Car finance

[TiredButDancing]

I'm currently looking at buying a new car. The first dealer tried to aggressively upsell me, which was annoying, but one point he made was that the interest rate he could offer was better. Which it was at between 7-8% on a PCP. The car was more expensive overall (21k) and it meant monthly payments would be around £250 with a high balloon payment of £10kish. Obviously, his goal is that I will just hand the car in and get a new one after a few years which is perfectly valid although for various reasons, it's not what Dh and I have done previously.

The other guy actually offered me some cars that met my brief (and that on paper I like more, although need to test drive) and the monthly payments are more manageable at £200 plus the balloon payment is lower at around £7k. Because the cars he sent me are cheaper at around £15k. However, the interest rate is 10%.

Obviously after the term is up, the more expensive car will probably be worth more than the cheaper car.

In terms of monthly payments, balloon payment etc, and car choice, obviously the second option is better. But I'm struggling with the 10% interest. It just feels so high and like taking a higher interest rate is short sighted.

Any thoughts from anyone who knows about this stuff more than I do?

Look at the interest figures in detail. Car finance people are notorious for quoting flat rate interest instead of APR because it makes it look cheaper.

Is that 7-8% flat rate or APR? What is the total amount payable and how much extra interest is payable over the term?

Same question for the other car, when you look at the actual numbers, how does it compare?

Personal loan rates are as low as 2.9% if you have a good credit rating. That makes the above deals look expensive. Could you get a loan for £10-15k and use that to buy a car?

A £15k loan over 4 years would cost about £330 pm if you got a 3% interest rate and you would own the car outright after 4 years with no balloon payment, which seems a massively better deal than £200 pm for 3 years then another £7k to pay to keep the car.

Do you need such an expensive car if you're needing to borrow to buy one and could you get a suitable car with a smaller loan? What is your usual car buying 'style' do you keep them for years or do you chop and change? Is your income stable?

What do you plan to do with the car at the end of the term? Pay the balloon or start another finance plan? This sort of deal can be a very expensive trap to get into you are always making car payments - what if your circumstances change and you no longer need the car, or it is no longer suitable? PCPs can be hard to get out of.

All good questions. The APR on the cheaper one is 10.5 vs 10.45 interest rate. That doesn't sound completely right? But the total interest payments are £2700 or so. I didn't look as closely at the more expensive one because I wasn't that keen on the more expensive car anyway.

You are absolutely right that I don't need such an expensive car. But it's a sort of "reward" for me after the last 8 years of being v careful with money etc and DH and I feel we can afford it, even though it absolutely is NOT the most practical solution. I concede completely that it's a luxury rather than a necessity.

We have tended to have cars for the longer term if financed (eg both of our current cars were bought on very good finance deals and we then refinanced the balloon payments, on not bad financing deals. Our more expensive/bigger car, which we are keeping, will be paid off next year and we hope to keep it for quite a few more years). In other situations, we have bought cheaper cars for cash.

I would personally prefer a loan and pay cash for the car but I didn't think we'd get the kind of interest rate you're talking about. But I did just do a quick money supermarket comparison and it looks like we have a good chance of borrowing what we need for just under £300 per month so thank you for making me check and not just make assumptions.

Are you more interested in overall value and keeping total cost minimised over the whole period, or monthly affordability, which is then paid indefinitely and costs more over long term?

These car people sell to you on monthly affordability and up sell by showing monthly costs aren’t much more.

I’d def look at loan and buying outright, with a view to keeping longer and having a few years without car payments. Use that time to save and 5 years later you can replace outright. Not for everyone I know.

And do you need the expensive car to have a ‘treat’ - isn’t any brand new car a big treat in itself. Sorry if it sounds preachy, but car salesmen have done a good job when a basic/standard brand new car feels so normal, it’s nothing special and you need the luxury version to feel you’ve had a treat.

The loan sounds better value. A smaller loan for a standard car seems better still. You’re doing well to avoid the up selling salesman. Don’t go for all the extras they offer too.

Never take out PCP on a used car, the APR on both of those is criminal

If you set up a spreadsheet and put the figures in for the pcp on those cars and then did a direct comparison for you getting a loan out the cost difference in interest paid overall would be massive

PCP can be useful when buying brand new because there can be dealer incentives and 0% apr , but even so it just enters you into a perpetual finance cycle

Don’t do it