Car Finance Options

Caitykinss

Hello all, I'm after a bit of help understanding what option would be best for us when we replace our car. Apologies for the long post - skip to the second to last paragraph for my actual question!

As a bit of background, I have an 11 year old Kia Picanto and my other half has a 12 year old Ford Fusion - both at the point of needing to be replaced soon and both worth less than £200 each. Initially, I had saved enough in cash (around £6000) to buy myself a little car outright, then we were thinking of waiting until next year to replace the Fusion. My other half has now been told that he will be working from home permanently, and my little Picanto has flown through it's MOT while the Fusion has starting making expensive sounding noises. We're considering going down to one car instead and pooling our savings to swap the Fusion for a bigger, nicer car, whilst keeping hold of the Picanto in case OH needs to nip out during the day.

For the cars we're looking at, we're going to need some sort of finance, but I'm getting very confused with the options. Our Picanto/Fusion were our first cars and we both bought them outright, so have never done finance before. 

We have about £10,000 cash between us (can stretch to £12,000 if needed) to put towards the car, and have been looking at ones that are around £18,000. For monthly payments, we can afford about £250 a month between us. Initially, I thought HP or a bank loan would be the best option for us, as I'd like to own the car and have it last as long as it needs to, but OH would prefer to do PCP and have the option of swapping the car after 3 or 4 years. He also likes the monthly payments are smaller, so we can stretch to a better car. The problem is, I don't really understand PCP (nor does he), and don't want to end up losing the £10,000 we put down, or have to come up with the same again in 4 years time when we swap the car. It seems PCP agreements work better for smaller deposits, so I'm stuck as to what to do.

My question is, if we go for PCP, is it a better option to put down a much smaller deposit that will carry on to the next car when we swap it? From what I've read, it would be unlikely we'd have anywhere near the £10,000 we originally put down left in equity to pass on to the next one. Essentially, what would be the best use of the £10,000 we have? 

Thank you   

Grumpy_chap

Before considering the finance, it is important to know the needs and wants.

Your strategy, AIUI, is to send the deceased Fusion to car heaven, keep the OAP Picanto as a second car, then buy a nice new car that meets your normal needs.

Seems like a sound strategy - the only thing I'd do is to hold onto the Fusion just until you select the new car incase there is a "scrappage" offer that requires something to be given in.  If not, then weigh-in the Fusion for scrap.

You have £10k to buy a car, or up to £18k if you finance.  What are your needs and wants for the new car? 
Are you looking for a brand new car or second hand?
Have you got so far as actually choosing a model of what the car will be yet?

Once you've chosen the car, then you can look at the finance approach.  The most cost-effective route will likely be influenced by the answers to the questions above.

Caitykinss

Thank you for responding. 

We're going to keep hold of the Fusion for now like you said, and see what scrappage/part-ex might be available. 

We're looking for a compact SUV, a year or two old with fairly low mileage, that is modern enough to potentially last us 10 years if we need it to, although it's more likely we'll swap it sooner than that. So far we've looked at the VW T-Roc, Kia Niro and Mazda CX-3. We're not completely set on the model yet, but that the sort of thing we'd like to go for and the price of £18,000ish seems to cover those options, as well as suiting the £250 a month payment for HP when doing online calculators. Needs are something reliable and comfortable to drive long distances as we like to do UK road trips and would love to do European ones too. We also need/want a higher driving position, and enough room to suit us when we start a family in the next few years, and enough boot space for a large dog. We'd also like/want something that is a bit more exciting to drive than we've currently got (not difficult!!), with Apple Carplay and adaptive cruise control. We love the idea of a hybrid, which is why we've looked at the Niro, but after test driving one, we're not sure it's 'SUV' enough for us. If we can't go for hybrid, we'd prefer something that is as kind on the environment as it can be.

Essentially, we're in our late-20s and have finally worked our way to having a fairly decent income, and would like a 'grown up' car that we can get excited about driving.    

Brie

How long would it take you to save up the extra above £10k?  Alternatively how much could you afford in monthly payments?  Do you have any options on 0% balance transfers or purchases on a CC you hold already or would be willing to apply for??  I know a couple of mine have deals where I can do a long term purchase at a guaranteed rate of 3.9% which may well be less than you would get for a loan for the same amount and period.

Caitykinss

I need to look into the CC option. I don't have one with a big enough limit - I only have a Clarity one for spending abroad, but willing to apply for one if that's the best option. 

We can afford about £250 a month, and it would take us a couple of years to save up the extra - longer than either of our cars will last.  

Grumpy_chap

Going for a 1 or 2 you mid-size SUV, £18k is a good budget and gives you plenty of choice.  

For financing, the route to go for is the way that comes up with the lowest overall cost to own.  The incentives on PCP and scrappage scheme deals are generally less favourable for used car compared to new, so you may well find conventional finance to be just as cost-effective.

It seems too early to give advice about the finance choices.

However, it seems as though you may be unclear as to the difference between PCP, HP, etc.  All are simply forms of finance (as are cash, bank loan, zero percent credit card). 

Caitykinss said:

I thought HP or a bank loan would be the best option for us, as I'd like to own the car and have it last as long as it needs to, but OH would prefer to do PCP and have the option of swapping the car after 3 or 4 years. He also likes the monthly payments are smaller, so we can stretch to a better car. The problem is, I don't really understand PCP (nor does he), and don't want to end up losing the £10,000 we put down, or have to come up with the same again in 4 years time when we swap the car. It seems PCP agreements work better for smaller deposits, so I'm stuck as to what to do.

Apart from lease (PCH), with any finance, you have the option to change the car after 3 or 4 years.  Or to keep the car for as long as it lasts.  It is incorrect that PCP cars have to be returned at the end of the agreement, though it is in the Dealer's interest that you do swap out so they don't promote the alternative options that loudly.

PCP monthly payments are smaller because there is a chuck of the finance never paid off.  This means you are paying interest on that chunk for the full term and all things being equal, PCP would cost slightly more overall because of the higher balance held on credit for longer - however Dealer / Manufacturer incentives often mean that all things are not equal.  It is also important to remember with a PCP that at the end of three years you either need to pay the balloon payment or change car so you need a plan to meet that bill.

With HP or a simple bank loan, at the end of the term, you own the car.

Your comment about "don't want to end up losing the £10,000 we put down, or have to come up with the same again in 4 years time when we swap the car" is confusing.  If you buy a car for £18k, say 2 yo, and sell in 4 years at 6 yo for £6K, the depreciation has cost you £12k.  Having the use of the car for 4 years has cost you the £12k plus whatever interest is paid.  That money is then "lost".

As this is MSE, the money-saving approach would be to buy a car with the £10k cash that you have and then run it until it goes no more.  

I don't often do this, and it is not very MSE, but if you go for something less popular there could be brand new within your monthly budget:
https://www.richmondmotorgroup.com/hyundai/offers/all-new-hyundai-tucson-se-connect/

DrEskimo

The most cost effective option is to buy a car with the cash you have, so just set your budget to £10k.

If you want to buy a higher value car, then look at the total cost of interest. PCP with low deposit on a higher value car will cost substantially more in interest. The lower payments come at additional cost to you.

The whole thing about wanting to change cars every few years is irrelevant. You can do this whatever finance option you choose. You will most likely just trade the car in at the end of the PCP, which is exactly the same process if you owned the car.

Caitykinss

I think with PCP I'm confused about the deposit we would need if we did want to swap the car at the end of the agreement. Essentially, I'm putting down a £10k deposit this time, to lower the monthly payments, but if I decide to swap at the end of the agreement, I'm confused about where the deposit for that comes from. From what I understand, I would use the equity left in the car for the deposit, which may only be £2k for example, and therefore the monthly payments for the next car would be much higher, unless I'd saved up another £8k by that point. Is that right? Then I'd be locked into a loop of needing to find £8k every 4 years to keep the monthly payments down.

In that case would it not be better to just start with a £2k deposit from the beginning and have higher monthly payments, and use the extra £8k for something else? I understand I'd be paying slightly more interest to do it that way. 

I'm sure I'm overthinking this. Honestly I think HP, bank loan or CC is the best option for us, but when I've mentioned this to car dealers they just look at me like I'm stupid (I know they're trained to push PCP as it's better for them). I think I'm just trying to fully understand PCP so that I can confidently rule it out or make an informed decision when they start throwing the 'deposit contribution/0%' garb at me.  

DrEskimo

Caitykinss said:

I think with PCP I'm confused about the deposit we would need if we did want to swap the car at the end of the agreement. Essentially, I'm putting down a £10k deposit this time, to lower the monthly payments, but if I decide to swap at the end of the agreement, I'm confused about where the deposit for that comes from. From what I understand, I would use the equity left in the car for the deposit, which may only be £2k for example, and therefore the monthly payments for the next car would be much higher, unless I'd saved up another £8k by that point. Is that right? Then I'd be locked into a loop of needing to find £8k every 4 years to keep the monthly payments down.

In that case would it not be better to just start with a £2k deposit from the beginning and have higher monthly payments, and use the extra £8k for something else? I understand I'd be paying slightly more interest to do it that way. 

I'm sure I'm overthinking this. Honestly I think HP, bank loan or CC is the best option for us, but when I've mentioned this to car dealers they just look at me like I'm stupid (I know they're trained to push PCP as it's better for them). I think I'm just trying to fully understand PCP so that I can confidently rule it out or make an informed decision when they start throwing the 'deposit contribution/0%' garb at me.  

There's two aspects.

The first is that a higher value car that is brand new will cost more in depreciation (and on PCP potentially more in interest), so the total cost would be more.

Secondly, whilst you may only have £2kish in equity, the lower monthly payments will presumably mean you can save more per month. However, what is the point in paying only £150/month towards a high interest debt, just so you can stick £100/month in a low interest saving accounts? 

Higher deposit and lower monthlies, or lower deposit and higher monthlies. It's really much or a muchness. It's the total cost that matters, and a higher deposit will just save you a bit of interest.

I find it can help if you have a specific example. Both of a used car you are interested in, and a comparable PCP?

It sounds like your other half likes the idea of getting a new car, and also keeping the £10k in the bank. Not uncommon but it's a false economy. You are agreeing to buy a high cost car, and sticking it on finance instead will just cost you more in the long run.

Grumpy_chap

Caitykinss said:

car dealers trained to push PCP as it's better for them

Yes, sort of.  Dealers like PCP because it starts to create the mind-set that you have this car for 3 or 4 years and at the end of the term will give that car back and buy another car on another finance package. Repeat sales and repeat finance sales, so very good for the Dealer.  In exchange for meeting never ending finance payments, you get a new car every 3 or 4 years.

The other good thing for PCP (as far as the Dealer is concerned) is that the lower monthly payments mean you can choose to have a more expensive car than you could otherwise on conventional finance.  So, the Dealer has done a big "up-sell" and you don't even realise.

If the Dealer offers PCP with an "incentive" such as deposit contribution, there is nothing to stop you taking the PCP finance, securing the incentive and then paying off the finance so avoiding interest costs.

Most MSE approach is to not pay finance and simply have the cheaper car you can afford.  However, this site is not just about make-do, but finding the most cost-effective way to achieve what you need and want within the reasonable constraints.

Caitykinss

As an example, this is one we've arranged to test drive this week:

https://www.autotrader.co.uk/car-details/202106073576926?include-delivery-option=on&make=VOLKSWAGEN&postcode=s727ga&sort=relevance&year-from=2019&advertising-location=at_cars&onesearchad=Used&price-to=19000&year-to=2021&model=T-ROC&radius=50&page=1&fbclid=IwAR3x9w76zarNSVjZ7Sinw9JZMOTyBLswtCFYDGKyOytWKOZ6HP6zs5nOUZA

And this is the one we test drove yesterday:

https://www.autotrader.co.uk/car-details/202106103683963?make=KIA&postcode=s727ga&year-to=2021&price-to=19000&sort=relevance&include-delivery-option=on&onesearchad=New&onesearchad=Nearly New&onesearchad=Used&advertising-location=at_cars&year-from=2019&model=NIRO&radius=50&page=1

I think I just hate the idea of getting anything on finance. I'd much rather save up and just buy outright and know that the car is mine. My OH wants a much better car than we can buy outright (I'd be happy to just spend the £10k, or scrape together £12k). He isn't anywhere near as frugal as me, and thinks absolutely nothing of finance. He's a magpie and likes his luxuries and is absolutely set on getting an SUV. He also loves the idea of getting a shiny new car every couple of years, and honestly think he would go for a lease option if I'd let him (I won't!). We've come to a compromise really, because I know we can afford to take out some kind of finance, but I'd rather it be one where I'm paying minimal interest over as short a term as possible, so we own the car as quickly as possible. I don't want the monthly payments to become a permanent outgoing.