Your One-Stop Car Finance Guide
A car is the largest item we buy that loses value every day.
When you drive off the parking lot in your brand new Mercedes, you’ve lost 20% of your investment already. Cars are liabilities, not assets.
But for some, me included, a car is a necessity. For commuting, socialising, shopping, whatever. Even as a social symbol. And since my 10-year old Beemer finally caved-in, I was back on the market for some new wheels.
And I did a lot of research.
PCPs, hire purchases, personal loans and cash. These are the four ways to finance cars. This jargon-free low-down of each lets you decide which option suits you best.
All real-life financials based on my own car choices.
Depreciation: New vs Used
New cars lose at least 50% of their value in 3 years.
Doesn’t matter what make, model, mileage, condition or colour. Depreciation devours new cars. The only time you should buy a brand new car is when your net-worth is at least five times the on-the-road price of the car. So, for a brand new car costing 50k? Your net worth needs to be at least 250k.
But buying used has its own headaches. Maintenance, servicing, taxes, emissions. Leaky pipes, busted tyres, broken timing chains, knackered gearboxes, wrinkled leather seats. “Pre-loved” isn’t a genuine human emotion — it’s a marketing tactic.
But the maths is unrelenting on this one. Even after incorporating maintenance and running costs, buying a used car is far better value than a new one. The trick is to buy one that’s relatively new, say less than 6 years old and with fewer than 100,000 miles on the clock.
ICE vs Hybrid vs Electric?
Internal Combustion Engines, or ICEs, are the behemoths of the car industry. Picture any car and it’s probably an ICE. Powered by fossil fuels, serviced by mechanics the world over and the de facto choice for most people.
Hybrids are relatively new. Powered by both a traditional IC engine and an electric motor. As you drive around burning fuel, the electric battery in the car charges up. You can then switch between electricity or fuel to power your car. Some cars allow you to use both. It’s a halfway house between ICE and all-electric. Think Toyota Prius.
Electric vehicles, or EVs are the newest kids on the block. All electric, zero emission, no exhausts and a relatively simple drivetrain. No oil changes, no timing belts, no gearboxes, fewer moving parts, instant torque. Power is delivered to the wheels by means of an electric motor. The cons? Range anxiety and battery degradation. Think Tesla.
Two key differences exist between these car types when it comes to ownership. One, EVs are generally considered to be mechanically simpler machines — so, less wear and tear. The 100,000-mile limit is a dealbreaker for ICEs but not so much for EVs. Two, EVs, at least thus far, depreciate slower than ICEs. A 6-year old ICE would be worth about 25% of its brand-new price today whereas an EV would be worth about 33%.
Factoring in the lower-service costs, longer vehicle life, zero-fuel costs and other incentives (50% off motorway tolls, for example), a used EV made the most sense for me.
Okay — so how do I pay for it?
Personal Contract Plans (PCPs)
A PCP is a shockingly enticing financial product.
At a first and even second glance, it seems to be excellent value. Here’s an example. Say you want to buy a brand-new 3-series BMW with all the bells and whistles. On the road cash price? €42,000. With a PCP, you can have it for €570 per month for 37 months. What’s more, they typically include a full yearly service, tyre replacements and valet serices. That’s brilliant right? What’s happening here?
To enter a PCP, you’d need to put down a cash deposit — typically 10–20% of the price of the new car. In the example above, you need a deposit of €4,000. You then sign a contract where the dealership guarantees a minimum future value (GFMV) of the car after the completion of your contract. For this example, this is €18,000. Then, you make the 37 monthly payments. Once your last payment is done, you get three options.
Option 1: Hand in the car to the dealership and walk away.
Option 2: Pay the dealership €18,000 and own the car.
Option 3: Go to a different dealership who may buy your car for more than €18,000 and pocket the difference.
Let’s look at the maths here.
Over the 37 months, you have paid the dealership €4,000 + 37*€570 = €25,090. That’s 60% of the price of the brand new car. And guess what percentage of the car you actually own? 0%. And that €18,000 GFMV of the car? That’s what the dealer expects the car to be worth 3 years later. Which means you’ll be hard pressed to sell it elsewhere for anything more.
Car dealerships know that few people walk into their showrooms with €42,000 cash to buy the car outright. And the car loses value everyday because of depreciation. So instead, how about they give the car away on a PCP that appears affordable to the customer while at the same time protecting their asset from depreciation? Genius. That’s why you are left with a €18,000 optional payment at the end of your term.
From the customer’s perspective, they get a brand new car and all the goodies that come with it. You get to keep the car, largely hassle-free and are guaranteed a minimum value at the end of your term. Sounds enticing. Except, you never really own the car. And not only that, the steepest depreciation in car value occurs in its first five years. And that’s typically what you end up funding.
PCPs let you buy cars you can’t afford. The dealerships throws in the additional hospitality perks not because they are nice, but because they are protecting their own asset. You never own the car and will rarely sell it for more than the GFMV.
So who’s a PCP for? Car dealers. And anyone who thinks effectively renting a brand-new car for 3–4 years is a great idea. In my example, you’ve effectively spent €25,000 on renting a brand-new BMW for 3 years.
A Hire Purchase, IMO, is the least compelling option. The clue is in the title: “Hire”. Not only do you not own the car until you make the last payment, you can’t even sell the car mid-loan. You are essentially locked-in to the dealership for the duration of the HP contract and typically, the rates of interest charged are higher than you would get from a bank loan.
On occassion, there maybe a few “goodies” thrown in but none of them make up for the steep interest you’ll pay.
Here’s the same example of the brand-new BMW 3 series on an HP purchase. Downpayment: €8,000 + 36-monthly payments of €982 leading to a total of €43,352. Assuming the market price of the car after your 36th payment is €18,000, your net spend would be around €25,000. And that’s not factoring in servicing and maintenance. And of course, there is the hassle of selling your car.
In my case, I narrowed my choice of next car down to this:
Used, 4–6 years old
Zero fuel charges
Reduced toll fees
No PCP or HP
At least 33% resale value
I chanced upon a 2015 Tesla Model S 85 KWh that fits all the above criteria. It’s market value should’ve been around €31k and it was priced at €32k. Reasonable? I put in an offer, went through my comprehensive used car checklist and test drove it.
My bank offered me a car loan at a 5.9% APR, a full 2-percentage points better than the HP option. The monthly payments? €615. Zero fees for overpayments. No early termination fees. All good.
The car had suffered its steepest depreciation yet. Even going by my ultra-conservative estimates, I reckon at any given point the market value of my car is higher than the amount I owe the bank. And because the loan would finance 100% of the car, I wouldn’t need to touch my investments. Which, at the time of writing, have grown close to 10% for the last 12 months. That’s still more than the 5.9% I owe the bank.
So, no PCP, no HP, no cash. And I’ve ended up with a Tesla.
Was this a risky gamble or a masterstroke? Will I be inundated with maintenance bills or never pay a single cent for fuel ever again? Am I taking on too much debt for a liability or did I play it well by leveraging “cheap” money to fund a necessity? Time will tell.
And have I sufficiently adjusted for depreciation? Put it another way, would you buy a Tesla off me in 2024 for €10,000?
I think you would.
Thanks to CarEdge.com for this excellent resource.