'Best' option for financing a new car?
18 January 2008, 03:42 PM
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'Best' option for financing a new car?
We're talking nearly new, circa £30k
Size of monthly payments not really an issue.
Deposit available up to 15k cash.
Wouldn't likely keep the car more than 2 years.
What's my best option from a dealer (i.e. not via a bank loan.)
thanks
Ed
Size of monthly payments not really an issue.
Deposit available up to 15k cash.
Wouldn't likely keep the car more than 2 years.
What's my best option from a dealer (i.e. not via a bank loan.)
thanks
Ed
18 January 2008, 07:39 PM
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I'd just buy a £15k car and save the rest. You'll save an absolute fortune on depreciation and financing costs.
Dealer options vary, but will include hire purchase and personal contract purchase. Interest rates will be high, flexibility will be low, the finance will have charges and you will likely be tied in and/or paying front loaded interest.
If you are offered 0% finance it means that the car is rubbish and won't sell and you'll pay in depreciation.
Dealer options vary, but will include hire purchase and personal contract purchase. Interest rates will be high, flexibility will be low, the finance will have charges and you will likely be tied in and/or paying front loaded interest.
If you are offered 0% finance it means that the car is rubbish and won't sell and you'll pay in depreciation.
18 January 2008, 10:32 PM
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Thanks John, nice idea but we all know that if we were worried about saving money we wouldn't be driving cars, let alone M3's and M5's 
I was just interested as someone once said I was stuped putting down a 15k deposit, I'd be better off saving the cash and just making the monthly payments and then swapping it for something else in a couple of years.
I was just interested as someone once said I was stuped putting down a 15k deposit, I'd be better off saving the cash and just making the monthly payments and then swapping it for something else in a couple of years.
18 January 2008, 10:48 PM
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Thanks John, nice idea but we all know that if we were worried about saving money we wouldn't be driving cars, let alone M3's and M5's
I was just interested as someone once said I was stuped putting down a 15k deposit, I'd be better off saving the cash and just making the monthly payments and then swapping it for something else in a couple of years.
I was just interested as someone once said I was stuped putting down a 15k deposit, I'd be better off saving the cash and just making the monthly payments and then swapping it for something else in a couple of years.
Not an expert on this, but maybe selecting a finance payment to suit yourself, decide when a good point would be in the future to get rid and then use the halves and quarters clause in your finance contract. You will be essentially leasing the car, but, and as i said i'm not an expert, it may work out cheaper.
If you take the view as i do that your main mode of transport is a massively depreciating item (well on the miles i do my car is, plus it's a ford
) and unless you have the cash to pay for your car outright on a marque not suffering from massive depreciation and change frequently so to protect the money spent. Then maybe the way i buy my work car might work for you.Ps before i get flamed for being crap, it works for me, and allows me to drive into the ground a car at a reasonable price, that i wouldn't want to be near after 2 years ownership let alone 4 years
18 January 2008, 11:36 PM
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Apart from the first year after graduation when I knew my income would quadruple over 5 years or so I've never taken out a car loan and never will. With hindsight I wouldn't have taken out that one, at the time at 9.9% APR, 20% deposit, front loaded interest meant when the car was written off I lost the £3k deposit and had made a year of payments and walked away with nothing. Yes, now you could have GAP insurance, payment protection insurance etc. I would have been better with a banger bought for cash.
Using finance is a way to end up long term in a worse car, or spend far more money than you need to. Unless your income is dramatically increasing or your employer/business arrangements make it beneficial, it seems to me to be better just to save for what you want. It is very difficult to get a risk free return higher than the rate you will pay on consumer debt. I know it isn't fashionable, but at the end of a cheap credit cycle it is probably sensible whatever your position? Porsches were good value during the last recession.
Regarding being silly for using your cash, the BMW dealer tried that with me on an M3. The finance package was rubbish, but they said nearly everyone bought on finance. I wasn't trapped when I realised that I didn't like the car and it was a load of hype, I had more fun in a Mondeo. I lost enough in depreciation alone, would have been comical with finance.
Using finance is a way to end up long term in a worse car, or spend far more money than you need to. Unless your income is dramatically increasing or your employer/business arrangements make it beneficial, it seems to me to be better just to save for what you want. It is very difficult to get a risk free return higher than the rate you will pay on consumer debt. I know it isn't fashionable, but at the end of a cheap credit cycle it is probably sensible whatever your position? Porsches were good value during the last recession.
Regarding being silly for using your cash, the BMW dealer tried that with me on an M3. The finance package was rubbish, but they said nearly everyone bought on finance. I wasn't trapped when I realised that I didn't like the car and it was a load of hype, I had more fun in a Mondeo. I lost enough in depreciation alone, would have been comical with finance.
Last edited by john banks; 18 January 2008 at 11:47 PM.
19 January 2008, 12:13 AM
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Cheers John.
I own my company and pay myself a low 6-figure salary so the monthly payments are not a major issue, and our medium-to-long-term exit prospects for the company are pretty favourable so (and please forgive me for saying as I know as well as anyone that in business nothing is ever certain) I'm not hugely worried about the situation in a year or two's time, but at the moment even on that size of salary my existing debts from funding the startup of the company, plus my lifestyle etc. I just would never get around to saving the full amount!
To be fair I've always done very well on depreciation. In fact, my RS6 I bought for £33,500 from a dealer, did over 7k miles, and then sold privately for £33,000!!! The M5 will also do very nicely, helped by a new engine courtesy of BMW. However, with the warrantly now run out, I regularly find myself spending £500+ on random bits....MAF's the other month, seat electrics the month before, service the month before etc. etc....I could be making payments on a new car for that with the added security of a BMW warranty.
So back to the subject, would I be best then putting the money from the M5 straight onto the new car, and then fairly small monthly payments with a balloon at the end, given that by the time it's due I should (hopefully!) be in a position where I would just be able to pay it off, or use the value of the car towards another purchase?
Excuse the ignorance, I've only had finance once before (on the RS6 which incidentally on Audi exec finance was something like 3.3%!)
thanks
Ed
I own my company and pay myself a low 6-figure salary so the monthly payments are not a major issue, and our medium-to-long-term exit prospects for the company are pretty favourable so (and please forgive me for saying as I know as well as anyone that in business nothing is ever certain) I'm not hugely worried about the situation in a year or two's time, but at the moment even on that size of salary my existing debts from funding the startup of the company, plus my lifestyle etc. I just would never get around to saving the full amount!
To be fair I've always done very well on depreciation. In fact, my RS6 I bought for £33,500 from a dealer, did over 7k miles, and then sold privately for £33,000!!! The M5 will also do very nicely, helped by a new engine courtesy of BMW. However, with the warrantly now run out, I regularly find myself spending £500+ on random bits....MAF's the other month, seat electrics the month before, service the month before etc. etc....I could be making payments on a new car for that with the added security of a BMW warranty.
So back to the subject, would I be best then putting the money from the M5 straight onto the new car, and then fairly small monthly payments with a balloon at the end, given that by the time it's due I should (hopefully!) be in a position where I would just be able to pay it off, or use the value of the car towards another purchase?
Excuse the ignorance, I've only had finance once before (on the RS6 which incidentally on Audi exec finance was something like 3.3%!)
thanks
Ed
Last edited by Edcase; 19 January 2008 at 12:27 AM.
19 January 2008, 10:03 AM
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You did well on the RS6! My M3 went from £36k (dealer) to £31k (private) in 6 months. I hung on for the best deals I thought I could get.
Only you can decide how much to pay, on similar income I save about half of it and have a fairly recession proof job, but then living in Scotland is cheap and I have no kids. It should surely be quite easy to rustle up about a quarter's gross income for a car, but equally you won't even notice the repayments I suppose. I'll do no more preaching!
Regarding finance, I can raise money through my business against my capital balance at base rate + 1% (my business partner did the same in October so no effect from the credit crunch then), and claim tax relief on the interest. This works out at only 3.9% which will be difficult to beat except for subsidised deals from dealers. It depends how much your business is loaded up with debt.
As a business owner you could also ask your accountant whether there are any options to do it through your business.
When comparing dealer finance, be aware of flat rates which dealers love to quote. However, they do put the APR in larger, bold font on the credit agreement.
As an example I dug out an old thread where we were discussing this on BM3W (interest rate was 4.5% at the time)... it disucsses flat rates, front loaded interest, balloons etc:
In reality the dealers never seem to get anywhere near the rates I can get off the bank.
You could use the M5 as deposit plus whatever you want to put with it in cash, then use HP to pay off the entire sum in 2 years. The payments shouldn't be that high, and then you'll own the car.
If you want to minimise the payments, then PCP would give you a smaller monthly payment, but PCP seem to attract higher interest rates, and of course you'll have a higher average balance throughout the deal because you won't have paid it off at the end. The dealers like to leave it so that you have enough extra value in the car at the end of the deal over the balloon payment so they can put you into your next car on another finance deal. As above it also protects them (the finance house) against default or total loss because there shouldn't be negative equity on the car.
The second option is tempting for many because of the lower monthly payments, and it suits their cashflow better.
BEWARE again, the real interest rate and front loaded interest. They have all manner of ways to take your money and make you think they are not!
On another note, I did see that on some depreciation resistant cars that the monthly payment on contract hire can be quite low. Then all the finance is off your personal or company balance sheet.
Only you can decide how much to pay, on similar income I save about half of it and have a fairly recession proof job, but then living in Scotland is cheap and I have no kids. It should surely be quite easy to rustle up about a quarter's gross income for a car, but equally you won't even notice the repayments I suppose. I'll do no more preaching!
Regarding finance, I can raise money through my business against my capital balance at base rate + 1% (my business partner did the same in October so no effect from the credit crunch then), and claim tax relief on the interest. This works out at only 3.9% which will be difficult to beat except for subsidised deals from dealers. It depends how much your business is loaded up with debt.
As a business owner you could also ask your accountant whether there are any options to do it through your business.
When comparing dealer finance, be aware of flat rates which dealers love to quote. However, they do put the APR in larger, bold font on the credit agreement.
As an example I dug out an old thread where we were discussing this on BM3W (interest rate was 4.5% at the time)... it disucsses flat rates, front loaded interest, balloons etc:
Higher balloon will give you less deposit for the next car at the end of the term. The lender will not want to expose themselves to the depreciation risk of a really high balloon as you would just give the car back and they would have to dispose of the car for less than the balloon. Or if you can't make the payments, if you have put down a low deposit and they have to take the car back they could be at a loss.
I think a good rate is Bank of England base rate plus 1% and I refuse to sign a loan agreement for even £20K private or business loan until I've got the rate down to this, but personal circumstances vary. I would suspect with Personal Contract Purchase that the rates will be rather less competitive. So with the present base rate at 4.5%, I like to borrow at 5.5% or lower.
Car finance people like to confuse with their talk of flat rates, which is the percentage of the ORIGINAL loan amount that is paid each year in interest, WITHOUT the charges. Also with some loan agreements you are not paying off the capital in what I consider a fair way - they can front load the interest so that say a third of the way through the loan you've paid loads more of the interest and the settlement figures are still really high. I had a car written off after a year and faced this nasty surprise.
So to give you an example from BMW® Financial Services for HP (I know you want PCP but I want to illustrate the rates) they said they gave the best rate up front because I didn't really want their finance but just took their quote anyway:
(a) Cash Price inc VAT 33365.00
(b) Less Initial Rentals/deposit 13365
(c) Balance of cash price/amount of credit 20000
(d) Add Charges 1769.92
(e) Admin Fee with first Monthly rental 125.00
(f) Purchase Fee payable with Final Rental (inc VAT) 50.00
(g) Total Charge for Credit (d) + (e) + (f) 1944.92
(h) Balance Payable (c) + (g) 21994.92
(i) Total Amount Payable (b) + (h) 35309.92
APR 6.3
35 * £604.72
Followed by a final payment of £604.72 and the Purchase Fee £50.00 Total £654.72
I managed to get a bank loan quote (at base + 1%) which saved 153.87 on the total amount payable made up from 28.87 less interest and 125 less on the fee (the bank charged 50 and BMW® charged 125+50). The bank loan also had a reducing capital over the term of the loan and there was no penalty for getting out early. I couldn't decipher if the BMW® offering was the same as my question wasn't understood it seems.
As you can see from the BMW® quote, it is 2.95% flat rate (1769.92/20000/3 years). The bank loan is 2.90% flat rate so BMW® were pretty near, but the extra 125 charge clobbered the APR to 6.3%, and would be worse if you took it over 2 years (6.6%). The bank loan comes out at 5.67% APR (0.17% is from the charges).
So, on a 3 year loan, the APR is approximately double the flat rate that the dealer will love to quote to you, more if there are lots of charges.
You can apply the same to a PCP with a balloon, but as I say, the quotes I've seen have higher interest rates. Make sure you fully understand and compare the loan details to avoid being ripped off. That means taking the quotes away and comparing in detail as above.
I always wondered about an alternative to a PCP being a loan for the whole amount including your balloon but over say 5 years as long as you can get out early:
In the above example, 20000 over 5 years would give a monthly payment with a £50 charge of 382.98, and assuming there are no get out fees after three years, you would have paid 13787.28 with 8685.17 left to pay.
"I want to put down a deposit of £15k and minimise my my monthly installments as much as possible by having a balloon payment of say 40%, if possible (over a 3yr term)."
Borrowing 25k over three years with 16k balloon
At base + 1% with no charges I make that 346.97 per month. In reality unless you get this rate and the charges are low it will be more, but this is maybe a best case to start from?
You will also be offered Gap insurance to cover the difference in payout you would get from your insurer if the car is a total loss, and the cost of a replacement car.
I think a good rate is Bank of England base rate plus 1% and I refuse to sign a loan agreement for even £20K private or business loan until I've got the rate down to this, but personal circumstances vary. I would suspect with Personal Contract Purchase that the rates will be rather less competitive. So with the present base rate at 4.5%, I like to borrow at 5.5% or lower.
Car finance people like to confuse with their talk of flat rates, which is the percentage of the ORIGINAL loan amount that is paid each year in interest, WITHOUT the charges. Also with some loan agreements you are not paying off the capital in what I consider a fair way - they can front load the interest so that say a third of the way through the loan you've paid loads more of the interest and the settlement figures are still really high. I had a car written off after a year and faced this nasty surprise.
So to give you an example from BMW® Financial Services for HP (I know you want PCP but I want to illustrate the rates) they said they gave the best rate up front because I didn't really want their finance but just took their quote anyway:
(a) Cash Price inc VAT 33365.00
(b) Less Initial Rentals/deposit 13365
(c) Balance of cash price/amount of credit 20000
(d) Add Charges 1769.92
(e) Admin Fee with first Monthly rental 125.00
(f) Purchase Fee payable with Final Rental (inc VAT) 50.00
(g) Total Charge for Credit (d) + (e) + (f) 1944.92
(h) Balance Payable (c) + (g) 21994.92
(i) Total Amount Payable (b) + (h) 35309.92
APR 6.3
35 * £604.72
Followed by a final payment of £604.72 and the Purchase Fee £50.00 Total £654.72
I managed to get a bank loan quote (at base + 1%) which saved 153.87 on the total amount payable made up from 28.87 less interest and 125 less on the fee (the bank charged 50 and BMW® charged 125+50). The bank loan also had a reducing capital over the term of the loan and there was no penalty for getting out early. I couldn't decipher if the BMW® offering was the same as my question wasn't understood it seems.
As you can see from the BMW® quote, it is 2.95% flat rate (1769.92/20000/3 years). The bank loan is 2.90% flat rate so BMW® were pretty near, but the extra 125 charge clobbered the APR to 6.3%, and would be worse if you took it over 2 years (6.6%). The bank loan comes out at 5.67% APR (0.17% is from the charges).
So, on a 3 year loan, the APR is approximately double the flat rate that the dealer will love to quote to you, more if there are lots of charges.
You can apply the same to a PCP with a balloon, but as I say, the quotes I've seen have higher interest rates. Make sure you fully understand and compare the loan details to avoid being ripped off. That means taking the quotes away and comparing in detail as above.
I always wondered about an alternative to a PCP being a loan for the whole amount including your balloon but over say 5 years as long as you can get out early:
In the above example, 20000 over 5 years would give a monthly payment with a £50 charge of 382.98, and assuming there are no get out fees after three years, you would have paid 13787.28 with 8685.17 left to pay.
"I want to put down a deposit of £15k and minimise my my monthly installments as much as possible by having a balloon payment of say 40%, if possible (over a 3yr term)."
Borrowing 25k over three years with 16k balloon
At base + 1% with no charges I make that 346.97 per month. In reality unless you get this rate and the charges are low it will be more, but this is maybe a best case to start from?
You will also be offered Gap insurance to cover the difference in payout you would get from your insurer if the car is a total loss, and the cost of a replacement car.
So back to the subject, would I be best then putting the money from the M5 straight onto the new car, and then fairly small monthly payments with a balloon at the end, given that by the time it's due I should (hopefully!) be in a position where I would just be able to pay it off, or use the value of the car towards another purchase?
If you want to minimise the payments, then PCP would give you a smaller monthly payment, but PCP seem to attract higher interest rates, and of course you'll have a higher average balance throughout the deal because you won't have paid it off at the end. The dealers like to leave it so that you have enough extra value in the car at the end of the deal over the balloon payment so they can put you into your next car on another finance deal. As above it also protects them (the finance house) against default or total loss because there shouldn't be negative equity on the car.
The second option is tempting for many because of the lower monthly payments, and it suits their cashflow better.
BEWARE again, the real interest rate and front loaded interest. They have all manner of ways to take your money and make you think they are not!
On another note, I did see that on some depreciation resistant cars that the monthly payment on contract hire can be quite low. Then all the finance is off your personal or company balance sheet.
Last edited by john banks; 19 January 2008 at 10:19 AM.
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19 January 2008, 10:32 AM
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Is this a new or used car?
If its new then I would avoid finance as the depreciation is a major killer on almost all cars now. Its getting to the point where I would not spend on a new car ever unless it was something very high end that was going to hold more value. However, if you dont care about the lost cash then its no problem, but then you really should be buying it outright.
If its used, then I would consider finance get the APR as low as you can, then do your sums, dont do it in the dealership but go home and use some of the online calculators that are out there.
Be careful what the dealer tries to con you into when it comes to finance rates etc, my inlaws recently went into a Merc dealer to buy a new car. They are not really upto speed on loans and PCPs etc, they came away having purchased their new SLK350 on PCP becuase the dealer said they can get more back on interest on their 45k in the bank. He had done some flash sums on his calculator and had basically tricked them. I did the sums with them and when they realised that was not the case they rang back and told him to cancel the finance deal. If it had been me I would have told him to stick the car too but they still took it.
If its new then I would avoid finance as the depreciation is a major killer on almost all cars now. Its getting to the point where I would not spend on a new car ever unless it was something very high end that was going to hold more value. However, if you dont care about the lost cash then its no problem, but then you really should be buying it outright.
If its used, then I would consider finance get the APR as low as you can, then do your sums, dont do it in the dealership but go home and use some of the online calculators that are out there.
Be careful what the dealer tries to con you into when it comes to finance rates etc, my inlaws recently went into a Merc dealer to buy a new car. They are not really upto speed on loans and PCPs etc, they came away having purchased their new SLK350 on PCP becuase the dealer said they can get more back on interest on their 45k in the bank. He had done some flash sums on his calculator and had basically tricked them. I did the sums with them and when they realised that was not the case they rang back and told him to cancel the finance deal. If it had been me I would have told him to stick the car too but they still took it.
19 January 2008, 11:53 AM
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John - thanks, very useful post. Unfortunately I can't run things through the business like I could before as we brought in some major VC's 
Billy - this is a nearly-new so it's done that horrible first batch of uber-depreciation!
Nik - problem is I need the car now. Even if I put aside 2k a month, it would still be at least 8 months until I had the cash! Besides, saving is not a strength of mine
Billy - this is a nearly-new so it's done that horrible first batch of uber-depreciation!
Nik - problem is I need the car now. Even if I put aside 2k a month, it would still be at least 8 months until I had the cash! Besides, saving is not a strength of mine
19 January 2008, 12:23 PM
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I noticed that Gareth from Bespoke who posts on BM3W/mtorque as a car/finance broker says that base rate + 2.25% (7.75%) is good on car finance just now - see their finance forum. This was balanced payments (ie not front loaded interest) which is kindest to you if your circumstances change.
19 January 2008, 02:47 PM
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Ed,
I did something similar recently to buy a new Mini. I had the cash but decided that in the long run I was better off using finance from First Direct. I got an APR of 6% IIRC, which I decided was about as expensive as funding it from savings.
I agree it's all very confusing, but in the end I totted up the cost of each option by breaking it down into bits to calculate the total cost. So cost of finance, cost of 'lost interest' cost of car at the end of the deal.
I'm not sure there's any one 'right' option it will depend your own circumstances, but in my case as bank loan + outright purchase was the cheapest.
I was truly shocked when I worked out the total cost of the MINI PCP
I did something similar recently to buy a new Mini. I had the cash but decided that in the long run I was better off using finance from First Direct. I got an APR of 6% IIRC, which I decided was about as expensive as funding it from savings.
I agree it's all very confusing, but in the end I totted up the cost of each option by breaking it down into bits to calculate the total cost. So cost of finance, cost of 'lost interest' cost of car at the end of the deal.
I'm not sure there's any one 'right' option it will depend your own circumstances, but in my case as bank loan + outright purchase was the cheapest.
I was truly shocked when I worked out the total cost of the MINI PCP
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