Do most people use finance or borrow money to pay for cars typically?

[Onedropbeat]

We have 2 cars, one is old but bought for cash so it’s just the maintenance required to keep it running that it costs us. This is creeping up with the older the car gets (13 years old)
It’s worth around £7k as a trade in or £8k private sale.

Our main family car is now 5 years old. Bought on finance with a balloon payment which is due this time next year

It’s a good car and not very costly to run at the moment as still relatively new and low mileage (to us)

Originally I planned on saving the money in a pot to pay the balloon and keep the car so that we are finance free on the cars

However, Covid means earnings and bonuses have dropped and vanished and so I won’t have all the money required by this time next year

Do most people use some form of borrowing for their cars?

At the moment it’s appealing to hand the car back, swap for a new one, and keep paying the same monthly payments which we can afford without having to worry about or dip into savings

But this will end up being in a perpetual cycle of finance for this car and I worry how long the original car will last before it’s more economical to replace for a new one

What would you do?

We have a small 7 year old Peugeot bought outright almost 3 years ago for £3k. Nothing has gone wrong on it so far - it doesn’t need to be expensive or brand new to be reliable. £3k must be much less than the balloon payment on a new car.

With finance I’d also look very closely at what would happen if the car got written off - would the insurance definitely cover the full amount or would you be left with some loan and no car?

@randomsabreuse

Our next car will probably be leased, if not that one the next one will. Because I'm not convinced about buying an electric car without very good warranties.

With Internal Combustion Engine cars the likelihood is of small, relatively inexpensive things going wrong with a much smaller likelihood of a catastrophic failure making the car uneconomic to repair, especially if the car has been maintained properly. With electric cars any failure is likely to be terminal - so it's a different kind of gamble and much more difficult to hedge moving the balance to the certainty of a lease deal no longer than the car's warranty from the likelihood that the £8- 10k car will survive long enough to justify the purchase cost.

From experience I'd choose to pay £5-8k for a second hand car or pay under £1k. Between £1k and 5k there's too much tendency to throw good money after bad fixing stuff.

We've always been tied to big cars (DH's work) and until recently very high mileage precluding leases, currently have a 10 year old Mondeo estate (done 160k + miles, owned for 5 years) and a 15 year old Subaru (owned for 3 years, 100k miles) so it's not about the prestige.

When we replace them we will ideally get some kind of plug in electric car, but might get one last ICE vehicle depending on available second (third+) hand Euro 4/5 estates and the lease deals available on electric options.

We're planning to buy 2 new I/C cars in around 5 years or so (2025/26). We have no confidence in electric cars, either in terms of cost, reliability, charging access, etc., so have no interest at all in buying/leasing an electric car until they're more mainstream. New in 2025 will mean they can last until about 2040. By that time, the electric car market will have sorted itself out, we'll know the brands/makes that are more reliable and the charging infrastructure will be in place.

I've never been an "early adopter" of technology, whether it's been a digital camera, computers, software updates, smart phone, flat screen TV, camcorder, smart meter, or whatever. I far prefer to sit out the first few years of anything new to let others do the testing (and suffer the failings) of new tech.

I tend to buy cash. Am not at all proud about what I drive, just the pick newest, lowest mileage family car I can get for around £7-8k Three years old would be a dream, but it's usually more like 4-5 years. Then I drive it until it's practically worthless and starting to have problems.

We bought our first car.on finance a couple of years ago and it's been a bit of a revelation tbh. Not so much the finance part but the getting a car that's only 3yrs old/has v low mileage part. It just works! And it costs so little in maintenance! We always bought with cash before, for around £3.5k - £5k, but I think we'll run this car for a good 7/8 yrs total and then trade it in for another newish one (Skoda), on finance again.

I always pay cash and do not have squillion pounds saved, I simply buy the best car for my budget which is never more than £7k.
Something I have noticed over the last couple of years when parked up in car park is that you never really see any old bangers anymore. Everyone seems to have newer model cars.

Most people use finance of some kind, PCP, HP, or Personal Loan

@crimsonlake

I always pay cash and do not have squillion pounds saved, I simply buy the best car for my budget which is never more than £7k. Something I have noticed over the last couple of years when parked up in car park is that you never really see any old bangers anymore. Everyone seems to have newer model cars.

I think partly due to scrappage

When I was younger I would buy a banger with an mot off eBay for £400 and run it until it died

Those same cars now are so rare some are going for £10k now and seen as classics!

Cars are also much more expensive to fix now - you need more kit and more things are sold as "whole assemblies" when only one little bit needs to be replaced making economic fixes much more difficult.

A lease deal gives certainty that your car will cost £x/ month for y months. You could buy a car for £3k, it needs £1,500 of repairs 3 months later, then another £500 and then 4 months after that you need to replace the dpf or some big bit of the suspension. Or it gives you 5 years of just needing basic consumables!

@randomsabreuse

Cars are also much more expensive to fix now - you need more kit and more things are sold as "whole assemblies" when only one little bit needs to be replaced making economic fixes much more difficult.

A lease deal gives certainty that your car will cost £x/ month for y months. You could buy a car for £3k, it needs £1,500 of repairs 3 months later, then another £500 and then 4 months after that you need to replace the dpf or some big bit of the suspension. Or it gives you 5 years of just needing basic consumables!

Modern cars may be more expensive when they go wrong but they're far more reliable so don't go wrong anywhere near as often as cars used to.

We've currently a 12 year old and a 6 year old, both bought brand new. Neither have broken down nor needed any repairs. All they've ever had is their annual services which have occasionally included a new tyre or new brake pads. (just remembered the 12 year old one had a new timing belt a couple of years ago, again in the annual service which added about £200 to the usual service bill).

We've had 13 cars over the last 40 years, from a £750 10 year old runaround through to mostly 3/5/7 year olds, a couple of ex-demos, and a couple of brand new. They've been various makes and ages and mileages. None have landed us with a £1500 repair bill, none have even had a service costing more than £500.

From anecdotal evidence, the people who get hit with big repair bills are generally the ones driving older higher spec cars, i.e. Audis and BMSs, or fuel injections or GTIs or whatever. The people I know with "normal" spec low/mid range brands don't tend to suffer the same big bills.

So many people do what you describe and I simply don’t understand it. However most of my friends have some level of debt and we have none. They’re obviously happy to be in debt... I’m not. I think it’s become normal now to just have a car on finance like it’s normal to have a mortgage.

It’s definitely become the norm to but a new car on finance, and really this is down to the rise of PCPs in around 2010. Before then, around 1/2 of new cars were bought on finance, now it’s over 90% and the vast majority of these are PCPs

HP results in a much higher monthly payment as you are paying off the whole amount of the car over the 3 or 4 years, whereas with PCP you are deferring a large chunk to the end and so the monthly payments become cheaper. For example on a £20,000 car on a 3 year HP the monthly payment is about £600 per month; on PCP it’s about £400. Or to put it the other way round, if you have £400 per month to spend, you can get a £20k car on PCP or a £14k car on HP. That’s why the streets are full of massive SUVs that people would not have previously been able to afford!

I sort of view it like a phone contract these days. I just upgrade my car and get a new PCP contract at the end like my phone.

I usually go for ex-demonstrater models when there's a new model coming out as they're often keen to shift them and am not fussed about a "new" car with 100 or so miles on the clock, and I like the fact I never have to bother with an MOT and usually get a service package thrown in. Also means there is less stress in changing cars when circumstances change - I recently needed something bigger and have ended up paying less per month.

Like someone above said, it's all about what outlay you're comfortable with. Cars depreciate anyway so even buying outright it's not money you're getting back.

@User1511

So many people do what you describe and I simply don’t understand it. However most of my friends have some level of debt and we have none. They’re obviously happy to be in debt... I’m not. I think it’s become normal now to just have a car on finance like it’s normal to have a mortgage.

I think you are right

Its across the board. People rent their mobiles in form of paying for the cost of the phone through their contract

Some people do similar with sofas and all sorts too

I don’t like debt either but I see how easy this becomes to do with cars specifically.

My last car (bought for cash) was 9 years old and every month I was paying out for repairs getting more and more expensive. I worked out I had paid around £4000 in repairs just over the year and the car wasnt worth much more than that.

I was due a new baby and fed up of having something unreliable and potentially not safe but hadn’t got huge amounts in the bank to afford anything better after I’d sold it.

I took out a pcp knowing it would give me something with cheaper tax, insurance and more reliability and ability to budget for the cost whilst I was on maternity and baby was young.
I assumed I’d keep the car and had plan for having enough to cover the balloon at the end of the term as my position after maternity leave was good enough for me to afford that.
Then the unexpected happens and it’s no longer possible to save the amount I planned to.

Then comes the choice - perpetual (affordable) finance, a reliable modern car and something good enough for long distance drives, or chop in, buy something for cash, but potentially have the repair bills and unreliability I had before

I love the car. It’s been good to me and I’d happily keep it.
I could put a mixture of savings towards the balloon and pay the rest on a low rate credit card or loan. This makes the most sense I guess.

Not the position I’d hoped to be in 3 years later but it’s not forever

Thank you to everyone giving some idea of the EV situation. That’s made me less worried of continuing with my internal combustion engine cars for a while

Weve got 2 cars - one was on finance but we paid the final payment and still have the same car 14 years later. The other bought as a 5 year old car for cash. (That's even older!)
I know one of my friends has an old car that they bought for cash and financing a brand new car and from the frequency of how often they change their cars, I assume another friend gets theirs on finance, but apart from that I wouldnt know what other people do.
MN always seem to know way more about their friends finances than I do!

Our family/work colleague experience is admittedly of cars doing 30,000 miles a year with fully loaded boots and barely touching motorways. We've had Nissan, Toyota, Honda and Ford suspension components replaced for £££ when only 1 tiny cheap bit is worn out, Skoda with a catastrophic engine failure just outside warranty period (fortunately a company car), followed by a clutch failure a year later (when it was actually our car). Ford had a DPF sensor failure (£1,500) despite being driven with a lot of care for the DPF. No prestige manufacturers here, lots of Peugeots Skodas, Fords and some Japanese cars.

The two cars that we've owned purely for us (Toyota and Subaru) have both been a little older and haven't had the big bills, just general wear and tear. The newer "work" vehicles have all suffered some kind of major fault unrelated to their heavy use, as well as needing big suspension components replaced to fix a worn out smaller bit...

Leasing was never affordable on the mileage the cars used to do but DH now has a work van so we no longer have to run a car for 30k plus miles a year. When one of the current cars becomes uneconomic to throw more money at, (or our local LEZ expands making using the diesel (not Euro 5) impractical) we'll probably end up leasing an electric car for "local" use. I think LEZs will push people out of older ICE cars fairly soon.

I also expect autonomous "taxis" and car clubs to replace most car ownership in the next 10 or so years. Not really holding out hope for an effective integrated public transport system though!

Cash for us. We don't have 'squillions' saved, but we do have a bit in the bank (ME expat salary). We don't care for new cars. I bought a new (to me) car recently for £15k. 6 years old, low mileage. It would've cost £55k brand new. I love it, but I certainly wouldn't have paid for it new. The depreciation for the first few years is nauseating on new cars, certainly not worth it for me anyway. I refuse to engage in PCP deals, absolute rip offs for the sake of having a new car...

Everyone I know buys on finance.
I don't drive because I'm a shit driver but an excellent cyclist!
DH drives. Our car was bought second-hand, cash, 8 years ago. It's an 11-year-old car and we'll run it into the ground like the one that came before it. We don't drive much, so we're not a family that lives in the car. I can understand if you're on the road a lot, you want nice wheels.

These lease and PCP deals rely on playing on people's fears about maintenance costs too.

People who don't have a chunk of savings can easily be made worried by car showroom staff who mention the cost of expensive named repairs. It pushes them towards the new car on finance which makes the car firms more money.

I've spoken to people who are pretty hard-up who said they had to buy new on PCP or lease because they won't be able to afford to pay for a repair on an older car. There is a huge fear or facing any kind of unknown bill, even thought the reality is that people with cars of 3-7 years old don't normally face big bills, but just the odd small one.

But if you're living close to the line each month (everything that comes in goes out...ironically much of that on monthly payments for cars, sofas, phones, pet insurance etc) then even thought of a bill for £200 for something can feel terrifying.

It's a bit like a large scale return to peoole purchasing on HP from catalogues and door to door installment sellers and only being able to manage to think of any coats in terms of mo they certainty rather than building a little bit of back savings and having confidence to save and know they can face the odd emergency/bigger cost.

Being told only brand new is reliable and that you deserve new, is a way of people to come to terms with paying on the never-never pretty much indefinitely. They feel they haven't got much choice, but at least they have new and shiny. And after having new and shiny, slightly older isn't so appealing and they are hooked....plus the fact they can't afford the upfront payment for slightly older anyway.

The last time we bought a car it was a better deal doing it on finance than paying for it outright.

We've always bought on finance. had a lease hire car too. big mistake really. My current car has 4 years finance left and is 4 years old so once the finance has finished we plan to keep the car till it dies and keep saving the money which we would have spent on the repayments to buy a decent car outright. I will never get a car on finance again.

Most people do, in my family it is often the "bank of Dad" involved. My DSiblings were incredulous that I didn't but a car until I had saved enough money to buy outright, and have continued to do that. (I am on my 4th car having needed to change for various reasons over the past 15 years).

We always buy a second hand car with cash - it's the most cost effective way to own a car. I've seen too many friends caught up in PCP finance and not being able to make the balloon payment at the end, so they end up not owning the car anyway. Better to take out a bank loan and buy a second hand car surely. I think a lot of people seem to value having a brand new car over making sensible financial decisions!

@ceeveebee

It’s definitely become the norm to but a new car on finance, and really this is down to the rise of PCPs in around 2010. Before then, around 1/2 of new cars were bought on finance, now it’s over 90% and the vast majority of these are PCPs

HP results in a much higher monthly payment as you are paying off the whole amount of the car over the 3 or 4 years, whereas with PCP you are deferring a large chunk to the end and so the monthly payments become cheaper. For example on a £20,000 car on a 3 year HP the monthly payment is about £600 per month; on PCP it’s about £400. Or to put it the other way round, if you have £400 per month to spend, you can get a £20k car on PCP or a £14k car on HP. That’s why the streets are full of massive SUVs that people would not have previously been able to afford!

The difference is with HP you own an asset at the end of the 3 years. The £20k car you quote probably has a PX value of £8-10k after 3 years which is a good deposit to use on the next car, so you don't need to borrow as much for years 4-6, hence much lower monthly repayments. Or you keep the car for years 4-6 and save the repayment money instead.

Absolutely - I think PCP is a bubble waiting to burst - but it is the reason why so many people are now able to drive cars that were previously beyond their means