Talk to me about car finance

[TuffTuff]

Ok, so DH and I need to buy a second car. In the past when I bought a car, I'd go for something that was about 6-8 years old, and buy outright for maybe £3-4000. I'd then just drive it until it stopped going - so generally about 8-10 years of motoring.

DH has always bought cars on finance. I don't know anything about this - I was surprised when his last one came to the end of the three years and he had to pay them to take it back. I thought he'd have owned it by then.

Anyway, our current car is one of my second hand ones, but we now need a second one. DH assumes we'd buy it on finance. I assumed we'd buy it outright (we have enough in savings to get something about 5 years old).

What makes more sense? I always thought finance was for when you needed to buy a car but didn't have the money to pay it outright. I know new cars devalue really fast, so is it not cheaper to buy a second hand one that will hold its value a bit better (assuming newer cars are fairly reliable).

Neither of us is interested in cars, so we don't care what type we get. We don't do a lot of miles, so fuel efficiency isn't a huge financial consideration (though obviously it's an environmental one).

What would make more financial sense?

Do you not get charged interest if you take out finance so it will cost you more

We're taken out a bank loan before as it was cheaper than the car finance

It would make more sense to just buy it outright. DP has been driving for 7 years and he has always paid outright for that reason. A friend of mine put a car on his credit card because it would be less interest

Finance you generally pay a deposit and then a monthly fee and after a period you own the car. It's just a bank loan really. If there's a fee to take the car back that's more like a lease agreement which is different. You don't actually own the car you are effectively paying to borrow it and then at the end of the agreement the lease company assess the car and charge you for any damage or you can pay an amount and keep the car.

I tihnk if he had to pay to return it he was leasing it. This can be a good way to control the depreciation (lease payments are smaller than finance purchaing payments because you never buy the car), however if you're planning to drive it to death and not get anything back for it then you might as well do that. Finance would mean you ultimately purchasing the car in installments, and if you can avoid paying car finance interest, you should.

Also you may find despite the interest on finance you may not save much by paying outright as the dealer will probably knock more off up front for Finance.

@PrincessLeia80 yes, I think there were some scratches or something and he had to pay because of those. I couldn't be bothered with that - having to worry about where it was parked in case someone scratched it, or having to watch the kids in case they damaged it somehow.

Also, we may not go to a dealer to buy outright - we know someone selling a car so we're going to check that out.

I have mine on PCP finance.

It is a loan but after three years I give the car back, pay another deposit and get another new(er) one. Or I could keep laying and own the car at the end.

I'm on my second car like this as I couldn't afford to buy outright and was fed up of driving bangers with my long commute.

Although it's a loan I see it more as renting I suppose as it's a monthly outgoing.

It's also on 0% do shop around.

If he's self-employed and can offset the lease against tax, it might make sense to do finance, especially if he's a higher rate tax payer.

However, if he does it as an individual, it's very much a lifestyle choice - he ends up spending a lot of money but he gets to drive the latest model. Financially, it will cost a lot more than doing it your way. If you get 8--10 years of driving out of a 4K car, even allowing an extra 3-4k for repairs, that's still maybe £60-80 per month. A similar-sized car on a lease will work out several times as much (but obv the car will be near new as opposed to being up to 15 years old).

Do you mean finance, or PCP? There’s a difference.

No one can say which makes more sense. It depends what you want from a car and how you want to pay for it.

Some people, like yourself, prefer to pay cash with savings.
Pros= no extra payments and you own the car outright.
Cons = car could be a lemon / money pit.

Others prefer a PCP deal as they get a brand new car which they can trade in for another new model every 3 years.
Pros = a brand new car every three years, no need to worry about MOTs or repairs as the car will be under warranty.
Cons = a payment every month.

@19lottie82 I'm not sure which I mean! I basically want to find the cheapest way of doing it. Assuming a second-hand car would be reasonably sound (if bought from a friend so we know the history). We're not at all worried about having a new car, or anything flashy, and don't mind taking it for MOT it's a quiet hour away from the kids

Hi OP - In that case it sound like you would be best just buying the cheaper car outright

If it isn't about swanning about in a new fancy car but getting from A to B and not wasting money then definitely a second hand car.

There will definitely be no swanning.

Get the AA to do a check on the car for you. You don't need to be a member it's around £200.

Your friend might not know that an expensive part is about to fail and you will have no come back. It protects both of you and keeps the friendship.

We have always bought outright as it seems crazy to pay interest on something when you don't have to. We deliberately seek out unfashionable cars though - we have two ex-mobility cars so a few years old but hardly any mileage and great condition. I like the fact that we don't have any debts, its just less to worry about really.

Hadn't thought of that, @Mosaic123 - will look into it. Ironically, the most temperamental car we've come across was one that FIL had bought new - just seemed to have loads of bother with it. Meanwhile my 10-year-old banger was sailing through MOTs and costing me nothing but petrol and a new set of wiper blades!

@lostherenow That's my feeling too - avoid debt if possible. But then sometimes I wonder whether that attitude is costing me money somehow.

Bank loans can offer better rates than car finance so may be worth looking at your bank's offers too. We have one on finance and one bought outright second hand for about £2000. If you can buy outright then that makes far more sense to me!

unihorn if you were buying a car outright through finance yes, but that’s a different kettle of fish again to PCP finance.

the best thing to do is negotiate a discount for taking the finance (we got £1000 - they get huge commission on it) then pay it off shortly after. We were told we could keep the £1000 off as long as we made 3 payments before paying off the whole thing, so cost us around £100 in interest.

Buying second hand is much better for the environment and the environmental costs of new car production far outweigh any benefits from increased fuel economy (especially when you consider most of the claimed fuel economy isn't even true).

It is also cheaper to get a second hand one outright - the only reason to buy new is if you want a new car. It never works out cheaper. Most repairs on cars only cost a few hundred max even for the bad things and you'd be unlucky to have anything major more than once every few years. I bought a car for £800 5 years ago and had to spend £800 in the first year on repairs, which sounds bad, but in the years since then I've only had very minor repairs costing less than £100 per year, so it works out pretty good.

If a new car is what you want, then you can start debating the merits of the various finance options.