Cars: Buy, Finance, Lease or don't Bother?
When it comes to buying cars, there are quite a few ways to finance the purchase. You can save up and buy a banger, use a little help from the Mum-and-Dad bank, get a loan or even do what clever businessmen are doing – lease a car.
And although for me to suggest you get into another debt wouldn't be very wise, many people will find that a car is an essential thing to have. Almost as essential as food or clothes (only cars often seem to depreciate faster than other bare essentials).
You may wonder what's with the "don't bother"
bit in the title? Well, it's actually quite an important point I'm going to be trying to get across. The truth is that some of the people who own a car don't actually need a car.
Because the hip car adverts keep suggesting you need one to be cool
, and because your dad used to have one, you kind of succumb to the pressure without realising that sometimes carpooling or public transport can provide a much more viable transport solution than the eternal fuss of owning a car. OK, it seems I didn't convince you. Let's crack on then.
Option 1: Buy a Car
Although there will inevitably be some serious opposition to what I'm about to say, I will still say it. Driving a used car is one of the easiest ways to go green
. Think about this: buying a new car every few years you are stimulating the overproduction. And a car is a very carbon-intense thing to build.
It is estimated that by the time the new car has rolled off the conveyor belt, it will have emitted 20 to 35 tons of CO2... and the funny (or not so funny) bit is that it hasn't done a single mile yet. If you're on a decent salary, the chances are that you can save up for a reasonable used car in just 6 months. It's a debt-free
and environmentally-friendly option. Consider it!
Option 2: Get a Car Loan
Although the interest rates on car loans are very friendly at the moment, a debt is still a debt. People have to consider several things before they decide on taking out (another) loan. Firstly, it's budgeting
– carve out a little bit of "me" time, sit down and make a list of your current income and expenditure. Are you going to be comfortable adding on another relatively large monthly payment?
If the answer is yes, consider if you have a back-up plan. Let's say something goes wrong with your job (God forbid) or you are faced with an emergency. Will you be able to keep up the repayments?
The car loan is the simplest way of getting your hands on a car you really want. The car's current value is divided by the number of months the loan lasts for (usually 36 or 48), the lender's interest is bolted on and here you go. At the end of the term, you own the car and it's your responsibility to decide what to do with it then.
Option 3: Vehicle Leasing
It's a matter of philosophy and lifestyle. Many people I know swear by lease because it allows them to constantly own a brand-new car
. Initially it was considered something only suitable for businesses but nowadays more and more private buyers are choosing to lease.
During the lease term, you're paying the leasing company for the depreciation of the car by making monthly payments. At the end of the term, you simply return the vehicle to the leasing company. You never own the car
, you're often limited to how many miles you can drive it per year but with all the bolt-on services and warranties it's probably the most hassle-free way of using a car that you will ever encounter.
Many people (especially the guys) form a sort of affection towards their car. They give them names, talk to them and spend more money on car wax than they would on facepaint for their darling wives. If this made you chuckle and then blush, car leasing is probably not for you
. When it comes to returning the keys to the dealership, you might feel strange.
Own it if You Insist
Leasing is not an easy thing to understand. You can check this whopper of an article by Creditplus.co.uk
on the various types of car leasing if you have a free afternoon. The one that gives you the chance to own the car is called lease purchase.
It is called lease purchase and the downside is that you have to come up with a large chunk of money to "release" your four-wheeled friend and take a full ownership. It's often called a balloon payment and it is calculated at the beginning of the agreement based on the annual mileage and the predicted future value.
So, think of it as a deferred payment. You will end up paying the full price of the vehicle, the only benefit is that you can do so over a period of 3 or more years.
It can sometimes be a little bit misleading – although you enjoy low monthly payments, you have that looming balloon payment at the back of your mind constantly. People taking on a car on a lease purchase agreement have to be very rational about their finances. Unless you have a huge emergency fund that is going to cover the balloon payment, you will have to have a solid plan on how to accumulate savings
so that in 3 years time you don't end up in a bad situation.
The best advice is to open a dedicated savings account where you would deposit certain sums of money regularly. The maths are pretty simple – if your balloon payment is £5,000, you will have to save less than £140 a month to accumulate the necessary money in 3 years.
Essentially, lease purchase is a lottery. If you've got the golden ticket (and you've taken good care of your car, which very few people do when taking vehicles on leasing terms), your car might be worth more than £5,000 at the end of the lease. Man, that's a really great feeling! However, you can't predict the movement in the used car market, so unless you're 100% sure you will want to keep the vehicle after the term, lease purchase is not the best way to go.
At the end of the day, it's for you to decide, but whichever you go for, make sure you've thought through all the options and decided what's best for you.
Click here to read more: Guides