Loans for a car - is there a better way?

mattrgee

I could do with a new car. i'm 6' 2'' and drive a 14 year nissan micra, its only got 60k on the clock but its the 'niggles' which are starting to get to me. Plus, there's not a lot of room!

Anyway, I'm not a great lover of loans or borrowing money full stop. I hate the idea of paying back the cost of car for 3 years+ whenever possible I try and save up and buy things in cash. But cars are just so dam expensive. I'm quite happy with 'nearly new' and 20k on the clock, but they still work out around 7-8K. Plus I want this to be an investment and a car I keep for a long period of time, so I want to get a resonable trim.

I'm able to save around £700 at the end of every month, although I'm currently not paying into a pension or anything. But even saving £700 every month, 8K seems a long way off.

Is it quite common for people to get a loan for a car, would I be joining the majority or the minority? Even over a couple of years it just seems crazy to be spending £300 every month just on a car!

Advice appreciated.

jimclark1967

I'd say there are 3 options depending on how urgently you need to replace your existing car:

1) Save up for it - at £700 a month you'd be there within a year.

2) Use 0% overdrafts and credit cards, but you need to play the system correctly or risk getting stung by charges and/or interest.

3) If it really is urgent get a flexible loan that allows you to overpay as much as you like. Then throw as much cash as you can afford each month at the loan to ensure you pay as little interest as possible.


For what it's worth I've just bought a 3yr old car with 20k miles on the clock for £4k from a car supermarket, paid half using some savings and the rest is on 0% cards for the next 9 months by which time it'll all be paid off - that's the plan anyway :beer:

JC

johannamse

mattrgee wrote:

Is it quite common for people to get a loan for a car, would I be joining the majority or the minority? Even over a couple of years it just seems crazy to be spending £300 every month just on a car!

Car loan posts on this forum are very very common. I agree with you. It seems absolutely crazy to me to spend so much BORROWED money on such a depreciating asset. People also commonly get HP, and/or car loans from Dealers with very high APR. A few months/years down the line when the car needs replacing or is written off, we get a post saying how unfair it all is. Borrowing money for cars, is one of my bugbears. Sorry for rant.

mattrgee

Thanks for the replies.

I just don't see how people can afford it. You see all these people with the latest model car, then after a couple of years they have a new one. And I'm not talking about high flying exec's either, this applies to many under some under 20's and many 25ish people.

I wonder what majority of people have to get loans at silly APR's in order to get the car they want???

Its a never ending band-wagon, you get the car you pay 8k and get a loan for 5 years, after that you think about trading it in and guess what? It's now worth half what you paid and its time for another loan!!!! Aggghhaaaa!

gkerr4

Sorry - but nearly every car under, say, 5 years old on the road today - is either financed or a company car!!

Speak to a dealer, my local BMW dealer says that approx 90% of cars they sell are financed through themselves, of the remaining 10%, approx 7% are financed through other routes (bank) and the remaining cars are bought outright by truly wealthy people. I even know that footballers finance their cars and pay a pretty penny for the finance rate too - try getting an unsecured loan for over £20k!!)

It's all to do with priorities really. You either want a fancy motor or you don't. I had company cars for years, but in Jan 2004 I opted out of the scheme and took the cash (decided that car tax rules make owning a better option). I had previously had a few BMW 3-series so I bought a 2yr old 318iSE with <20,000 on the clock for £12,500. I financed this 100% since I didn't want to use any savings. Basically I have paid £279 a month for it. just 20 months on I want to change so I am lining up a used Merc CLK to replace it. I owe £7000 on the loan, but am being offered £7800 - £8000 trade-in so I have gained £800 to £1K equity in the car. I'm happy with that. I'll trade in and start again. As my salary goes up (it's doubled since i bought the BMW) I can afford higher monthly outlay and better cars have to follow. I'll look at about £400 / month now which means with the equity in my car I can look at cars around £18,000 (i'll actually add some savings to this and look at the £20,000 mark)

PCP scheme's are much the same - at the end of the day you don't really want to own a car since they are nasty things to own and depreciate a lot. So finance packages are based around paying solely for the depreciation. The PCP "final payment" shoule equal the value of the car at that point (usually three years) if the car is worth more - then great, you have made some equity. You can get into all sorts of side-bets around "guaranteed value" - but if you are buying a car with strong residuals (Merc C-class, BMW 3series, VW Golf etc) then you can get better finance figures by taking the risk

Like most things - you makes your choice and pays yer money.....

macca64

I paid cash for my car approx £4k around 3 years ago and I hope to keep it for approx another 3 years. I also hate the idea of paying interest on a loan to buy something that depreciates in value.

My dad brought his car approx 10 months ago, using a mixture of cash and a flexible loan. He has just taken out a Capital One 0% until January 2007 to pay of the flexible loan (Via Egg card to do SBT to bank etc), which means he will save interest of approx £100.

So really you could try a 0% credit card for as long as possible, or a life of balance card, both offer flexibility of overpaying!!

Good luck.

tomstickland

You can buy totally sound cars for £1.5K nowadays. For example, a friend's girlfriend has a 5 year old Skoda Felicia in as new condition and he says it's worth <£1K in the Parkers guide. Really, don't bother borrowing £7K or whatever, there's so many good cars out there for a lot less than that.

agc_2

If you can find a model of car which doesn't depreciate much, it makes the thought of a car loan easier to swallow.

I'm buying a new toyota prius. It's a hybrid petrol/electric car. I reckon it'll save me at least £800 per year in fuel costs (probably nearer £1000), the road tax is only £65 quid, no congestion charge, fairly low insurance and its kinder on the environment. It drives well too.

There's virtually no second hand market in these cars. Those that are on sale are only a few hundred off the new price. ex-demo models are like gold dust. 3-6 months wait for an ex-demo at the dealers I tried.

Anyway, the apparent lack of depreciation plus the really good deal I got buying the car convinced me that a loan wasn't such a bad thing. Have taken out a loan of 11K at 5.7% as part payment for the car which I'll pay off in a year. Considered using a 0% credit card. The dealer would have added a 2% charge for this and I know I'm not really disciplined enough to manage the 0% rate.

Any thoughts on the best cars to go for in terms of minimal depreciation?

gkerr4

i don't know...

for me - the idea of 'moneysaving' and 'car ownership' just don't sit hand - in hand.

Car selection and purchase is too much of an emotive issue. If you really just want to get from a-b then perhaps tomstickland's idea is good. But personally I wouldn't be seen dead in a brand new skoda let alone a sub £1k one.

nor an electric crossbreed or whatever they are called. Sorry -I am sure they are eco-friendly and the finances probably work out favourable (same case for the honda whatsitsface) - but at the end of the day - it's a toyota - worse still, it's a hideously deformed toyota.

for me - moneysaving is for other area's of life - like the electriciy bill, credit cards and good use of savings accounts / careful selection of current account. For my car - I'll pick with my heart and live with the costs.

as for other cars that depreciate favourably - well most Volkswagens are pretty good - in aprticular the Golf family and especially the upper models such as Gti, R32, V6 4-motion etc. If you can live with a 'taxi-sounding' car then the GT-Tdi has awesome residuals and is probably quite economical too.
Mercedes C-class are a good bet (top gear once said "it depreciates slower than the queen mums funeral - actually that was when the QM was alive and made in better taste then. no insult intended). but A-class is not!
BMW 3-series and most 5's are good - 7's are not since the market is smaller. Remember though the the options you put on the car are worthless once you drive away (with the exception of things like leather and auto box)

On another front - why not look for a used, quality car where someone has already taken the biggest hit in depreciation. A good example here is the Mercedes 'ML' class (the SUV / 4x4 thing) - hideously expensive when new, but a decent 3/4 yr old, lowish mileage ML320 with all sorts of toys can be had for around £17-20k now - this would be over £40k new and with a good valet and a private plate (to de-age it) will still look a million dollars on the road.

(just hope nowt goes wrong - 'cos there are no moneysaving idea's when it comes to repairing Merc's!!!)

Rafter

OK Matt,

Excessive debt is a bad thing, but manageable debt for Mortgages or Car loans at a reasonable rate of interest is not a bad thing. It 'enables you to buy things you need or want now and spread the cost over time for a manageable fee'

Taking your example of buying a £8,000 nearly new car you are going to keep for a long time.

Lets say you take out a loan over 5 years. That way the value of the loan should never be more than the loan outstanding - a good thing if you might want to upgrade or suddenly sell the vehicle.

You get a good value loan at say 6% APR. Your payment each month will be £154. Of this £133 will be repaying the £8000 and £21 is interest.

Is £21 a month a price you are prepared to pay for having the car now rather than saving up?

R.

Number_6_3

Must admit I not a fan of loans either...

When I brought my car I took out a loan with egg. Who at the time (may still do) had a loan which had no penalties for paying back early. They also offered better rates the more you borrow.

So I took out a loan for a lot more than I needed and sent them a cheque before the money had cleared in my account. I kept the schedule the same and the payments, eventually upping them to clear it quickly.

I think Egg are pretty uncompetitive at the moment, but there are plenty of others out there. Just make sure there are no penalties for paying back earlier, and make sure that the payment protection isn't a condition of the loan.

R