Buying a Car - Finance Question

anotheruser

I don't quite understand how car finance works and whether it's worth it.

Saw a car that says this:

So £168 x 48 is about £8,065. Added to the 1000 deposit, it's about £9065. Not sure why it's not £9400.

But then it says this:

So really, I'd be paying £168 a month for 48 months, then have to make a final payment of £3060?
And because I am taking a loan, the interest I'd pay is £2725?

I guess Hire Purchase is similar but there's no extra payment at the end? Auto Trader gives this:

So I guess I'd pay an extra £590 for the privilege of paying monthly? That doesn't seem too bad.

I have some cash but not enough flow to pay for a car outright at the moment. 

I guess getting a 0% credit card and paying a bigger deposit means I'd pay less in interest? And paying the 0% credit card means I'd pay next to no interest (as I'd effectively be buying the car outright).

Am I sort of on the right track with this? 

Kattekwaad

Buying secondhand cars on PCP tend to have very high interest rates so compare the price of new cars.

But don't rush there will be deals around when this is all over.

Also look at bank loans and price them up.

DrEskimo

Yes you have understood things correctly. Obviously there is a larger difference between your PCP and HP examples as your PCP has only £1,000 deposit and is over 49months, whereas your HP example has a £4,000 deposit and is over 24months. Generally speaking, a HP will always cost less in interest than a PCP of similar APR, since you are not paying down the entire capital on the PCP. As you rightly point out, a lump sum is deferred to the final payment.

Borrowing £4,850 at 11.9% is still expensive, even if it's just £590 in interest. I would agree that a 0% credit card for that amount would obviously be better as it would save you paying any interest. However, that is dependent on getting accepted for a 0% credit card, getting a limit of at least £4,850 and that you pay it off during the 0% introductory term (e.g. 24months). If you don't pay it off and can't transfer the balance to another 0% card, then you are left facing very high interest rates after the introductory period.

If there isn't an immediate rush, then just keep saving and wait a bit longer, or look for cars that are around the £4/5k budget that you do have.

AdrianC

anotheruser said:

I don't quite understand how car finance works and whether it's worth it.

Saw a car that says this:

So £168 x 48 is about £8,065. Added to the 1000 deposit, it's about £9065. Not sure why it's not £9400.

But then it says this:

So really, I'd be paying £168 a month for 48 months, then have to make a final payment of £3060?
And because I am taking a loan, the interest I'd pay is £2725?

Yes. On a PCP you're borrowing the entire amount, and paying interest on the entire amount, but only paying back the depreciation over the term. You still owe the estimated future value. At the end of the term, you either give back the car and walk away, or you pay the £3,060 and own it.

So you're paying £1k up front, £168 every month... then either giving it back or paying another £3,060 to own it.
To own it will cost you £12,124. You've only paid off (£8,400-£3,060)=£5,340 of the actual loan over the four years. The rest of the monthlies covers the interest.

I guess Hire Purchase is similar but there's no extra payment at the end?

Correct. But you pay more each month, because you're paying all of it off over the term.

Auto Trader gives this:

So I guess I'd pay an extra £590 for the privilege of paying monthly? That doesn't seem too bad.

You're only borrowing half as much for half as long as your first example. The interest rate is the same - 11.9% APR.

£8,840 price. £4,000 paid straight off. £4,840 borrowed over two years.

I have some cash but not enough flow to pay for a car outright at the moment. 

I guess getting a 0% credit card and paying a bigger deposit means I'd pay less in interest? And paying the 0% credit card means I'd pay next to no interest (as I'd effectively be buying the car outright).

Am I sort of on the right track with this? 

Do you need a nine grand car?

If you can put four grand down on the second one, why not just buy a four grand car...?

Mutton_Geoff

You say there is "no payment at the end" for the second one, that's because you've effectively paid it at the beginning (ie £4,000 deposit instead of £1,000 for the PCP). Be careful these loan calculators are designed to make it look as cheap as possible to get into a newer car. You are also comparing apples and pears. The first deal is a 4 year loan with balloon, the second is a 24 month unsecured loan.

You are right to be adding it all up to find out the cost of the loan. This is particularly important with a depreciating asset like a £9k second hand car which won't be worth much at the end of 4 years.

If you have £4,000 for the deposit for the second deal, I'd bet you could find something as good as the £9k car for £4k and not have any loan payments to make.

If you were still tempted to borrow, watch out for the car dealers "fixed rate of interest". 6% looks cheap but the equiv APR is almost double.

If your credit rating is reasonable, you should be able to borrow £8,000 at a rate closer to 3% (eg Tesco Loans). If you must borrow money to buy a car, get yourself a loan first (loans less than £7,500 attract much higher rates of interest). £8,000 over 3 years would cost you £232 a month and total interest £358 over that period. I reckon you could buy the same car privately for closer to £8,000 that your dealer wants £9,500 for.

Don't forget to factor in servicing, tyres, brakes, MOT etc.

anotheruser

AdrianC said:

Do you need a nine grand car?

If you can put four grand down on the second one, why not just buy a four grand car...?

There's quite a difference in terms of modernidity, mileage and model between both values.

My 56 plate focus is really showing its age.
Yet my 11 plate golf is pretty modern still.

If I want something with low mileage and relatively new (2011+) (which is now 9 years old!), have to pay the bigger bucks.

I did only give a quick look on auto trader though so not fully investigate the market yet.

Mutton_Geoff

anotheruser said:

AdrianC said:

Do you need a nine grand car?

If you can put four grand down on the second one, why not just buy a four grand car...?

There's quite a difference in terms of modernidity, mileage and model between both values.

My 56 plate focus is really showing its age.
Yet my 11 plate golf is pretty modern still.

If I want something with low mileage and relatively new (2011+) (which is now 9 years old!), have to pay the bigger bucks.

I did only give a quick look on auto trader though so not fully investigate the market yet.

I just looked on Autotrader. There are loads of 2012/2013 Ford Focii there, several from main Ford dealers, several with only one owner, all under 70k miles, all less than £4,500 (which gives scope for your negotiating the purchase down to £4,000).

Keep it simple with a petrol engine/manual gearbox.

AdrianC

anotheruser said:

AdrianC said:

Do you need a nine grand car?

If you can put four grand down on the second one, why not just buy a four grand car...?

There's quite a difference in terms of modernidity, mileage and model between both values.

My 56 plate focus is really showing its age.
Yet my 11 plate golf is pretty modern still.

If I want something with low mileage and relatively new (2011+) (which is now 9 years old!), have to pay the bigger bucks.

I did only give a quick look on auto trader though so not fully investigate the market yet.

383 out of 471 2011 Golfs on Autotrader are <£4k.
170 of 280 £9k Golfs on Autotrader are 2015 or newer.

Pause and think about that for a moment. For the four year difference, you're paying £1k/year. That's depreciation.