How would you finance buying a car?

[clam]

Will need to replace my car at some point over the next few months. What are the best options for financing it? DH says buying new is a complete waste of money as it depreciates the minute you drive it off the forecourt. But can you get finance deals (good ones) for used cars? And are they a good idea if we could pay cash? I keep reading that dealers are in dire straits, but prices still seem high to me.

We have just signed to buy a used car through a garage and we are able to take out the loan with the garage at a far better rate than the bank.

But we are in France so perhaps things are different here.

Cash to the dealer is the best option (and second hand has lower depreciation).

Can you extend your mortgage to get the cash?

If you can pay cash but that cash is currently in a guaranteed return savings plan, it usually makes sense to take out a loan.

Because of the interest rate you earn on your investment, and then the interest on that, and the interest on that etc even if the interest rate of the loan is a little higher than the guaranteed interest rate on the savings, it can be worth it.

We just bought a car , couple of years old.
Pretty good finance from the dealer.
There were plenty of people in there buying cars no sign of struggling.

If you have cash you may be able to secure a marginally better deal.

Cash in teh dealer usually gets you a better interest rate etc. (as bank loans tend to be a better rate - I have always found Halifax or A&L pretty good)).

But the dealers tend to be a bit more flexible with teh price if you take it on finance (as they make comission on that).

I know someone who has just bought a used car after an insurance right off. They wanted to pay cash as they had the insurance cheque in the bank and they had an horrific time trying to get a good deal.

My advice. Find the car you want. Ask the price for cash. Go and get a quote with a bank and see how much per month. Also ask them for a quote for a finance deal and see which one you pay less per month and/or less in total with. It really depends on the exact deal and circumstances.

i normally find that signing up between the 24th and 31st of the month works well as they have sales targets to meet and tend to be a bit more flexible on price!

Cash to the dealer by taking out a separate loan. The loans you get through dealers are invariably not the best - look on moneysupermarket or similar.

ST, if you extend your mortgage, let's say you've got 20 years left, wouldn't you end up paying the car loan for the next 20 years? Plus the interest on that?

Clam, I agree with your DH re new cars. Waste of money. And second hand market is supposed to be struggling, so you might pick up a bargain perhaps.

Well, we have the cash locked away at 7% at the moment, but that will revert to goodness knows how low at the end of the term. I s'pose it depends if there are any 0% deals around! Or am I deluding myself? Probably silly but I have a problem with seeing such a lump sum disappearing. Somehow it hurts less to pay bit-by-bit......

Putting the loan on your mortgage means that you get it at a much lower interest rate. You can still pay it off at the rate you would if it were an unsecured loan, but it would cost a lot less.

We always buy new.
We lease one car - the dearer one. There are some very good lease deals at present.
We have a personal loan for the other car.

Am showing my ignorance here, but how do lease plans work? Are they a good deal?

Mine was bought from new - you can get good deals if you show that you're prepared to walk away. We got it on a 0% finance deal over 3 years. IMO there is no point on paying interest on something that is continually losing money

Clam - IMO - not usually.

An example.

You buy a car wirth - lets say £8000
You get a "hire purchase" loan with the car company for eg. £4000

You pay back the £4000 over (eg) 3years.

After 3 years you pay the car company the outsatanding £4000 (or get a loan), or give them the car back.

Typically they are set up so that after 3years, you give the car back in exachange for another new car and start a new deal on teh same basis....

We got a very good lease deal. We are leasing a Golf R32 for quite a low monthly pay. Yes, you don't keep the car in the end - but as we change our cars regularly and always buy new this is working out a far better deal than buying outrght.

SMS - that is not lease. That is contract hire or PCP.

Leasing you are basically just renting the car - like you would rent a house for example. You never own the car.

there is talk of the government introducing a cash incentive to trade in cars over 9 year old for new ones. If it happens it would probably be in a few months time. If your car is not 9 years old then buy soon in case that does revitalise the market.

As fewer new cars are now being sold there will soon be a shortage of quality second hand cars.

Good point, tatt. Might spur DH into action.....

Will watch with interest as dh's company lease is up soon but we still need to run a 2nd car.

Two things to consider re cash vs credit financing:

(1) What kind of discount will you get for paying cash? Ask for a 10% discount, see what happens.

Then with that proposal at hand, go to another dealer (of the same make), show the discount proposal you have, and see if they propose an even lower price. (I've done this. It works )

(2) If you don't use your cash for purchasing a car & leave it in bank, what interest rate will it earn? How will that rate compare to the interest rate you will be charged for credit financing, if you borrow to pay for the car?

I can tell you right away that your money get much less interest than what the bank will charge you for a car credit. (Unless you are invested in high-yield corporate/foreign government bonds). In this case, it makes sense to pay cash rather than borrow to buy a car.

We've been looking into this recently CA and I was shown the figures. If your money is invested in a guaranteed return of 4% it is still worth borrowing at 4.90%.

How?

Because the money in the bank will pay 4% interest on the whole 3 year term of the loan (assuming it is 3yrs here).

With a loan the amount you pay interest on will decrease. So at the end of teh loan you will be paying less £ in interest because the value you are paying interest on is lower.

So if you have £5000 in hte bank, and assume that you get 4% pa interest and that it is calulated annually (for simplicity - as they are usually calculated monthly/daily now) you will get
4% interest on £5000 in year 1
4% interest on £5200 in year 2
4% interest on £5408 in year 3
So at the end of year 3 you will have £5624 in teh bank. Profit of £624

If you borrow £5000 - and again assume that you pay 4.9% pa interest and that it is calculated annually at the beginning of the year (to simplify things), and that the monthly repayments are 1/36 of outstanding balance for yr1 1/24th for year 2 and 1/12th for year 3 (these assumptions are to make the calculations easier...and illustrate the priciple...in RL interest is calculated monthly and monthly payments are fixed at the begining of the loan but my head can't work that bit out!)

Year 1 £5000 outstanding £245 interest charge. Pay £146 per month.
Year 2 £3493 outstanding £171 interest charged. pay £153 per month
Year 3 £1828 outstanding. £73 interest charged. Pay £158 per month. Loan is paid of.

Total interest charged is £489

So buy leaving your money in teh bank you have made enough profit to cover the interest charges, with £135 to pay teh car tax (as long as you don't buy an SUV!)

Basically a small difference in the interest rate on a loan and savings can be soaked up as the amount in £ terms of interest on savings increases with time. The amount of interest on a loan in £ decreases with time.

However....I think that you would have to be lucky to get a loan at 4.9% and savings at 4% TBH....

I understand the concept of compound interest

I was actually trying to ask how you find such terms to borrow & deposit at.

We were recently offered credit at about 7%

(We benefit from the 6% "Livret A" rates for now but that will end at the end of March.)

We have just got a loan at 3.90% over 4 yrs from the dealership. We could have had 2.90% over 3 yrs.
It's a pretty good rate and I must admit it helped us decide between two makes of vehicle.
But all the other dealerships we visited are offering 4.9% on new and second hand.

If you put money in an 'assurance vie' you are usually guaranteed a return of at least 4%.