Buying 25k car outright or use HP and leave cash in investments

fionasmith14

Hi all,

This may be a very silly question but numbers are not my strong point and i just wanted to get an idea from you guys before asking my financial advisor who will hit me over the head with a stupid question. (not really but its all just a thought at this stage)

I have around 400k invested 50/50 between Henderson Cautious Fund and the Prudential PruFund cautious. I have 15k cash and around 20k in ISA's. I want to sell my current car which is worth around 10k and buy a newer model around 24k.

Should I purchase the car outright from my investment money or should I hire purchase / lease the car over 3years? That would be around a 6.5% APR. I know investments can change at the drop of a hat and I'm not always likely to have the investments making more than that APR particularly at the minute....

As i said, Im useless at this sort of thing so any advise would be greatly appreciated.

Superscrooge

Generally you will get a better deal as a cash purchaser.

Every organisation involved in the selling process takes their cut of the profit. The finance company will be making a profit. The salesman probably gets commission for selling the finance etc.

You need to study the exact figures but I have always found that it is better to be a cash buyer than to take out a hire purchase or lease agreement

wooder

Hi Fiona

I had the same dilemma when I wanted to buy my Lexus RX a couple of years ago. I could easily afford to buy it if I withdrew money from my Fundsmith account but as it has been making over 17% pa average every year for the past 5 years I decided to look around and see what I could borrow the money at.
I finally took a HSBC loan at 3.9%pa which has just a one months penalty payment for early settlement so obviously it has turned out the right thing to do. I actually took the loan and then started looking for the car, which I found about six months later and was able to go look at it (private sale about 150 miles from where I live), do the deal, bacs the money over to the sellers account and drive it home there and then.
I bought used but it's in absolutely pristine condition, has low miles and drives like new and is a fraction of the cost of a new one. Remember, they are only new when they are in the showroom !
By borrowing the money from the bank I was able to shop around for a good deal and I also own the car (but owe the bank).
I think you should shop around for a better rate than 6.5% and then your investments have a better chance of beating it.

Futuristic

You usually only get decent lease deals on business lease, there are some odd personal leases with good offers on sometimes however. I'd check the estimated depreciation over 3 years on the car and compare to the lease offer.

YorkshireBoy

Just to throw a spanner in the works!...

How about using this credit card...

http://uk.virginmoney.com/virgin/credit-cards/money-transfer-32m/

...where you'd get the cash for the (very rough!) equivalent of around 1.2% APR (£236 fee for a £14K money transfer over 32 months). £142 a month for 31 months and the balance paid before the 0% expiry date.

The difference per month between this and a loan monthly payment at 6.5% APR is (£429 - £142 £287. Bung that in 3 years of 6% regular savers and there's £100 a year interest to be had...wiping out the fee and giving a small profit on top.

Of course you may prefer the 'easier' option of the loan and it's £1,447 interest charge over 3 years?

Just out of interest (pardon the pun!), what's the current return on your £35K savings?

noh

I have found that with my last two new car purchases finance was cheaper than a cash purchase.
One was because the manufacturer was offering a deposit contribution so I took out the minimum on Hire Purchase in order to get the £750 contribution I then paid off the finance within a week.
The most recent purchase was 0% finance provided by the manufacturer so it would have been rude not to take it.

Not so relevant to this part of the forum but make sure you check the new price via a broker such as Drive the Deal or Carwow etc. Then use that price to negotiate with your chosen dealer. If they won't come close then order via the broker

TheTracker

noh wrote: »

I have found that with my last two new car purchases finance was cheaper than a cash purchase.
One was because the manufacturer was offering a deposit contribution so I took out the minimum on Hire Purchase in order to get the £750 contribution I then paid off the finance within a week.
The most recent purchase was 0% finance provided by the manufacturer so it would have been rude not to take it.

Not so relevant to this part of the forum but make sure you check the new price via a broker such as Drive the Deal or Carwow etc. Then use that price to negotiate with your chosen dealer. If they won't come close then order via the broker

Likewise, with a 25% down payment I was able to get a 3 year 0% PCP that matched Drive the Deal, and they weren't able to go lower for cash. With my PCP there was a final balloon payment of 25% after three years. I gather data research must show this 0% incentive is more than paid for by people refreshing cars after three years or being unable to pay the balloon and then incurring interest. MSE says only 20% of people go on to buy the car (pay the balloon). So perhaps also look at PCP?

Here is the MSE page on PCP. I suffered none of the downsides in the link. The price wasn't higher and paying the balloon was free and easy. In return I put half the car's value in 3% deposit accounts.

KNJ_2

Don't forget to buy GAP insurance if you finance it.


Look at extended warranties as well.


Do you really need a car? 5000 a year on a car is a lot of public transport/taxis/ pairs of comfortable shoes, a really nice motorbike/bicycle

bowlhead99

KNJ wrote: »

Don't forget to buy GAP insurance if you finance it.

GAP insurance effectively covers the difference between what the insurance company will pay out for the car when you write it off, and what you paid for it (or, some reducing scale of payout over time). You can buy the product via a dealer, a finance company, or an independent insurer.

Depending on how much was financed and the depreciation profile of the car, this might be quite a chunky amount, and for someone who is financing a car because they can't actually afford to buy it outright, it could be quite galling to still owe (e.g.) £20k to a lender but have no car and only a £16k payout. So GAP insurance can be a useful product for some people who can't face that kind of cashflow problem, though on average the policies make money for the sellers of the policies.

However, the OP's position is that they have plenty of cash and other assets that they could use to buy the car outright, but they are just considering getting some finance because the interest rates are at relative historic lows and they could do other things with their cash. So they are not going to be destitute if a car insurance payout was £16k and they still owed £20k. They can simply pay off the loan with their other assets, just like they could have paid for the whole car up front in the first place.

They would then be in a similar position to any cash buyer of a car who had bought a car, suffered depreciation, and then written off their car getting an insurance payout which was lower than what they had paid for the car.

So, while GAP insurance may be useful if you write off your car - whether you'd bought the car outright or you'd financed it - on average they make money for the sellers of the product. The choice whether to take the expense of buying it, depends on two things: your expectation of the likelihood of it paying out, and the affordability of being in a situation where you write off your car and don't have it.

I don't see that it's so compelling for OP that they should "not forget to buy it" as if it is 100% obvious that they should definitely buy it and they'd be silly to choose to save their money.

racing_blue

If I had £400k, I would use some of it to buy the car.

1. It would keep the decision honest about how much £££ I wanted to spend

2. No paperwork hassle, simpler transaction and accounting

3. Investment returns are fickle. Eg. your Henderson Cautious managed fund returned 0.43% last year and had annual charges of 0.7%

N1AK

fionasmith14 wrote: »

I have around 400k invested 50/50 between Henderson Cautious Fund and the Prudential PruFund cautious. I have 15k cash and around 20k in ISA's. I want to sell my current car which is worth around 10k and buy a newer model around 24k.

Should I purchase the car outright from my investment money or should I hire purchase / lease the car over 3years? That would be around a 6.5% APR. I know investments can change at the drop of a hat and I'm not always likely to have the investments making more than that APR particularly at the minute....

To do a comparison you really need to come up with a rough expectation of the return you'd get on the money if you invest it and borrow instead; it is the difference between that estimate and the loan rate that gives you the financial cost of each option.

Other questions like whether you're likely to want to keep the car after 3 years etc may help you decide whether buying or leasing are the more convenient option for you.