PCP VERSUS HP. A view

[Dieselman]

It may be considered old fasioned nowadays, but I prefer reverse finance. If I want to buy a car (or similar expensive object with a life of a few years), I'll save up for it, and buy it cash. The downside is I had to drive around in older cars for a few years until I got the first decent car, then put the 'payments' towards its replacement.

If I lose my job and cant afford the 'payments', I'll just continue in my old car and not worry about debt.

I plan to keep this car 5 years, so if hard time come, I'll either keep it longer, or flog it.

I have never used anything but cash for cars, it keeps you in control. I intended to change my current car at 4 years old, but decided not to. All the time since then I'm winning.

The problem is that we have a culture of impressing other people with new cars due to vanity, so the market feeds on that and provides packages to lock the buyer into a cycle of repeat sales.
Salesmen in all facets much prefer to sell on lease/PCP finance as that keeps them in control of the next purchase, not the buyer. They dislike doing a cash deal as they lose control.

 

[Colin_b]

Borrow, borrow, borrow, borrow.

If you can make it work then why not.

I bet the guys who are banging on about not borrowing are all 50+.

I do slightly resemble that. So what? Beyond a mortgage I've not borrowed money since I left school. But there again, I didn't have a half decent car until my mid 20s. 5 years sacrifice when I was younger now means I don't have to worry about debt.

Whatever floats your boat, though. If you are happy with debt, fine It isn't a competition.

 

[gIzzE]

For fecks sake, there seems to be a one upmanship on this forum like I have only ever discovered on pistonheads!!
Every post on here seems to raise an argument, maybe it is the 'grumpy old man' demographic of the Mercedes owner or something?? (that was a joke by the way and I class myself in that group!)

I was talking more about Robert Saunders post rather than borrowing on a depreciating asset.

Best bit of advice I ever had was, don't buy the £150k house and try and pay it off over 20 years, buy the £500k house and just pay the interest.
Keep doing that and moving as and when property prices increase, and by the time you retire you can sell the £1m house and buy a nice £500k house and stick the other £500k in the bank.

Everyone I know who has done the same are the ones that are doing well, no it's not for everyone as some like piece of mind, but for those that like a bit of a gamble it can work very well.

Also why stick £40k into a car when you can borrow at less than you can invest at??

Borrowing can work, and some seriously rich people make their livings from it, so not to be written off.

I agree, don't so some crap PCP at 10% apr, but if you can borrow at less than the BBR then go for it, it makes sense.



Regarding the Europe comment, alot of Europe does rent and think we are daft, but I agree half do also buy like us, just pointing out we get inbred ideas and going against the norm is often frowned upon.

 

[gIzzE]

Other thing to consider when borrowing money for a car is total ownership costs.

Buy say a 3 year old E class for £20k cash.
That car will loose £10k over 3 years, will cost more in servicing and maintaining, and may not be as fuel efficient as the new model.
So for someone doing 15k miles a year it may cost £450 a month over the period.

What if you were to buy a 1 year old one for £25k, would loose about £12k over the same period but would be in warranty for 2 years. May get 25% better economy and will cost less maintainance wise.
So if you borrow the difference it may actually end up costing less.

We swapped our 32mpg BMW 2005 diesel for an Efficient Dynamics 2007 320d that did 45mpg, the funding of the difference was £80 a month, the fuel savings for me were nearly £100 a month, so it meant borrowing worked in this instance, plus I was in a newer, nicer car.


It is not black and white.

 

[st4]

Nope..
Borrowing only makes sense on an increasing asset, not a depreciating one. There could be an argument for borrowing if you can borrow at less than the rate of interest or capital growth you can achieve with your own money, but that's the only time, and given that the additional growth would be minimal is it worth it for the problems being tied into a contract can create.

The great argument of the 1980's re property, they just couldn't see that the housing market could indeed fall.

Borrow what you can realistically afford to repay. I am not an ideal example as I've borrowed heavily to own an MB, and as a nice car as it is, I wished I saved up cash and bought it that way. If I get a better paid job, I will save and settle the HP at the first opportunity, and if I don't, please flag this post up to me if I get "notions".

 

[Rory]

Best bit of advice I ever had was, don't buy the £150k house and try and pay it off over 20 years, buy the £500k house and just pay the interest.
Keep doing that and moving as and when property prices increase, and by the time you retire you can sell the £1m house and buy a nice £500k house and stick the other £500k in the bank.

I missed a clear opportunity to do this and regret it, BUT timing is everything. Say you bought that £500K house a couple of years ago on an interest only fixed rate deal which is about to end.

The house is now only worth £400K (if you could get anyone to buy it) so you can't move the mortgage as you wouldn't be able to get anyone to lend you £500K on the property.

So even assuming your current lender will remortgage you (and that's probably only possible as they know they'll lose a packet if they to repossess), they'll probably only do it at their standard rate so your monthly payment will go by over £1000. If you can't afford the extra then you're screwed. Bankruptcy beckons.

 

[gIzzE]

Yeah you have to make sure you have at least 70% loan to value when you start to take this route, and the you need to move fairly often to make it work quickly.
And be able to sit tight while things are not so good, or move out of your £500k house and only get £400k but move into the £700k place and give them only £500k.

 

[scumbag]

So, if renting is so good (and as a means to an end I have used rental to get me to this location whilst i prowled about looking for a overpriced home) who owns the homes others rent?

My point here is the same as those who say, never buy new. If everybody rented, there would be no homes, in the same way as if nobody bought new, there would be no new cars.

Renting is a cost option, usually cyclical. If you can't afford to borrow, either the amount, or high interest payments, renting is the only option. This is what happens in Europe when interest rates are high.

When it changes, buying becomes the best long term option.

Doesn't change any fact about the statement, if you can't afford it, don't buy it. And if you buy a home cash, thats the cheapest short term, mid term and long term. But how many people have £100k or more laying about?

So you get a loan secured on the house and you are away. However, cars can be bought, but people want better cars, and when they get so they want something they would not afford normally, and PCP allows you to buy it, off they go to buy it.

Now where is that free lunch I was promised.

 

[MBManInKen]

Now where is that free lunch I was promised.

I'll tell you once I'm done watching the pigs fly by...

 

[scumbag]

I'll tell you once I'm done watching the pigs fly by...

hells teeth, price of bacon will go up now.

 

[Colin_b]

I'll bet most of you who are against borrowing will have a mortgage -or did so at some point in your life.

Sensible borrowing at a sensible level is -um -sensible some of the time. Some find it hard to save but are good at keeping up payments on a loan. Why not? Freedom of choice.

A mortgage makes sense - you are buying an appreciating asset (in spite of current problems). In 10 years or so time you'll not lose money, history says.

Buying a car you can't afford with someone else's money is silly. But that isn't borrowing sensibly. If you can afford it (and guarantee you can over the course of the loan), fine.

 

[Dieselman]

Buy say a 3 year old E class for £20k cash.
That car will loose £10k over 3 years, will cost more in servicing and maintaining, and may not be as fuel efficient as the new model.
So for someone doing 15k miles a year it may cost £450 a month over the period.

What if you were to buy a 1 year old one for £25k, would loose about £12k over the same period but would be in warranty for 2 years. May get 25% better economy and will cost less maintainance wise.
So if you borrow the difference it may actually end up costing less.

Your figures don't stack up.

You say a 3 year old car is £20k and a one year old car is £25k but will lose 12k over three years. That makes it worth £13k., which is a lot worse than a 3 year old one, which couldn't work if the car was only losing an additional £5k after the first year and before the end of the 3rd one.

Using some realistic figures.
1 yr old car £27k, 3yr old car £14k. Now rework the maths. Depreciation is always the greatest cost in car ownership.
1st year will be about 10-12k depn, 2nd year £7k, 3rd year £5k.
I also doubt the maintenance costs are significantly higher after the 1st year until at least the 6th year or longer.

 

[Bobby Dazzler]

Best bit of advice I ever had was, don't buy the £150k house and try and pay it off over 20 years, buy the £500k house and just pay the interest.
Keep doing that and moving as and when property prices increase, and by the time you retire you can sell the £1m house and buy a nice £500k house and stick the other £500k in the bank.

I sort of agree. I've considered doing something like this - get a much bigger house with a longer duration mortgage - and take the short term pain on the basis it will get easier. We never found the house that was perfect enough to take the risk though.

What I don't understand is how you would take £1m equity (£500k for a nice house, and £500k for the bank) out of a house sold for £1m, but with an interest only mortgage. If that's possible, then put me down for too!!

Buying a car you can't afford with someone else's money is silly. But that isn't borrowing sensibly. If you can afford it (and guarantee you can over the course of the loan), fine.

Not like me to do anything other than sit on the fence, but I'm not sure I agree with that either. Borrowing money doesn't necessarily mean you can't afford something? If you can meet the repayments, then you can afford it. Just a different way of financing something.

 

[hawk20]

The idea that borrowing money to buy houses always pays is quite false. Unless house prices rise faster than the interest rate on the mortgage you actually lose by buying.

Over the very long term, house prices have risen about 2% faster than prices. So have earnings. They tend to move roughly in line. So if the real interest rate is 2% or more, investing in houses does not pay. I'm sure Scumbag won't like that fact but it happens to be true.

And it is not true, Scumbag, that if everyone rented there would be no houses. In some countries nearly everyone rents and the banks fund the developments. In some countries governments have done the funding (see communism).

 

[st4]

The idea that borrowing money to buy houses always pays is quite false. Unless house prices rise faster than the interest rate on the mortgage you actually lose by buying.

Over the very long term, house prices have risen about 2% faster than prices. So have earnings. They tend to move roughly in line. So if the real interest rate is 2% or more, investing in houses does not pay. I'm sure Scumbag won't like that fact but it happens to be true.

And it is not true, Scumbag, that if everyone rented there would be no houses. In some countries nearly everyone rents and the banks fund the developments. In some countries governments have done the funding (see communism).

Another argument that folk used was that its cheaper to borrow when inflation is high as that wipes out the value of the principle borrowed. But then rates are high too, and the concept that house prices would rise above the rate of inflation (negating the cost of borrowing) is just a farce.

Plus if you borrow to buy, then are made redundant and take time in getting back to work, and you're in negative equity, your in deep sh1t. If you save and buy, or have a large degree of equity in the asset, your not so far up sh1t creek.

 

[gIzzE]

Your figures don't stack up.

You say a 3 year old car is £20k and a one year old car is £25k but will lose 12k over three years. That makes it worth £13k., which is a lot worse than a 3 year old one, which couldn't work if the car was only losing an additional £5k after the first year and before the end of the 3rd one.

Using some realistic figures.
1 yr old car £27k, 3yr old car £14k. Now rework the maths. Depreciation is always the greatest cost in car ownership.
1st year will be about 10-12k depn, 2nd year £7k, 3rd year £5k.
I also doubt the maintenance costs are significantly higher after the 1st year until at least the 6th year or longer.

New cars are loosing around 40% in year one at the moment, then approx 10% of the initial value each year after that till it gets to about year 4 and then it slows a little more.


Please note that I also said you may be swapping for a more efficient car, in which case the borrowing may be worth doing.

 

[st4]

New cars are loosing around 40% in year one at the moment, then approx 10% of the initial value each year after that till it gets to about year 4 and then it slows a little more.


Please note that I also said you may be swapping for a more efficient car, in which case the borrowing may be worth doing.

Remember to include VAT in that, automatically 17.5% depreciation has to be included as soon as you turn the key.

 

[hawk20]

Remember to include VAT in that, automatically 17.5% depreciation has to be included as soon as you turn the key.

I'm afraid that is an old wives tale that has been comprehensively disproved. Secondhand prices are determined by Supply and Demand not by how much tax there was or was not included in the original price when new.

Some cars have sold secondhand for above the new price (when there is a waiting list). Some sell today for way less than the new price less the VAT. The old model CL500 was selling brand new apart from 20 miles on the clock for £25k below list price after the new model came out. It is supply and demand. Worth what someone will pay. Salesman always tell the tale about VAT to excuse the awful depreciation we all suffer much of which is caused by them flooding the secondhand market with cheap pre reg cars and demonstrators. And much is caused by the very tasty finance deals they offer on some new cars, especially with PCP deals. See the E class offers at the moment. Offering several thousand of dealer contribution (and you can get more as a further discount) and offering finance at rates way below the market rate of interest. What chance has anyone against all that when trying to sell a fairly new but secondhand car?

I remember when I wanted to trade in my 6 month old B class and got offered a horrible price. The salesman said: 'the trouble is we are offering such good discounts and finance deals on the new ones that secondhand ones have to be really cheap to sell'.

 

[gIzzE]

Very true, but then sometimes a dealer can buy a car used for more than new and make more money on it as they only pay vat on the profit made on used.

 

[Piff]

New cars are loosing around 40% in year one at the moment, then approx 10% of the initial value each year after that till it gets to about year 4 and then it slows a little more.


Please note that I also said you may be swapping for a more efficient car, in which case the borrowing may be worth doing.

These %age figures obviously vary between cars that are more desirable and less desirable. (ie MB compared to Kia)
But on what original figure are they based?
I paid £21k for my car, list was around £28k at the time.
Now, three & a half years later what is my car worth 65% of what I paid or 65% of the list price?