What is the ‘best’ way to pay for a car

cyrilsneer

I’m looking to change my car. I have a used Mini to trade in - worth £5k - and am thinking of getting a one-year old Mini next.

A car is a depreciating ‘asset’. I know this. I’ve only ever paid cash before for cars that are a few years old. I’m slightly wondering what is the best way to buy a car of significantly higher value than I am used to.

If I buy a car with real money then I invest, say, £18k cash on top of the trade-on car - only for the car to be worth half that within a few years - and for its value to then continue to dwindle.

If I ‘finance’ a car then I can go down the hire purchase route which is effectively a loan to buy the car. I borrow the money over a certain period and pay interest. At the end of the term I own the car - and it is worth significantly less than I paid. I can’t see any advantage in doing this since I’ve got savings and can pay cash.

Or there is the PCP route. I sign up for a payment plan over four years. During that time I make payments - including interest - which effectively cover the depreciation. After four years I hand the car back and start again - accepting that I will be paying £250pcm for the rest of my life in order to have the use of a car. OR, at this point, I can pay them a lump sum and the car is mine. I’m wondering if I do just ‘suck it up’ and pay a monthly payment and depersonalise ownership of a car although it is not what I am used to.

1. Have I understood the options correctly?
2. What is the best thing to do? I’m in a position to pay cash if I decide that is the best thing. The car salesman says ‘You don’t want to tie up your own money in a car’ but he would say that, wouldn’t be, if he makes commission from selling me a finance plan.

Thank you in advance for any advice or guidance.

Steph xx

neilmcl

All things being equal cash will always be the cheapest way to buy a car, however you'll likely get a better deal from the outset buying a car on finance and there's nothing stopping you from cancelling/settling the finance straight away therefore taking advantage of any discount/contributions offered. Having said all that, PCP is just another form of HP and is never a good way to finance a used car, the APR for starters will be much higher.

splishsplash

My preference would be trade-in + cash.

I don't really understand how a PCP works though. It just seems like a crazy expensive way to rent a car you will never actually own.

Supersonos

cyrilsneer wrote: »

I’m looking to change my car. I have a used Mini to trade in - worth £5m - and am thinking of getting a one-year old Mini next.

Is it made of gold?

As a higher-rate tax payer, it was cheaper for me to take out a loan over three years rather than take the money out of my business in one go and pay the increased tax.

I also took out the dealer's PCP to get a £2k dealer contribution, only to pay off the PCP a couple of days later with the loan money.

neilmcl

Supersonos wrote: »

Is it made of gold?

As a higher-rate tax payer, it was cheaper for me to take out a loan over three years rather than take the money out of my business in one go and pay the increased tax.

I also took out the dealer's PCP to get a £2k dealer contribution, only to pay off the PCP a couple of days later with the loan money.

Unlikely to get much of a contribution on a used car, also the OP already has the cash, you didn't, it was in your business.

cyrilsneer

Oops! £5k! Xx

Supersonos

neilmcl wrote: »

Unlikely to get much of a contribution on a used car, also the OP already has the cash, you didn't, it was in your business.

Are you sure about that? Mine was a used car and I would say £2k was quite a hefty contribution on a £23k car.

And with interest on loans as low as it is at the moment, one may prefer to invest the £23k in something else (one's mortgage for example).

facade

splishsplash wrote: »

My preference would be trade-in + cash.

I don't really understand how a PCP works though. It just seems like a crazy expensive way to rent a car you will never actually own.

It is fine for the sort of people who would keep on throwing money away by constantly buying new cars every 3 years.

Conventionally, you would buy a car, then after 3 years trade it in, loosing a fortune, and buy another.
PCP is just a way to only pay the money that you would have thrown away anyway, you never have to pay for the bit of the car that you would have owned, and then just get the same money back at trade in.


It isn't a great deal on used cars, as the interest is usually much higher, and there is the chance of having a car that is outside warranty, that you have to either repair or pay for in full should it break.

motorguy

Supersonos wrote: »

Are you sure about that? Mine was a used car and I would say £2k was quite a hefty contribution on a £23k car.

And with interest on loans as low as it is at the moment, one may prefer to invest the £23k in something else (one's mortgage for example).

Its rare to get a big contribution on a used car, and if there is its usually accompanied by a heavy interest rate.

The trick then being to take out the subsidised loan, then clear it with a cheap loan.

motorguy

facade wrote: »

It isn't a great deal on used cars, as the interest is usually much higher, and there is the chance of having a car that is outside warranty, that you have to either repair or pay for in full should it break.

I've never really got that argument - would someone who bought a 3 year old car for cash not want to repair it should it break?

facade

motorguy wrote: »

I've never really got that argument - would someone who bought a 3 year old car for cash not want to repair it should it break?

It is about perception.


If you paid £5k cash for a car and 2 years later it needs £3k of work, you either stump up the £3k, get rid for whatever you can get and buy another, or just walk for a bit until you can sort it out.


If you are paying the monthlies, you wouldn't want to put another £3k into someone else's car, especially whilst you are possibly stretched paying the monthlies.