing is financing a car like that.
I’m only asking this out of interest really, curious some would say.
Thanks for any replies.
??

You’re not likely to have that wealth in a bank account but rather as value in your business of invested in property etc. For those people, they have a high net worth and a high income but not millions in cash so renting toys makes sense.

In addition, at that level you would almost certainly not have your wealth onshore so you’d make onshore purchases by borrowing from yourself and at that point it’s probably cheaper to just borrow from someone else.

Yes, I recall Anton once mentioning the amount of 'wealthy' millionaires that could actually withdraw one million in cash is very small.

[Dr Jekyll]

selmahoose said:

Okay.

Imagine a world where people get involved and invest in businesses.

And imagine someone (likely with huge experience and expertise behind them) who gets involved or invests in a business which costs them £250k from their bank account and pays them back a minimum of £2.5k per month

Now, it's a fairly safe assumption that an individual who does this is a HNW individual. Who can easily pass the HNW and affordability checks required by those who set them up with high cost lease purchase deals.

Next, imagine that a couple of years later at balloon time they choose the 'hand back the car' option.

They still have the business they bought, dont they?

So the 'cost' of the car has been the sacrifice of some or all of the profit from the business they bought whilst they kept the car.

But they still have the business they bought and its value which keeps profiting and which they wouldn't have had if they'd bought the car with cash.

Is that clearer? Or more realistic?

The sequence of events is clear. What isn't clear is how this is different from simply borrowing to invest in the business and spending savings on the car.

Option 1) Put savings into the business. Fine, you make a profit.
Option 2) Put savings into the business and borrow to buy a car. Fine, you spend your profits in interest on getting the car you want now.
Option 3) Spend savings on a car and borrow to invest in the business. How is this different from 2?

You are borrowing to invest in a profitable business. But buying a car at the same time and treating the profit as coming from financing a car.