Apart from our homes, cars are the most expensive purchases that most of us will make. Yet we waste thousands of pounds buying cars that we don’t need. And we do it in an unresearched and pretty haphazard way without investigating the value we are getting for the money we spend.
The options to use when paying for a car these days are almost limitless. Cash, credit card and personal loan are all options if you want to buy the car outright. The benefit of one over the other isn’t always a straight ‘financial’ question. If you use your own cash to buy the car then your savings are depleted. These savings may have been giving you comfort as an emergency fund that you had a reserve should something unexpected happen. From a straight financial angle the question usually is “Will a loan cost me more or less than the rate of interest I am losing on my savings.”
Your own cash will cost you nothing, apart from the opportunity cost of doing something else with it, a personal loan might cost anywhere between 5% and 10% APR depending on your personal circumstances and a lot of people forget that if you have a big enough credit limit then you can buy a card on your credit card which could cost nothing if you find a card that offers 0% interest.
But what is the benefit of owning the car outright rather than just leasing it? If you lease then you usually find that service and repairs are included, as long as you stick within a certain mileage limit. The downside is that you have to make a ‘balloon’ payment at the end of the term of the deal, at which point many people just hand the car back and start again.
At this point it all gets very confusing, as four different adverts in last week’s Sunday Times showed very nicely:
- Jaguar XF, price £33445, £398 per month.
- Nissan Qashqai, price £22,250, £219 per month
- Renault Clio, price not quoted, £149 per month
- Ford Focus, price not quoted, £229 per month
Apart from the fact that each advert is for a different make and model of car each offer was completely different from the others. Three were for purchase (none of them outright, all had ‘balloons’), the Ford Focus was a lease with no option to ever own the car. The Jaguar involved a deposit of £199 and a final payment of £13000, Apr 4.9%. The Renault was attractive at 0% APR and a deposit of £1321 with final payment of £5000, and the Nissan involved a deposit of £5,000 a final payment of £11,000 and the APR was 4.9%.
Some of the offers included servicing and some didn’t and the annual mileage you were allowed before you incurred extra costs was different in each case. How do you compare all of these options sensibly?
And of course each of these adverts was for a brand new car. But should you be buying new? You could lose a huge chunk of the value of the car in the first 12 months, and some depreciation numbers are explained below as well, just because you drive it new out of the showroom.
And which of the cars in the adverts is the right one for you? Many are attracted to particular cars because of the badge on the front, be it Jaguar, BMW, Mercedes or some other perceived quality ‘marque’. But how many of these purchases are really about vanity rather than value? Do you really need a badge? Is there a smaller, cheaper car that does everything you need it to do at half the cost, freeing up a big chunk of cash to go and do something else with?