Any finance experts out there?

Posted by: Paul Hutchings on 30 March 2006

OK I hope I shall do a decent job of explaining/asking this.

I have a sum of money sat in a savings account. I want to change my car.

I could go out and pay "cash" for the car I want. At the same time I'd sooner hang on to my money for as long as possible.

What I'm trying to work out is roughly this:

Suppose I purchase a car that costs £20k and I pay cash.

It might be worth £10k in three years time, so (barring running costs etc) three years motoring has cost me £10k, with an the immediate effect that £20k left my bank account at the start of that three year period.

Suppose I do "personal contract hire" or whatever they call it on a £20k car. I pay the a deposit, and I then pay £x amount per month. After three years I could either pay the balloon payment, or simply walk away. If I walks away I have no car, but the last three years motoring has still cost me X amount. In the meantime I could have most of the £20k invested/earning interest to offset what I would be paying for the vehicle.

I'm fairly sure that after three years, going down the second route will have cost me more money, but I'm not sure how to work out how much more - basically am I much better off paying outright versus maybe paying more for the flexibility.

I'm hoping I've explained that fairly well, I know it depends on the amounts involved, and I know that of course buying a new car is not a way to make money - I'm purely looking at the best/most sensible way to take the hit.

Hoping the people here are more impartial than speaking to a typical car dealer!

cheers,
Paul

Posted on: 30 March 2006 by rackkit

Or you could just get a loan for the 20k over 3 years. Keeps your 20k in the bank and you've still got 10k's worth of motor sat on your drive in 3 years time.

Posted on: 30 March 2006 by Steve Bull

All loans and PCPs should give you a 'total amount repayable' figure and quote you and APR. If you struggle to get a straight answer on this then try another dealer/provider. Also watch for those who only want to talk £x/mth - they will have something to hide (probably a lengthy repayment term making up for lower monthly payments).

At risk of stating the obvious, borrow as little as possible for as short a time as possible at as low an interest rate as possible. Unless you can borrow as a lower interest rate than your savings are earning, put down as much of your own money as you can manage. If you can get 0% finance then watch out for where else you're being screwed on the deal.

A PCP will probably cost less per month as you are only repaying part of the capital (the bit that's not covered by the final balloon payment). It may cost you more overall for the same reason - the balloon payment still has to be accounted for.

Not sure if this is helping! It's hard to write an easy explanation and that is the main reason why I avoid PCPs.

Steve.

Posted on: 30 March 2006 by hungryhalibut

Why not get a 2 year old model of the same car for about £12,000 or whatever and let someone else pay the initial depreciation?

Nigel

Posted on: 30 March 2006 by Gary S.

Paul

Find an on-line calculator to work out the interest you would make if you left the money deposited. I use the one on the Daily Mail's website click here then go to All calculators and then to Long-term savings. This will allow you to play arround with the interest rate and term etc.

£20k over 3 years at 5% would lose you £3,152 compounded interest.

I have never found PCPs to be value for money when compared to outright purchase - fine if you haven't got the capital but otherwise I always buy if I can.

But better still buy nearly new, as suggested by Nigel, and avoid that initial depreciation My current car cost me book price less £8K for a car 6 months old with 8.5K miles! It's still got 2.5 year warranty.

Regards

Gary

Posted on: 30 March 2006 by Paul Hutchings

Hungryhalibut - just a personal thing I suppose.

Steve, this is what I'm trying to get my head around, until a couple of hours ago I was working on the "well the money's there" theory and then I started looking at the PCP principle.

Edited - If I have cash in the bank and I buy a car, for £a after three years I'll have a car worth £b so I'll have lost £c in depreciation.

Suppose I invest £a in a decent savings account, which will make compound interest of £x over three years. If I did a PCP then after three years I'll have paid £y, this will be more than £c, but taking into account £x it might not be much more, and I won't have had to part with £a all in one chunk.

I hate trying to explain my thinking as it could turn into an essay. I know it will cost me slightly more overall, but as a principle have I missed something totally obvious?

Paul

Posted on: 30 March 2006 by Gary S.

Paul

Further to my earlier post - you will of course only get anything approaching 5%(gross)if the money is invested in an Isa

Gary

Posted on: 30 March 2006 by Vaughn3D

The answer depends on the interest rate of the loan and the return you get on your $ in the bank. If you can borrow for a lower interest rate than the bank pays you, then borrow the money. If you must borrow for a higher interest rate than the bank gives, then use your cash.

Posted on: 30 March 2006 by Bob McC

Enrol at a university and get up to £4K at an interest rate of inflation only.

Posted on: 30 March 2006 by Jay

quote:
Originally posted by Paul Hutchings:
but as a principle have I missed something totally obvious?

Yeah. It's the part where you are paying interest on money you don't need to borrow

The cheapest way is to pay up front for the car and then save the payments you would've made on a loan and such like. At the end of the 3 years, you have car and money in the bank that's been earning interest.

Get a spreadsheet and run the two scenarios. That's what I'd do...

Enjoy either way. You get a new car!

Jay

Posted on: 30 March 2006 by Don Atkinson

Paul,

As a ROUGH guide try this

Option A (PCP)
Pay deposit of say£2k
£18k in the bank for 3 years at 5% less tax will give you total assets of about £20k at the end of the three years.

You will have coughed up £x pm in finance payments. I have no idea what £x pm would be. Assume £250pm. ie £9k over three years

Option B (buy for cash)
Nothing in the bank (you just spent it on a car)

Start saving £250pm. At the end of three years you will have saved £9k and earned interest of about £500. You will also have a car worth £10k. ie total assets of about £20k

Adjust the above figures and interest rates to suit your case.

Add in the cost of servicing/tyres/exhaust etc if these are covered by the PCP option, otherwise ignore them.

Does this help at all?

Cheers

Don

BTW I work on the ROUGH basis that a car depreciates 20% pa or 50% over 3 years when buying/selling privately. But when you sell a car to a dealer knock off about 10% for his involvement and when you buy a car from a dealer, add about 10% for his involvement.

Posted on: 31 March 2006 by Paul Hutchings

quote:
Originally posted by Don Atkinson:

Does this help at all?

Don

Don,

Yes it does, thanks very much. You've outlined my thinking. I was concentrating on the best use of what I have saved, but I will still be bringing in my normal wage so the existing "pot of money" will continue to be added to.

Being a little more specific, I've been pondering a new MX-5, nice car, approx £20k new. Then some bastard at work made me go and look at Porsches. Although it's their "basic" model the Boxter seems one hell of a nice car.

As I see it, if I buy a £20k Mazda and it's worth £10k after three years it's cost me £10k. If I buy a £33k Boxter and it's worth £21/22k after three years obviously I spent more to begin with, but after three years I've not lost much more (ignore servicing/running costs for now).

I guess what it comes down to is running a spreadsheet as Jay suggests, and working out what £33k invested sensibly would be worth after three years, working out what a PCP would cost me over three years, and seeing how close the difference is to what I'd have lost in depreciation after three years if I'd simply purchased one outright.

Thanks to everyone who's offered input - always was a bit of a maths dunce

Paul

Posted on: 01 April 2006 by Milan

Paul,

With cars it is worth looking at the price guides (available at newsagents or even better ask the dealer) and then you can determine the depreciation. You may find the Porshe holds it's value better or vice versa.