CREDIT: PUNIT PARANJPE/AFP
As Britain’s appetite for driving the newest and flashiest cars shows no signs of abating, the Bank of England has issued apocalyptic warnings about the state of the motor finance industry.
Banks are “failing to learn the lessons of the past”, said governor Mark Carney last month as he commented on the banks’ easy lending of consumer credit. But how much attention should you be paying to the doom and gloom?
According to the experts there are still many reasons to consider a car finance deal as you can end up paying less in the long term.
Guy Anker, a consumer expert at moneysavingexpert.com, the finance website, said: “For people who can afford to buy a car they can be a good way of spreading the payments.
The issues come when car salespeople are really, really pushing vehicles on people who possibly shouldn’t be buying a car because they can’t afford it. Using the example of a brand new Mercedes E-Class saloon with an on-the-road value of £35,205 we look at the options.
Buying with cash
The most obvious way to buy a car is by simply paying the ticket price and buying with cash.
You will pay £35,205 – the full value of the car. You own the car straight away and are not tied into a lengthy finance deal, interest payments or mileage limits.
Its anticipated value after three years, the length of most finance deals, on the road is approximately £15,950, according to Mercedes, amounting to a £19,255 cost.
Estimating value is far from an exact science as car values are notoriously hard to predict. But if you own the car outright any drastic fall in value will cost you money when you sell.
Of course this is only a factor if you want to sell after three years to buy a newer model.
Personal contract purchase
The most popular car loan (and what the Bank of England is so worried about) is a PCP. Here you buy the new car with an upfront deposit and pay monthly payments for a fixed period, usually three years.
At the time of the sale the dealer will set an “optional purchase payment”, also known as a balloon payment, which you will have to pay as a lump sum at the end of the term if you want to keep the car. A buyer could also hand the car back and walk away, costing you nothing extra.
As long as you can afford the repayments, a PCP can end up being cheaper than buying the car in cash up front. With the E-Class, assuming a deposit of £5,999, the dealer will currently offer a balloon payment of £15,950 and you will pay £344.59 a month for three years.
This means over the course of the three year period you will pay a total of £18,404.24.
The other option is to lease the car for three years. This allows you to drive a new car but never own it outright, similar to a PCP but without the option to buy it at the end of the agreement.
With the Mercedes example a 36-month agreement would have an upfront payment of between one and nine months’ rental. The length would affect the size of the monthly payments.
Assuming the largest payment (making the monthly cost the smallest) of £3,872.61 – the monthly payment would be £430.29 for the following 35 months.
The overall cost on this option will be £18,932.76 – slightly cheaper than outright purchase and more expensive than a PCP.