Monday, 3 September 2018

Car Finance Fun - seems a bit mad to me

Her Indoors bought one of those big white SUV cars two-and-a-half years ago on the never-never (HP or finance lease or PCP or whatever names they dream up for what is essentially the same thing).

I don't know the exact numbers, so I'll simplify a bit.
List price = £27,000
Deposit = £5,000
Three years @ £333 a month = £12,000
Final payment* = £12,000

* Depending on which whizz bang never-never scheme she's on,  this might be called 'loan outstanding', 'residual value', 'balloon payment', 'purchase option price' or whatever. She can also pay this  off over three years, @ £333 a month.

I've checked Autotrader and the second-hand value of that make and model is about £12,000 for three years old and £7,000 for six years old. Let's ignore VAT for now, it sort of nets off.

So if she sees it through, the total finance cost was negligible at £2,000 (works out at about 3% per annum) and she owns a car worth £7,000.
Here's where it gets weird, looking at it from the point of view of the dealer/manufacturer.

The chaps from the dealer rang her a couple of days ago, and said that if she pays another £1,000 she can swap it for a similar new big white SUV car (even though she's only two-and-a-half years into the initial three years) and the monthly payments stay the same. The current second hand value (two-and-a-half years) old is £14,000.

Let's assume this repeats itself, for ever. Every two-and-a-half years, she pays them £11,000 (£1,000 cash plus 30 months @ £333) and 'enjoys' £13,000's worth of depreciation (£27,000 list minus £14,000 residual)

The dealer/manufacturer collects £11,000 and loses £13,000 of depreciation, i.e. they give up £2,000 of the nominal profit margin when they sell the car, a kind of negative interest rate.


Lola said...

Yes. mad isn't it? Mind you it does mean that there are lots of three year old cars out with low miles at very good prices. Jaguar f Type sports cars bought on PCP are about £35K as opposed to £65K new and always with low miles.

Mark Wadsworth said...

L, indeedy. Or from my point of view, plenty of 15 year old cars which are more or less free.

A K Haart said...

Seems a bit mad to me too. It keeps people buying new cars and discourages them from switching brands but still seems like an expensive way of doing it. An insider's explanation would be interesting.

Mark Wadsworth said...

AKH, good point about brand loyalty, I hadn't thought of that.

I think the other point is, as mass manufacturers, they like to keep the production lines rolling and official list prices stable.

But really what they are doing is making cars and renting them out for what people will pay (fixed by demand), and they tweak the deposits and interest rate so that they end up with the entirely hypothetical list price.

Dinero said...

Yes the Hypothetical list price is an interesting point
Aside from that, it is a solution to the depreciation problem as those that want to drive a new car dont see the depreciation as it is amortised into a monthly payment The main dealer branches out into the second hand car market and has the opportunity of the sales commission and pitching the servicing and insurance contracts again. People who are not interested in a new car can buy a very similar car from the manufactures main dealer without subsequent depreciation.

Mark Wadsworth said...

Din, more good points. Mrs W from example 1 just wants to drive a new big white car for £333 a month, no MOT hassle, free yearly service. The gentleman from Lola's example us happy to pay £1000 a month to drive a new-ish F type.

johnd2008 said...

Here in New Zealand, the Government is keen to sweep all the old cars off the road as they say too many people are dying in cars without airbags etc.some of the reasons there are so many old cars about is that the roads are not salted in the winter so rust is not the problem it is in the UK, also there is a thriving market in secondhand cars from Japan as they also drive on the left. But, and this is the amusing part, is that the old cars will be got rid of, only if the owners can afford to buy a new one. I dont know many people who would prefer to drive an old banger if they could afford a new one.

JuliaM said...

This is why I never buy a new car!

Mark Wadsworth said...

JD, has the government considered salting the roads as a way of getting rid of the old cars? Or simply banning imports from Japan?

JM, I'm with you on this, but I understand how people drift into permanent new car ownership.

Lola said...

And we must remember that a fair chunk of this finance is government off balance sheet borrowing to pay the VAT

Lola said...

FWIW I understand that the factory gate price of any car is about 50% of its showroom price.

Of the price of a new car the greatest up front costs are VAT and selling expenses. If you deduct those then the depreciation graph is a much shallower curve. In other words a PCP scheme really finances VAT and selling costs and small amount of depreciation over the first three years. Maybe as low as 20% in total (or lower on some motors). Say about 6% 'real' depreciation per year.

Like MW I have mostly bought older good used vehicles. My 'best buy' being a 1996 Defender 110 County bought in 1999 for £11250 that I kept until 2012 and sold to a mate for £3,500 (I could have got £5,000). We did about 150,000 miles with it.

The other reasonable buy is an ex-demonstrator. My current ride was about £4000 of list with various extras thrown in - leather seats, rubber floor mats, mud flaps, three years servicing and some other things.

mombers said...

I'm amazed that '0% APR' ads are allowed. In the US it's blatant misinformation - they will say '0% APR or $5000 cashback!', i.e. whatever $5000 interest is in APR, not 0%. You'll get a better deal from a finance company most of the time. Interesting that no one has sued for false advertising.

I suppose they get away with it here by not advertising how much cheaper you'd get the car if you pay for it in cash.

Although I don't drive, the missus' car is always bought in cash second hand. Has worked a charm, hard to get 3% on a savings account and paying £10k+ upfront sharpens the eye for a better deal rather than a monthly payment.

MW, how does VAT work on a second hand car? Seems like a huge saving to be made on VAT only being payable on the dealer margin - or £0 on a private sale. But I suppose second hand prices are dragged up by new car VAT - supply is restricted by people not wanting to take such a fat loss

James James said...

"plenty of 15 year old cars which are more or less free."

Why do you permit your wife to waste such enormous amounts of money on cars?

Mark Wadsworth said...

JJ, how do you mean "permit"? She does what she wants and I give in all the time, just like most marriages.

Mark Wadsworth said...

L: "Like MW I have mostly bought older good used vehicles..."

Ahem, I have actually just bought 'older used vehicles' on the spur of the moment. I wouldn't objectively describe any the five cars I have ever bought in my life (yes, that few) as 'good', apart from the VW Golf, that was rock solid and only needed one repair in eight years.

L, VAT is the worst tax, on that we are agreed. But don't forget that people are quite emotional/irrational when it comes to cars.

'Depreciation' is not an objective measure of utility or mechanical soundness, (in which case it would be pretty straight line) it is measure of how much extra people will pay for having a shiny, brand new car vs one that is a few years old, which other people's kids might have puked in, or which might have hidden defects etc.

M: "I'm amazed that '0% APR' ads are allowed"

Agreed, but I hope that people can see through this, the list price is a fantasy figure that few people ever pay.

The sane buyer can choose the cash discount; loads of 'free' extras; a 0% finance deal; the dealer gives you £4,000 in part exchange for a rusted pile of crap etc.