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?

I think a lot of people seem to value having a brand new car over making sensible financial decisions!

I agree. If someone always wants a new car less than 3 years old, then leasing is the answer. But it still costs a lot more than having a slightly older car or buying new and keeping it longer. Leasing is for vanity.

It’s also a lot more complex than people being sensible or not sensible!

A lot of this is about deep rooted attitudes and approaches to money and finance and risk, many of which are connected with upbringing. Lots of peop,e find themselves in a financial position which feels like catch-22 and that they have no choice. If you haven’t got any savings or only a tiny amount (and loads of people find this due to high cost if housing and childcare or low incomes or even moderate incomes) then buying a car, apart from a banger outright isn’t possible, unless people delay a long period and save what they could afford for a monthly payment....it could take many years of saving £200 per month to get to £5k for a 5 year old used car.

But lots of people can stretch to £200 or £250 per month. That is affordable. It allows them to access a car and a payment plan and also a new or nearly new car. It is a quick fix which solves the car problem for them.

The difficulty is that it is the more expensive option over time. Balloon payment schemes can have lower monthly payments which lure people in, with the offer that they can buy after 3 years. But those offering know that most people, won’t have the lump sum in 3 years and so will then offload their 3 year car and start a new plan with monthly payments. That’s what they want people to do...to be paying continually.

And lots of people are happy to pay continually because it feels affordable. That is more important for them than if it’s the best value motoring they could have. Quite simply they can’t afford the best value motoring because it requires having money up front.

Several people have said if you can’t afford it upfront and outright, the best thing is to get a loan to buy a 2-3 year old car. When it’s paid off, you own a car you can keep driving. It’s the end of the monthly payments..land getting out of the continuing cycle of mo they payments, even if it means the initial mi they payments are more, is the key for lots of people and the best compromise. If they stop paying mo they payments for another 3-5 years and have the discipline to save in that time, by the time they need another car, they have the money to get one outright or to take a very small loan out.

The issues all get jumbled in people’s minds too. They like new cars and they can easily believe that only a new car is reliable motoring, and they fear extra maintenance costs too and all these things move them away from the cheaper buying outright and a couple of years old, towards something which is ultimately much more expensive but has more certainty in it.

It’s the reality, that those who can least afford it often pay more for most things. They pay more by paying on instalments and they pay more to avoid facing bills along the way. For example, with boilers, most people would pay less if they didn’t have a boiler policy and simply replaced their boiler every 10-15 years when they needed to.....but they don’t know exactly when the replacement will be needed and would need to know they had the £3k available to pay for it. People who have some cash stashed away can go for the cheaper option with cars or boilers because they have financial security behind them. Loads of people just don’t have that security and the thought of a bill for £3k horrifies them.....so they pay more on a monthly basis for avoid it. People with a good few grand in the bank don’t fear a boiler or a vets bill or having to buy a new car. They know that at some random point those bills will come and they just pay them when they’re needed. In most cases they save money. Yes, there is the odd case where the bill is huge and some kind of insurance scheme or instalment plan would have been cheaper, but that’s not the norm.

Independent Car dealer here...

In the last couple of months I reckon finance deals have accounted for 25% of our sales. Most of our customers pay by bank transfer... Whether they have arranged their own finance, that's up to them. We don't prioritise finance customers, we treat all of our customers the same.

@reenon

Independent Car dealer here...

In the last couple of months I reckon finance deals have accounted for 25% of our sales. Most of our customers pay by bank transfer... Whether they have arranged their own finance, that's up to them. We don't prioritise finance customers, we treat all of our customers the same.

There were some statistics that showed re new cars, about 75% of "premium" badged new cars were bought on lease, but only about a quarter or "normal" badged new cars were bought on lease. So it seems to be the new/premium market where most people buy on lease, but for more modest cars and the second hand market, it seems mostly to be bought outright or bank loan.

For example, with boilers, most people would pay less if they didn’t have a boiler policy and simply replaced their boiler every 10-15 years when they needed to.....but they don’t know exactly when the replacement will be needed and would need to know they had the £3k available to pay for it.

Not sure boilers are a good example really as the boiler insurance only pays for repairs, not for the eventual replacement which will be required after 15-20 whether you've had boiler insurance or not. Insurance doesn't provide a new boiler replacement for boilers at the end of their lives.

Wombat, that's a very good explanation. Makes sense. And of course the companies are delighted to have people paying continually.

I remember when DD got her first job after uni, office temp work. The workforce was 95% (fairly) low paid young people, yet the car park was full of sports cars, BMWs etc.

DD got the bus, and when the bus route changed she bought a Ford Ka which was a few years old. Was about £5,000, she had some savings, we gave her a little, and she put about £2,000 on HP, not much over £100 a month for a couple of years. Next time I would advise her not to use HP but as she'd only just started working we thought she might not be eligible for a normal bank loan. Anyway the regular payments must have helped her credit file.

She loves her dinky little Ka!

Boiler cover can include having your boiler replaced with a new one, if you take it out when your boiler is under a certain age. The firms that offer this cover know that boilers are pretty reliable for a good 10 years and someone will pay more over the period before they need a new one, than a new one costs. I am talking about plans like those British Gas offer...they aren’t simple insurance products but include servicing and replacement of parts and labour and a new boiler too if needed.

For many years I bought with bank loans, as soon as it was cleared I traded the car in and got a slightly better one with a new loan. That went on for decades until I eventually had a sharesave mature and bought outright. Have been able to do that for the last three cars now because of that leg up. I’ve been driving 35 years though now, so it didn’t happen for the first 25 years!

Never bought on finance, always more expensive IMO.

Oh and I never buy brand new, always 6-12 months old and usually ex-demo.

Bank loan here - far cheaper interest rate and no balloon payment. Monthly payments weren't vastly different to the quoted PCP deal (with balloon payment at end).

@SpeakingFranglais

Oh and I never buy brand new, always 6-12 months old and usually ex-demo.

At certain times of the year (a few days before quarterly bonus deadlines), or when a model is being discontinued, you can haggle good deals on brand new. We went to a dealer to look at an "ex-demo" that was about 9 months old. We ended up saying no because we didn't like the colour. The salesman told us he could get us a brand new one (delivery only mileage) in the colour we wanted for the same price, which was 25% off list price. We'd just hit it at the right date as they were desperate to register a few more cars to hit the next tier of registration bonuses so we got the car at less than it cost them!!