The boom in financial services has increased the range and diversity of car finance options. In the following article we will look at a range of these options that are designed specifically for brand new cars. These include purchase, leasing & subscription If you are looking for ways to buy an older car, take a look at this guide from AutoExpress.
So, why would you want to buy your car?
Let’s start this by asking a different question. Why do most people buy their homes? This is primarily for two reasons;
- They want to make modifications and,
- They want to own a financial asset that appreciates in value.
However, both of these reasons don’t apply for most people when it comes to cars. The majority of people do not modify their cars. In fact, most people find brand new un-modified premium vehicles to be more desirable than equally expensive cheaper vehicles that have been modified! This distinction makes cars different from homes in this regard.
Another feature that makes cars different is that they depreciate in value as they get older. The AA states that;
“The average new car will have a residual value of around 40% of its new price after three years.”
This means that you are constantly losing money when you own your car. This means it makes sense to rent, hire, or lease your vehicle if possible as, in the words of the billionaire oil tycoon J.Paul Getty, “If it appreciates, buy it. If it depreciates, lease it.”
Therefore, in the following article we will look at ownership, leasing, and subscription as viable cost-effective options.
Buying your Car
Buying a car is the traditional method of getting a car. This can take the form of outright purchase, PCP and Hire Purchase.
PCP (Personal Contract Purchase) usually requires you to pay a large deposit (10% – 20%) of a car’s value to get into the vehicle. After this you will pay monthly payments for the term of your contract and then you have the option to buy the vehicle by paying off the remainder of the vehicles’ value in a balloon payment.
Unfortunately, due to the average rate of depreciation being 40% of a vehicles value over three years, it is unlikely that it will be worth buying the vehicle at this point.
In this case, most people return their vehicles and take out a new PCP, making the use of PCP similar to leasing. However, depending on your monthly payments and depreciation PCP could end up costing more than a comparative lease.
Because of this lack of transparency, the automotive industry is phasing out PCP in favour of Hire Purchase. This behaves similarly to a mortgage where you pay a deposit and your monthly payments are calculated to include the value of the vehicle, plus interest. This is great if you are purchasing a vehicle to use long-term but if you are wanting to change your car more frequently than 4 years at a time then it could be a more expensive option.
Leasing a Car
Leasing is essentially another word for “renting” a car. In this case, you do not pay any upfront deposit. Instead, in your first month you usually pay 3,6 or 9 times the normal monthly payment. Then, you pay a static fee each month for 2,3 or 4 years. After this you can simply return the vehicle.
Although at first glance it may seem to cost the same as ownership but with the downside of not owning the vehicle, car leasing prices are calculated based on the depreciation of the vehicle, not the whole value. This means that rates are significantly less than Hire Purchase or even PCP. At the end of the contract, you return the vehicle, and you can then take out a fresh car lease.
Car Subscription is one of the latest options when it comes to driving a car. In this case you subscribe to an individual service that provides cars. Unfortunately, there are many different types of car subscription with different formats which makes discussing them quickly quite difficult. Fortunately, most subscription services have common features that let you change your vehicle at least every 12 months and give you more flexibility to cancel.
For example, Car Lease & Go offer a car subscription that lets you change your car every 6 or 12 months with only a £180 document fee. There is an initial payment for setting up this service but after that every new car you get is only charged at the normal monthly rate. You also have the option to leave the contract every three months without any charges. This means that Subscription Services can both be a great short-term option but also a cost-effective long-term option.
Owning a new car is becoming increasingly expensive and, in most cases, does not make sense. Because of this, leasing has become more popular, but it is now seen as a very restrictive option. Now, with the advent of Car Subscription Services, you can benefit from cost-effective motoring and incredible flexibility. It is for these reasons that we recommend leasing or car subscriptions for most motorists looking at a brand-new car.