How can finance be better than cash

[pvr]

I see this often mentioned that having a car on finance works out cheaper than paying cash. I still can't understand that and have never financed a car but would like to understand how that works.

I am collecting a new car in about 3 weeks or so, and had to take the finance option to get the extra £1k off the car's new price, and the sales guy told me to cancel it within the 14 days cool off period so I would still get the £1k extra discount. I had to do the same with the Audi to get an additional year warranty and get the service inclusive pack and cancelled the finance on that as well.

I looked at the Audi paperwork at the time and items such as "you have to pay £50 to get a plate change", and "you can't change wheels without their permission etc etc" - I would hate to be beholden to anyone to be told what I can and can't do with my cars.

A friend bought an M5 on finance because it was a fixed deal for 3 years, and he said that the depreciation alone would have costed him more if he bought it outright and now he knew exactly how much the 3 years would cost him. I had always assumed that you would always be the loser when financed as they would not provide that option if they did not make money out of it. What am I missing?

 

[Ducklakeview]

Sometimes manufacturers will throw incentives in if your take their finance. It's all about shifting cars.

A couple of years ago my best mate was looking at a new A7. At the time, audi were offering £14,000 off the list of something like £48k. This equated to a better deal than anything else offered at the time, even from a broker.

He was originally paying cash and px. As his px was more than the max deposit, he ended up with £6,500 cash back and took the remainder over the shortest term they allowed which was 24 months.

So worked out cheaper than if he'd paid cash and px. I think the best deal he could otherwise have got was about 12% off whereas he ended up with around 26% after taking into account the (low) interest he paid on the balance. One of the terms of the discount was that the finance agreement had to run its term and not be paid off early.

Mike

 

[-Tom-]

I'm pretty sure that they get a healthy commission on the finance product that they've sold too, so can feed that back in with incentives.

 

[M1ghty_m0use]

Never agreed with finance, and don't see how finance with interest can be cheaper than out right sale my parents brought me up to live within my means, and save for what I want , my theory is if I can pay the finances with the interest I can save the money in an isa . The trouble with this day and age everyone wants everything "
now". the only thing I owe Money on is my mortgage . If I wanted a m3, Porsche 911 Etc I'll save for a couple of years and would get more satisfaction knowing I've worked ,earned and own it rather on the "never never"

Sure some people will Disagree with me


there's 21 yo kids at my fathers work driving new m3's through their Work scheme paying £850
A month , and living at home suckling on mamma teat , I've never got it

 

[Ducklakeview]

Never agreed with finance, my parents brought me up to live within my means, and save for what I want , my theory is if I can pay the finances with the interest I can save the money in an isa . The trouble with this day and age everyone wants everything "
now". the only thing I owe Money on is my mortgage . If I wanted a m3, Porsche 911 Etc I'll save for a couple of years and would get more satisfaction knowing I've worked ,earned and own it rather on the "never never"

Sure some people will Disagree with me


there's 21 yo kids at my fathers work driving new m3's through their Work scheme paying £850
A month , and living at home suckling on mamma teat , I've never got it

I'm the same, mortgage is the only thing I have other than a couple of credit cards for emergencies, BUT if it makes more financial sense and is actually cheaper than paying with your hard earned I don't see a problem.

Personally I'll stick with an older vehicle that I can buy outright. Don't get new wrong, I'd love to buy a new X5 rather than the 6yr old one that I'm looking at now, and the payments wouldn't be a problem BUT I'd wince every month at the total cost of depreciation and payments.

Mike

 

[jamie_z4]

Also, a lot of finance is a hand back scheme, like the 21 y/o's with a m3 @ £850 a month,

your driving round in a rental car - glorified 'Enterprise' isnt it.

not for me!

 

[pvr]

I understand the hand back deals like Nissan does with the Leaf, i.e. 2 years fixed monthly charge (i.e. rental). But I was trying to understand those non hire agreements, i.e. you have the loan for X months after which you own the car or pay the balloon payment, how that can ever be cheaper than cash.

 

[Ducklakeview]

Also, a lot of finance is a hand back scheme, like the 21 y/o's with a m3 @ £850 a month,

your driving round in a rental car - glorified 'Enterprise' isnt it.

not for me!

Yup, that's the other side. I heard recently that something like 70% of private new car sales last year were on some form of PCP. Great idea in theory, but come the end of the term, you have to either walk away, start again with cash input or buy the "used" car.

When I was in the business, as a finance manager for a large multi franchise dealership, it amused me at how easy it was to "sell a payment" rather than an "overall cost" people were obsessed with the monthly payment, and to hell with what happens in 3 years.

Time after time I saw customers come back at the end of a PCP and have to "downgrade" to a smaller/cheaper car because the equity wasn't there in the car after paying off the balloon figure.

Weird thing is, a lease on the right car (low depreciation) can work out MUCH cheaper than a PCP. However, at the end of the day you are still effectively "renting" the car. For some, like those who get a car allowance, or the likes of me who is self-employed and can offset the cost against tax, it can be a good thing - BUT I still have to "earn" that money, and declare it to HMRC etc...

Mike

 

[Ducklakeview]

I understand the hand back deals like Nissan does with the Leaf, i.e. 2 years fixed monthly charge (i.e. rental). But I was trying to understand those non hire agreements, i.e. you have the loan for X months after which you own the car or pay the balloon payment, how that can ever be cheaper than cash.

PCP's are rarely, if ever cheaper, however a straight HP deal with an "incentive" ie massive discount can be, as per my post above.

Mike

 

[jamie_z4]

i learnt the hard way,

when i was 23, i got an e92 320d on PCP, i was young (still am!) there was a good incentive , the dealers are all 'forget the cost of the car, what can you afford a month?!) I could afford £330 a month, and walked out with the keys to a shiny top of the range m sport white bmw coupe with all the toys, only after the novelty wore off and i was bored with it, i had to pay 3 grand to return it, and was left with nothing but a bitter taste

The straight HP was £380 a month over 5 years n PCP was £330 over 4, for info.

you live & leanr i guess.

 

[MACK]

Whatever your views on finance/debt etc the thing I never get its how people fall for the "whats your monthly budget?" probing question.
At the end of the day its about the cost price of the car, the residual value and critically the rate of interest and that's APR not the flat rate dealers love to hide behind. The number of times you see someone fall for the my budget is x and suddenly the dealer come back with a deal that happens to £10-20 above that by magic! Lots of folks dont even look at the APR and in many cases its costing them thousands.

 

[jamie_z4]

Whatever your views on finance/debt etc the thing I never get its how people fall for the "whats your monthly budget?" probing question.
At the end of the day its about the cost price of the car, the residual value and critically the rate of interest and that's APR not the flat rate dealers love to hide behind. The number of times you see someone fall for the my budget is x and suddenly the dealer come back with a deal that happens to £10-20 above that by magic! Lots of folks dont even look at the APR and in many cases its costing them thousands.

as per my post above, i fell for it, it was one of those, i was sat in the showroom looking at a shiny new BMW at a price i could afford, its a surreal experience for someone as impulsive as i am

 

[Baadshah]

A memorable website for contract hire cars....

http://www.lingscars.com/

My eyes started to hurt after a few seconds....you have been warned! :dizzy: :dizzy: :dizzy:

 

[PerryGunn]

I think a lot of this depends on how good you are at negotiating a cash discount on a new car - if you look at some of the leasing deals that have floated around over the last couple of years, they can look very inviting especially if the lease company has got a good deal on a bulk purchase and you don't mind the spec that they are offering

e.g. there was one that was available several months back on a manual 118d MSport (can't remember if it was 3 or 5 door) with nav and a couple of other options and 10,000 miles/year - 3 year deal @ £199 deposit and £199/month so total cost for the 3 years was (roughly) £7500 including all the setup fees etc. (I remember this one because I looked at it as a cheap option for an extra car)

Given that a 118d MSport with nav was listed at around £22-23k at the time (so say £22,500 for the sake of argument)
- if you assume a 3-year depreciation figure of 45%, you get a 3-year-old value of £12,375 so would lost just over £10k in 3 years (from list price), assuming the same residual value the break-even point with the lease deal would be a new cost of £19,875 (i.e. a discount of around 12.5%)

From the point of view of someone who walks into a showroom and is slightly intimidated by the process of trying to negotiate a deal, wants a new car with manufacturer's warranty every few years without having to try to sell privately or get their pants pulled down in trade-in values, you can see why some of these deals are attractive

 

[MACK]

Whatever your views on finance/debt etc the thing I never get its how people fall for the "whats your monthly budget?" probing question.
At the end of the day its about the cost price of the car, the residual value and critically the rate of interest and that's APR not the flat rate dealers love to hide behind. The number of times you see someone fall for the my budget is x and suddenly the dealer come back with a deal that happens to £10-20 above that by magic! Lots of folks dont even look at the APR and in many cases its costing them thousands.

as per my post above, i fell for it, it was one of those, i was sat in the showroom looking at a shiny new BMW at a price i could afford, its a surreal experience for someone as impulsive as i am

Don't feel too bad, it gets most people. Bet you won't fall for it again though! The folks I never really get are the ones, that keep falling into the trap.

 

[jamie_z4]

Whatever your views on finance/debt etc the thing I never get its how people fall for the "whats your monthly budget?" probing question.
At the end of the day its about the cost price of the car, the residual value and critically the rate of interest and that's APR not the flat rate dealers love to hide behind. The number of times you see someone fall for the my budget is x and suddenly the dealer come back with a deal that happens to £10-20 above that by magic! Lots of folks dont even look at the APR and in many cases its costing them thousands.

as per my post above, i fell for it, it was one of those, i was sat in the showroom looking at a shiny new BMW at a price i could afford, its a surreal experience for someone as impulsive as i am

Don't feel too bad, it gets most people. Bet you won't fall for it again though! The folks I never really get are the ones, that keep falling into the trap.

most definatley mate, i wont spend more than 5k on a car now

 

[Paulr]

A memorable website for contract hire cars....

http://www.lingscars.com/

My eyes started to hurt after a few seconds....you have been warned! :dizzy: :dizzy: :dizzy:

Holy buttery Jesus, that is a busy website!

Finance is there for people that don't have the cash to pay outright, but can afford a monthly payment. When manufacturers do a supported finance rate it is worth keeping your money in a high build account and using theirs to buy your car.

Where it went wrong was when the balloon was set unrealistically high and the car was worth nowhere near the final large balloon payment.

Contract Hire works if you understand you don't actually own the car (who cares? You don't if you do normal finance until the last payment anyway). You are basically just paying for the depreciation, which you will anyway if you brought it outright or on standard finance, but then you don't have the hassle of trying to PX it to Swiss Tony in a few years time. Deposits tend to be a lot smaller as well.

 

[pvr]

I think a lot of this depends on how good you are at negotiating a cash discount on a new car - if you look at some of the leasing deals that have floated around over the last couple of years, they can look very inviting especially if the lease company has got a good deal on a bulk purchase and you don't mind the spec that they are offering

e.g. there was one that was available several months back on a manual 118d MSport (can't remember if it was 3 or 5 door) with nav and a couple of other options and 10,000 miles/year - 3 year deal @ £199 deposit and £199/month so total cost for the 3 years was (roughly) £7500 including all the setup fees etc. (I remember this one because I looked at it as a cheap option for an extra car)

Given that a 118d MSport with nav was listed at around £22-23k at the time (so say £22,500 for the sake of argument)
- if you assume a 3-year depreciation figure of 45%, you get a 3-year-old value of £12,375 so would lost just over £10k in 3 years (from list price), assuming the same residual value the break-even point with the lease deal would be a new cost of £19,875 (i.e. a discount of around 12.5%)

From the point of view of someone who walks into a showroom and is slightly intimidated by the process of trying to negotiate a deal, wants a new car with manufacturer's warranty every few years without having to try to sell privately or get their pants pulled down in trade-in values, you can see why some of these deals are attractive

From the negotiation with BMW for the 140 using coast2coast, I got a final discount of 22% or there abouts before we discussed finance or cash. I did not get the impression that I would get it any cheaper either way, so in your example above assuming the same starting price, the finance deal would work out cheaper.

 

[PerryGunn]

From the negotiation with BMW for the 140 using coast2coast, I got a final discount of 22% or there abouts before we discussed finance or cash. I did not get the impression that I would get it any cheaper either way, so in your example above assuming the same starting price, the finance deal would work out cheaper.

That's why I said 'a lot of this depends on how good you are at negotiating a cash discount on a new car' - if you're a 'sophisticated' buyer who does some research and isn't afraid of trying to strike a decent deal with the salesman, you can get some good discounts.

IMO, there's no 'one-size-fits-all' answer as you need to do your research, look at the deals available at that time of year, work out if you may be able to squeeze a bit more due to end of quarter/half-year/annual sales periods, weigh up discounts on in-stock cars vs factory orders, look at car broker quotes etc. etc. If you want to make decent savings, you've got to put in the leg work

For Mr. Average who walks in unprepared and thinks they're doing well when the salesman charges list price but offers to throw in some rubber mats and a 'free' tank of fuel, and would be ecstatic at a closing offer of a 5% discount, the lease deals can work out much cheaper

 

[srhutch]

Whatever your views on finance/debt etc the thing I never get its how people fall for the "whats your monthly budget?" probing question.

A BMW dealer tried this with me back in 2007ish.

I hated his approach. This was straight finance, but all he was worried about was the monthly figure, where as I wanted to know how much my part ex was and the cost of the new car. Needless to say he didn't get my business.