KiwiGTI

It simply boils down to simple accounting, most businesses would assess the fundamental costs between owning an asset outright or by financing it, whether it is on HP, lease, contract hire etc.

It is exactly what you have to do with a car. Takle a long term view of the period of ownership, eg: 3 years, and work out the costs of each method. There is no right or wrong.

sbk1972

Remster,

Mmmm I dont think I would ever sink so much money into a car purchase again. Depreciation is a killer, regardless what car you get. I love my M3 and am pretty much stuck with it now as the idea of of selling it on for £10K doesnt fill me with joy, also I dont need the money. So, I store it in my garage, for summer use only (its a conv).

If you want to finance a car, I was told that the best way forward is to get a bank load, or increase your mortgage / take the money out, and use this to buy the car. This means you get a better % rate, the car is yours to sell if your situation changes i.e. no surrender value to pay if you close early on your lease / hp etc.

However, what we are trying to aim for is free motoring. That new car looses money from day one. So, if I paid £40K for the car, each day this figure is decreasing. If I did a HP, i.e. rented the car, with the monies I earnt via the invested £40K sum, then I still have my cash, but I get a car with it. This, to me , is free motoring, to a point.

One thing Ive learnt from expensive cars is that after a few months they become old cars, and that inital `lust` for them decreases. Now, I tend to pay £2K max on cars, trying different types, as variety is the spice of life. Then, after a few months, or when I get bored, I then shunting them off, all whilst investing my money in the markets / stockes or soon to be property. I dont tend to lose much money, but Ive still got my wedge billing up in the back ground.

Another thing, expense cars although are fun, are problematic. You tend to worry where you park them, insurance, servicing, etc etc. The number of fights, problems I had when I first got my M3, I tell you, real nightmare.

As to your friends, well, everything can be brought on the never never, as longs as your stupid enough to sign the contract, agree to the rate, the ballon payment etc. Its whether you want to have that debt around your neck. I paid for my M3 outright, and I can still hear my father telling me that I was a little stupid for doing this. However, I wanted the car and `had to have it`. Now, 8 years on, if I had invested that cash into a flat etc, then I would be far better off.

However, you only have one life, you work hard, and its your money. Whats the point of working hard and not enjoying yourself. Therefore, if you see a car you like, can afford it, which ever way you can, then treat yourself. There's no pockets in a shrowl.


1972, yep, Im 34.

SBK

sbk1972

Andy,

Lovely age 25, if I was 25 now, then I would being aiming for a holiday home. I went down the speed boat option, brought a 18ft 250hp speed boat, and although fun, was the most expensive waste of £££ ever. Fuel, insurance, moorings, maintenance etc started to out weight the enjoyment of the item. Speed boats are only fun if your mate has one. When you can go down, meet him, and let him take you out on it. Although easy to buy, selling speed boats is a pain, took me ages to shunt my off.

Nothing is worse than dragging the thing down to a ramp, filling it up with £80 worth of fuel, trying to catch the tides, to then eventually drive it home, and a wheel bearing collapsing on the trailer :-(, hence why owners often carry 2/3 spares with them.

Now a holiday home, there's a good idea, place ot use in the hols, place to rent out and make some money. Also, if brought in the carribean, gives you an address to sent up an off shore account.

SBK

Diablo

Yup,

That's exactly what I did this time around - nice low cost bank loan. Effectively, its your own PCP deal, but you get all the benefits - if you get a good rate and spread the loan to keep the monthly payments low.

And no deposit/initial charges/termination payment, etc.

Calculated that between 2 and 3 years old, the car will be worth more than the balance of the loan, at which point I can sell it, clear the loan (or simply top it up)

Scumbag

I would have thought that the worst way to pay is by mortgage extension...you might get a lower rate, but you are paying for it for far more years...The thing to look at is how much you pay for it in the end. Thats why one of the best investments is to pay your mortgage off early

As it says above, the only way is to do the sums:
What is it going to cost me over its life (including the sale at the end of ownership), and what do I lose out on in the meantime (eg interest). Also dont forget the more intangible factors (like cashing in an hp contract if your circumstances change....could be expensive)

To my mind the car is losing money from day one, whether it is owned by you or a leasing company. They may have some tax breaks, but they also have overheads, and profit. What you pay in Lease / PCP has to cover that cost of depreciation...so you are paying for that anyway, whether you buy outright or on hp/pcp....the only difference is that it seems more 'obvious' when you have shelled out a large sum. The trials and tribulations of owning new(er) cars

The only way to avoid the depreciation trap is to buy cars that have pretty much flatlined (unless you get a manufacturer's staff discount!!). So purchase at 2k is a damn good way to do it...depends how much you want the kudos of the new motor

Andy Tang

iTrader: (3)

I use to think like that, looking for the next car.....

But at 33 I'm happily married, we have a daughter, with another baby on the way and new house on the horizon.

My "Porsche fund" has taken a battering, and it will probably be another 17-18 years (after the children move out) before it recovers!!

Andy M3

Don't get me wrong, i am doing ok for myself. I have 3 children, i am 2 years married living in a 4 bed detached home, take at least 1 holiday abroad / year. But i would like to ever improve the house plus add to my disposible income and have a 2nd home etc. But most importantly change my mid engined turbo RWD tiptronic monster into a 996 GT3

sbk1972

Andy - Sounds like your doing well for yourself matey. Should be proud of what yuo've achieved. Unlike many on this site, its nice to read that with hard work, effort, people are doing well.

Andy T - I see what your saying and your 100% right. Im trying to pay off my mortgage early, well hopefully by next year. However, means that Im working every hour god gives me, and no money for toys :-(

Worth it in the end.

SBK

KiwiGTI

Yes, the absolute worst way to buy a car is to extend the mortgage. Bank loans are normally the best.

Scooby-Doo

The BMW finance on my X5 was lower than the return on my savings so I financed the whole car.

Scumbag

Impressive...but if you assume that
(i) you are taxed on your interest
(ii) you are not getting interest on the full amount each month, as you need to repay the monthly payment...as time goes by the amount that you have left in the interest-bearing-'pot' reduces by the monthly repayment each month. Even if the account is not set up that way - you need to make the repayments from somewhere (monthly pay packet), but you could afford to invest this pay packet amount if you had no loan
(iii) there is less haggle-room for the car if you take out a low-rate finance offer

I am struggling to see how it works in practice.

douglasb

Not necessarily (the far more years bit).

If you have a flexible mortgage the lender may allow you to borrow the amount over a shorter term. I did this with a Standard Life morgage. I had about 15 years to run on the main mortgage but borrowed some of the cash for the Legacy over 3 years (now paid off).

Scooby-Doo

You fail on point 1 Wifey does not work and therefore not liable to tax on interest payments Funnily enough I have 0 saving in the eyes of IR.....and bugger all if wifey does a runner !!!!!!!!!!!!!!!!!!!!!!

Dracoro

Errrrmmm, the £7881.25 is only a theoretical 'loss' or rather something he didn't gain.
He had £50k, he's now got £25k therefore the car cost him £25k.

So option 2 costs £5,795.16 more to finance than to buy outright.

The question is, could you have gained at least £5,795.16 from investing over three years from the £50k? If yes then it's the better plan to finance the car and invest your cash, else it isn't.

645

Hi Dracoro - You do have to include the lost interest somewhere...

Quite simply, you need to include the opportunity cost of coughing up the 50K up front - if you didn't spend it, you'd make interest on it...you could either include it as a cost in the Purchase Option (interest lost) or a gain in the finance option (i.e.interest gained). That's 7.8K in interest - let's assume tax free, either by ISA or using a spouse's spare allowance.

As you put it, could you have gained at least £5,795.16 from investing over three years from the £50k? Yes, 7.8K!

Oh, and for a level playing field - option 1 assumed a resale of 25K. If it really could be sold for that, then in the finance deal you'd take the option to buy at 22.5K at the end of the lease and sell for 25K. i.e. another 2.5K in the bag for the financed option - even better!

So...in response to the OP, finance MAY be better...it all depends on the car's depreciation and the interest charges, plus what you could do with the cash if you didn't lock it up in the car. You also need to factor in (which someone has already mentioned) the fact that in the financed option your cash balance is reducing each month to fund the finance payments. It's not a trivial financial model to develop, but its worth doing your sums.

Scooby-Doo

In addition I hold value in cash assets for unexpected requirements. Luckily none so far but you never know.

Scumbag

I'm starting to think about this all myself...£30k to spend. I'm still struggling to see how finance would work better:

you might think that £30k would give loads of interest 5% over 3 years yields £4800(ish) compound interest @ 5%
BUT:
As I would have a monthly payment to make out of this, a quick play on Excel, and I reckon that my monthly £910(ish) payment it reduces the interest to £2300 (ish)
As all my interest free invesments are already being used I will pay 40% tax on that, meaning £1400 is the interest I would actually get.

Thus to take the HP option, I would have to pay less than £1400 on £30k over 3 years to make it worthwhile...so only a rate better than 3% will make the HP option worthwhile.

Two further points...
(i) I'm reasonably sure of my figures, but not 100%
(ii) I'm obviously a saaaaaaaaaaad little pixie

Andy M3

Bank interest isn't the only way to earn money you know. You give me your £30k and i recon i could make some reasonable dosh, not through a bank.

Dracoro

Aha, I see, 645. Makes sense as you would get interest if you did nothing.

In addition, you have to take into account the spending power of the buyer. Someone on £15k a year with £50k cash would not be able to afford the repayments (and get into debt and have to finance the debt etc.!) whereas someone on £40k a year maybe could afford the monthly payments. All down to circumstance.

If you've got £50k in the bank then invest it and buy a cheaper car. A few years down the line you could afford an even better car but not if you spend it now etc. (that position could potentially go on forever though! ).

njkmrs

Some good points allround.Also some crap .Divvy comments especially.!!
The deal is do what suits yourself.Without getting to deep ,this aint no dress rehearsal !!
A lot of what people have said strikes a cord with lots of us ,probably.If you can do it ,then do it,dont think too much about it,without getting yourself into finanacial strife obviously .
Cars are going to lose you money ,property wont ,if bought with sense ,but you cant drive a house and get the same pleasure .

Take a risk now and again ,it keeps you alive ,and if it goes wrong ,you start again.
Enjoy.

SKYMAN

From my experience this simply is not true. 'Property management costs' come out of the rental value, and you are left to ride (hopefully) the capital appreciation wave.

Diablo

Not always - if you can pay the finance costs from income, your capital sum is not reducing, assuming the finance costs are paid from disposable income. This may, of course, reduce the beer budget, so you need to factor that in

Diablo

Yup, and you could die prematurely driving a ****box, but with cash in the bank

Not much use to you if you are not there to enjoy it.

If you can afford it, do it, whichever way suits you best

645

Hi there again. Totally agree with Diablo and others - I spend far too much on cars, but I love em, so does the Mrs! You have one waste of money in your life!

On your numbers Scumbag, I did an excel as well. Assuming 30K invested as a lump sum over 3 years, with 5% AER (approx. 4.75% per month) and £910 per month withdrawal, you will reduce the 30K to zero by month 35, even taking into account monthly compound interest! However, you would have some capital left in the car though.

What I was suggesting was not HP, but PCP. The reason your HP is so quite large is that a large chunk of it is paying off the capital - all of it. If you can find a decent PCP with decent rates (there's the trick!), you should be comparing this to buying it outright. The cost of a PCP is basically just depreciation and interest.

Just as an example, I looked at a second hand Cayenne a while ago, direct from Porsche. They have a slightly different PCP scheme to others - you name the retained value figure yourself. It's academic really, as it's not what they'll pay you - it's just used to set your monthly payments. Obviously, you make it as accurate as you can, otherwise you'll end with a lump sum to pay on resale. Anyway, here's an example:

Cost of vehicle: 35K
Value after 36 months: 18K
Capital to fund (depreciation): 17K
Interest payable on full amount (i.e. 35K)

Worked out about £600-650 per month.

So this scheme means you don't end up paying off all the 35K, just the depreciation part, although as with any PCP you pay interest on the full 35K. And the depreciation is lower because it's secondhand.

You could also look at HP'ing it over a longer period - say 5 years, but still sell at 3 years. You will more than likely have paid off the depreciation in that time.

As someone has already said, there's a lot of snobbery on here about buying a car outright - that's pretty dated logic and a tad old fashioned. The key question is what's the cheapest way to run the vehicle of your choice - and if you run a business, you have even more options....don't get hung up on the method. Anyway, good luck!

NWMark

Isnt that figure too low.

quick check on directline loans and for a loan of 25k over 3 years at 5.6% APR you pay back £31,265, so surely the above is incorrect.

Mark

Scumbag

645 -
On the figures - I reckon you're right about 35 months...all depends on when the APR is paid in the month, and when the payment is made...I didnt worry too much about that.

On the PCP...do you still get any 'haggle room' on the price? And any advice on who offer 'good' deals on new motors? I assume that the main dealers offer less good deals

Looks like I have some more spreadsheets to write !!!

645

Yeh, spreadsheeting it's the only way! I assumed interest paid monthly (4.75%, approx. 5% AER) and taxed at full 40%. Payment for car paid at start of each month.

On normal PCP's there's isn't a huge amount of haggle room - I looked at an S4 Avant a while back from direct from Audi, and they put some daft low residual/balloon payment into the calcs - I said bugger off, I thought Audi's were supposed to hold there value better than most! They did change it by a few K, so it was worth asking.

As I said, the Porsche one is different. They don't set it, you do....but of course that's not the resale value, just the final balloon payment. As long as you set it around the value you THINK it'll be worth at the end of the term, you're fine.

Remster

Cheers for the quality input (eventually )

As I thought the Porcshe scheme is different to most which I am now looking into further.

Scumbag

Looking at Norwich Union Cars...Their prices on new Audis are pretty good (£3k saving on an S4), but their APR is 8.9% on the PCP. I'm pretty sure I couldnt get that from Audi....I can feel a spreadsheet coming on

shailet

all I can say is anyone who can get a car via any type of finanace is lucky. My Mrs absolutely will not go down the credit route and thinks cars are a waste of money.
I have to save for years to eventually be able to think about getting the next car, pisses me right off but also to some extent makes me think I am lucky I havent got £££ in payments to make for the next 3-5 years.