Tony asks: “I need advice on the best way to buy a new car. I just can’t figure out what the best way to buy would be – Lease, Hire Purchase or PCP? What would you do in my position?”
[powerpress]
Q&A 38 – Should I Buy A New Car On Lease, PCP or HP? – Shownotes
Today’s question comes from Tony:
I need advice on the best way to buy a new car. Firstly, I fully appreciate that the absolute best way to buy a car is to buy a slightly second hand car outright.
I’ve done that for the past two years and it’s done me well, but right now I want to sell that car for around £10k and use the cash towards a deposit on a house.
I’ve also just got a new job that requires a lot of driving, and so I’d like a comfortable new car with a few gadgets in it.
So far I’m tempted by the new A4, or possibly a BMW 3 series. A Mercedes would also be nice, but not sure it’s in my budget. I’m looking to spend between 150 and 250 a month.
I just can’t figure out what the best way to buy would be – Lease or PCP?
Lease appeals because of the lower monthly cost, but then I don’t have anything to show for it at the end of the contract.
What are your experiences with PCP? What would you do in my position?
Thanks for your question Tony.
The Best Way To Buy A Car
You say at the start of your question that “I fully appreciate that the best way to buy a car is to buy a slightly second hand car outright”. Yes, it is Tony. But, clearly, from the remainder of your questions, you actually don’t fully appreciate it Tony.
Your proposed plan is finically pretty darn poor. Your idea seems to be broken down into the following.
Firstly, you will sell your second hand car for £10k. This means that you already have a pretty expensive car. You state your objective is to sell it and then put the cash towards a deposit on a house. So far, not a terrible plan. If you were going to tell me that you’d put £8k towards your house and £2k to buy an older or lower spec second hand car, not something I’d be against.
Poor Financial Planning
But, this is when your plan goes down the toilet. You want to sell your car so that you can actually get a more expensive car, but only put down a deposit on the car and sign up to a hire purchase, PCP or lease.
Where to start? Well, firstly check out why lease options and PCP deals are so bad.
This will show you that these financing options are really quite terrible. There is a reason that car dealerships push them so hard; this is where they make their money and hence where you lose your money.
Even then, if we pretended it wasn’t a terrible idea, then you want to get this level of car (a BMW or Merc) for £150 to £250 a month. Without putting a deposit of at least £5-6k this isn’t going to be at all realistic.
If you are driving a lot, this is going to be even worse. Firstly, the miles that you put onto your car will mean that the depreciation will add up more quickly and you may exceed the PCP limits for annual mileage meaning that you’ll have even more to pay each year.
Don’t Buy New Unless You’re A Millionaire
We promote a rule here at Moneystepper that people who buy new cars think is ridiculous, and rich people think is very sensible indeed.
Don’t buy a new car unless you are a millionaire.
No, really.
A Recommendation
Selling your old car for £10k means that the car you have is probably already beyond your means.
My recommendation would be to sell that, buy a cheaper second hand car for £2-£5k and put the rest towards your house deposit.
Do not exchange your cash now for higher future payments – that is nuts!
Sorry if I sounded too blunt there Tony, but I intend to be. Most people in your boat will go ahead with PCP or HP anyway because the patter of the salesman (but it’s only £xx per month and you get to drive this fancy car) will pummel my sensible words into the ground.
However, the only person who wins from your decision is the car salesman and the finance company Tony.
Don’t let them win!
Ask Your Question
This show runs three times a week and answers all of your personal finance questions. If you have any questions, please don’t be shy to ask. You can ask in three ways:
- Leave a comment on any of the Q&A podcast shownotes (including this one)
- Email me at moneystepper@gmail.com
- Leave a message on the Speakpipe App which you will find below and on our “submit a question” page:
After assessing my financial capability, I was able to buy a used car and avoid myself from being in debt. I am glad that I did the right decision.
Sorry, I’m laughing at your recommendation to Tony to trade in his £10k car for a second car for £2-£5k, haha!
Does Tony really want to be driving miles in a second-hand banger, with perhaps questionable service history with no warranty? What would Tony’s customers think? Would it affect his corporate image?
Getting a new car sometimes makes sense, although getting a new expensive car when you’re saving up for a house probably doesn’t make a lot of sense. Tony could probably get a decent nearly new Audi or somesuch but not for less than £5k.
Depreciation is always mentioned but when I’ve bought a new car in the past, I’ve not cared that my car has dropped in value as soon as I’ve driven it off the forecourt. It has no real bearing unless I was thinking of selling the car and trying to claw some money back.
I’ve recently paid off the PCP on my car. When I started my journey to FI, I had a year left to pay, but I was still able to have a >40% savings rate, so buying a new car is not all doom and gloom, if done properly (no ridiculously expensive car), it can be part of your FI plan.
And no, I’m no millionaire and unlikely to ever be one, just someone on an average salary who prefers to buy new cars!
Thanks for your comment Weenie, and I appreciate that everyone is entitled to their own opinion in “personal” finance. However, in my defence, I would argue that a second hand car for £2-5k is very different from “a second-hand banger”.
Also, you say:
However, I would argue that you not caring that the car drops in value is different than it having no bearing. It doesn’t matter if it’s a car, a TV or anything else. Say you can either buy something brand new for £100, or the same item which has had limited usage a year later for £50. Whilst it may not be your personal preference because you like to “buy new”, which option to choose does financially have a bearing on your net worth.
That said, I couldn’t agree more with your statement about it being part of your FI plan and that you can still have a good savings rate whilst paying for a new car. The important thing is what you value. If you are happy to spend an extra £x on a new car, then that is great if you’ve thought through the decision and you get genuine joy and happiness from it. Personally, I’d rather go second hand and spend that £x that I saved on a holiday or other experience. As with all things “personal finance”, it’s horses for courses…
“Say you can either buy something brand new for £100, or the same item which has had limited usage a year later for £50.”
But that item wouldn’t be the same because it wouldn’t be new and what if I needed it now and not a year later?! 🙂
Like you say, horses for courses!