ACCOUNTANT EXPLAINS: Should You Buy, Lease or Finance a New Car

Summary

This video explores the financial implications of different car ownership options: buying outright, financing (higher purchase), leasing, and Personal Contract Purchase (PCP). It compares the total cost of each method using a medium-sized family car example, with a 15% deposit over a three-year term. The analysis reveals that leasing can be cheaper in the short term, while buying outright might be more cost-effective in the long run. The video also discusses the psychological factors and opportunity costs associated with each choice, advising viewers to consider their personal circumstances, such as the length of time they keep cars and their investment options, before deciding.

Takeaways

• 🚗 The debate between buying and leasing a car is significant, with each option having its own advantages and disadvantages.
• 🏦 Buying a car outright means paying the full price upfront, avoiding any future payments or interest.
• 📈 Financing a car, known as hire purchase in the UK, involves a deposit, borrowing the remainder at a set interest rate, and making monthly payments over an agreed period.
• 📝 Leasing a car is akin to renting, with lower monthly payments calculated based on the car's depreciation during the lease term, not its full value.
• 🔢 Personal Contract Purchase (PCP) involves setting a term, making a deposit, and agreeing on a final value for the car at the end of the term, with options to keep, return, or part-exchange the car.
• 💰 An analysis using a medium-sized family car as an example shows that the total cost of ownership can vary significantly between buying outright, financing, leasing, and PCP.
• 📉 The current high secondhand car prices may not be sustainable, suggesting that future resale values could be lower than current market comparables.
• 📈 The lease option is often cheaper monthly but does not provide ownership, and the end-of-term buyout price is not guaranteed.
• 🚘 PCP is popular and lucrative for dealerships, but it may not always be the most cost-effective option for consumers.
• 💡 The decision to buy or lease should consider total cost, opportunity cost, psychological factors, and individual circumstances such as how long one plans to keep the car.
• 🤔 The video encourages viewers to consider their personal financial situation and preferences when deciding the best way to purchase a car.

Q & A

What are the four main ways to purchase a car mentioned in the script?

The four main ways to purchase a car mentioned are: buying the car outright, financing (higher purchase), leasing, and Personal Contract Purchase (PCP).

What does it mean to buy a car outright?

Buying a car outright means paying the full price of the car upfront and not having to worry about any further payments or interest.

How does the higher purchase financing option work?

In the higher purchase financing option, a deposit is paid towards the car, and the remaining amount is borrowed at a set interest rate for an agreed period. Monthly repayments are made over this period, and at the end, the car is owned outright.

What is the difference between financing and leasing a car?

Financing a car involves paying off the full value of the car with interest over an agreed period, after which you own the car. Leasing is like renting, where you make monthly payments to use the car, and at the end of the contract, you return the car. The payments for leasing are calculated on a portion of the car's value that depreciates during the lease term.

What is a Personal Contract Purchase (PCP) and how does it work?

A Personal Contract Purchase (PCP) involves setting a term for the agreement, paying a deposit, and agreeing on a final value for the car at the end of the term. The loan amount and monthly payments are calculated by subtracting the deposit and final value from the car's cost. At the end of the contract, you can choose to keep the car by paying the final value, return the car, or use the final value to part exchange the car.

What factors were considered in the financial analysis of the different car purchase options?

The financial analysis considered factors such as the deposit amount, interest rate, monthly payments, total cost over the contract period, and the potential resale value of the car after the contract ends.

Why might a dealership push a customer towards a PCP option?

A dealership might push a customer towards a PCP option because it is the most lucrative for them. It encourages customers to stay with the dealership, upgrade their car, and part exchange it, thus generating ongoing revenue for the dealership.

What is the potential downside of leasing a car?

The potential downside of leasing a car is that at the end of the contract, you do not own the car and must return it. Additionally, there may be costs associated with wear and tear or exceeding mileage limits.

What is the opportunity cost of buying a car outright?

The opportunity cost of buying a car outright is the potential return you could have earned by investing the money elsewhere, such as in the stock market or other cash-generating assets.

What psychological factors are mentioned in the script that could influence the decision to buy, lease, or finance a car?

Psychological factors mentioned include the desire for full ownership and the freedom to do what you want with the car, the stress of monthly payments, the appeal of driving a newer car, and the concern about future car maintenance costs and resale value.

What advice does the script give for making a decision on how to purchase a car?

The script advises to consider the total cost of each option, the potential resale value of the car, opportunity costs, and personal preferences such as the desire for new cars, the stress of monthly payments, and the need for flexibility.

Outlines

00:00

🚗 Car Ownership Options Overview

The paragraph discusses the debate between buying and leasing a car. It outlines four main methods of purchasing a car: outright purchase, financing (higher purchase), leasing, and PCP (Personal Contract Purchase). The speaker expresses surprise at the cost differences and emphasizes the importance of understanding the financial implications and psychological factors involved in each option. An average medium-sized family car is used as a basis for comparison, with a 15% deposit and a three-year term.

05:04

💰 Financial Analysis of Car Purchase Options

This paragraph delves into the financial analysis of the four car purchase options. It provides a detailed breakdown of costs associated with each method, using a hypothetical medium-sized family car as an example. The analysis includes the total cost of ownership over three years, the potential resale value, and the monthly payments for each option. It also discusses the opportunity cost of upfront payment versus investing the money elsewhere. The paragraph concludes by suggesting that while buying outright might be the cheapest option, other factors such as psychological comfort and flexibility should be considered when choosing between purchase methods.

Keywords

💡Ownership

Ownership in the context of the video refers to having full rights and control over a purchased asset, such as a car. It is a central theme because it distinguishes between buying a car outright, where you own the vehicle from the start, and leasing or financing, where ownership is contingent upon meeting certain conditions. The script mentions that buying a car outright provides 'full ownership' and discusses the benefits of this, such as being able to do what you want with the car and not having to worry about monthly payments after it's paid off.

💡Lease

Leasing, as discussed in the script, is a method of acquiring a car where you pay monthly to use the vehicle but do not own it. At the end of the lease term, you return the car. The script uses leasing as an example of a lower upfront cost option, with payments calculated on a portion of the car's value and depreciation, but it also highlights potential downsides, such as the uncertainty of the car's end value and the lack of ownership.

💡Finance (Higher Purchase)

Financing, or 'Higher Purchase' as it is referred to in the UK, is a way of buying a car where you pay a deposit and then borrow the remaining amount at a set interest rate over an agreed period. The script explains that with financing, you make monthly repayments over three years and then own the car at the end, which is different from leasing where you only pay off a portion of the car's value and do not gain ownership.

💡Depreciation

Depreciation is the loss in value of an asset over time. In the context of the video, it is crucial because it affects the total cost of leasing versus buying. The script notes that lease payments are calculated based on the car's depreciation during the lease period, and it also discusses the impact of depreciation on the resale value of a financed car.

💡PCP (Personal Contract Purchase)

PCP is a type of car financing agreement where you set a term, pay a deposit, and the company provides a final value for the car at the end of the agreement. The script explains that PCP is popular because it offers flexibility at the end of the term, allowing you to either pay the final value to keep the car, return it, or part-exchange it. However, it may not always be the most cost-effective option.

💡Interest Rate

The interest rate is the percentage charged on borrowed money. In the video script, it is mentioned in the context of financing a car, where the interest rate affects the monthly payments and the total cost of the car over the financing period. The script provides an example where an interest rate just under 11% impacts the monthly payments for a financed car.

💡Deposit

A deposit is an upfront payment made when entering into a financial agreement, such as buying or leasing a car. The script uses a 15% deposit as a basis for comparison across different car purchase options, illustrating how the deposit amount can influence the monthly payments and total cost.

💡Total Cost

Total cost refers to the complete amount paid for a car, including all fees, payments, and potential resale value. The script emphasizes the importance of calculating the total cost to determine the most cost-effective option, comparing different methods like buying outright, leasing, and financing.

💡Opportunity Cost

Opportunity cost is the potential benefit or profit missed out on when one alternative is chosen over another. In the script, it is discussed in the context of buying a car outright versus financing, where the upfront cash could be invested elsewhere to potentially earn a higher return than the cost savings from not financing.

💡Psychological Factors

Psychological factors refer to the emotional or personal preferences that influence decision-making. The script mentions these factors when discussing the benefits of owning a car outright, such as the peace of mind from not having monthly payments, and the ability to modify the car as desired.

💡Maintenance Costs

Maintenance costs are the expenses incurred to keep a car in good condition. The script touches on this concept when discussing the benefits and responsibilities of owning a car, noting that maintenance costs fall on the owner and can accumulate over time.

Highlights

The debate between buying and leasing a car is controversial, with arguments for full ownership and long-term cost-effectiveness for buying, and lower monthly payments and driving new cars for leasing.

A thorough analysis reveals significant savings differences between what car dealerships typically promote and the actual cheapest option.

Four main ways to purchase a car are buying outright, financing (higher purchase), leasing, and Personal Contract Purchase (PCP).

Buying a car outright means paying the full price upfront and avoiding future payments or interest.

Financing a car involves a deposit, borrowing the remainder at a set interest rate, and making monthly repayments over an agreed period.

Leasing a car is akin to renting, with monthly payments calculated based on the car's depreciation during the lease term, plus fees.

PCP involves setting a term, paying a deposit, and agreeing on a final car value at the end of the term, with options to keep, return, or part exchange the car.

An analysis using a medium-sized family car as an example, with a 15% deposit and a three-year term, shows varied costs for each option.

Higher purchase financing costs around £810 per month, totaling nearly £34,000 for three years, with full ownership at the end.

Leasing costs £345 per month, totaling around £17,000 for three years, with the option to buy the car at the end of the term.

PCP, the most popular option, has monthly payments of £453, costing approximately £21,000 for three years if the car is returned, or £36,000 if kept.

Car dealerships often promote PCP as it is the most lucrative for them, but it may not always be the best financial option for the buyer.

Buying the car outright for £30,000 and selling it later could be the cheapest option, but opportunity costs and investment returns must be considered.

Psychological factors such as the desire for new cars, lower monthly payments, and ownership benefits play a role in the decision-making process.

Long-term car ownership through higher purchase can alleviate the stress of monthly payments and provide full control over the vehicle.

Leasing or PCP options offer the benefits of driving newer cars with lower monthly payments and less concern about future car value or maintenance costs.

The analysis assumes individual car purchases rather than business or company purchases.

The video encourages viewers to consider their personal financial situation and preferences when deciding how to purchase a car.

Transcripts

the question of whether you should buy a finance  or lease a car is surprisingly controversial on  

one side you're making that buying a car is  the best option because it means you get full  

ownership of the car and it works out cheaper in  the long run but on the other side you may think  

that leasing is a good idea because it means  you pay far less on a monthly basis and you  

get to drive around a brand new car after doing  a thorough analysis and running the numbers on  

all the various options I was pretty surprised  at what I found and the difference in savings  

between going for what a car dealership tries to  sell you and what is actually the cheapest option  

so in this video we're going to cover four of the  main ways to purchase the car what they are which  

one's the cheapest and finally the psychological  factors to take into consideration this is part  

of a series of accountant explains videos where we  discuss all things personal finance and Building  

Wealth part one what are the main options the  first way to purchase a car is just by buying  

it outright pay the full price of the car on day  one and you don't have to worry about any payments  

or interest going forward pretty straightforward  the second way to buy a car is through finance and  

in the UK this is often referred to as higher  purchase and it works in a similar way to a  

personal loan so you pay a deposit towards the  car you borrow the outstanding amount at a set  

interest rate for an agreed period let's say  three years and then over the three years you  

make monthly repayments and then at the end of  that period you own the car the Third Way is to  

release which is essentially like renting you make  monthly payments to use the car and at the end  

of the contract you give the car back the monthly  payments here are calculated slightly differently  

than in the finance option in the finance higher  purchase option you are paying off the full value  

of the car because you're going to own the car at  the end in the lease option you are only repaying  

part of the car and that's the part that the car  depreciates during the time you have it for you  

then divide that amount into monthly payments and  add some fees on top the fourth option is PCP and  

for this you set a term for the agreement you pay  a deposit and then the company provides a final  

value for their car and what it will be worth at  the end of the agreement these are then subtracted  

from the cost of the car to work out how much the  loan will be and how much you'll be paying on a  

monthly basis at the end of the contract you have  a few options for the PCP you can decide whether  

you want to keep the car and pay that final value  you can choose whether you want to return the car  

or you can use that final value to part exchange  the car now we've covered the foundations let's  

go into the financial implications and the cost  of each of these so to compare apples with apples  

I've done this analysis using an average  medium-sized family car so that is the Audi  

of these options I'm using a 15 deposit so 4500  pounds and a three year term to make it as like  

for like as possible the first financing option  we discussed is the higher purchase so I put down  

a deposit the interest rate I was quoted was  just under 11 which brings my monthly payments  

for a three-year term to 810 pounds a month that  means the total price I pay for the car at the end  

of the contract is just under 34 000 and at this  point I now have full ownership of the car let's  

assume now I want to sell the car I'm going to say  looking at comparables on the market I can get 16  

000 pounds per eye online on the second hand  car market this car three years old is going  

for a fair bit higher than this twenty thousand  pounds plus but I don't think this is an accurate  

representation of what we can get for the car in  three years time because secondhand car prices are  

going through the roof at the moment and I don't  believe this will continue for the next three  

years I think this bubble will burst before then  so if I were to sell the car for that much then  

it would have essentially cost me around 17 500 to  have the car for three years the next way we spoke  

about is buying a car through a lease in the lease  option assuming I put down the same deposit the  

monthly payments are 345 pounds a month far lower  than the finance higher purchase option because of  

the way we say it's calculated only on a portion  of the car and it's no interest so in this case to  

have the car for three years it would have cost  me around 17 000 pounds sometimes you have the  

option to buy that car at the end of the term but  this isn't guaranteed and you won't know how much  

the dealership is actually going to give you for  that car until the last few months of the lease  

term unlike the next option which is the PCP this  is the most popular one the one that most people  

take up and one of the reasons for this is because  the car dealership pushes you to take this one on  

because it is also the most lucrative for the them  but it definitely may not be the best option for  

you if you are just looking at it in terms of  a total cost perspective let's run through the  

numbers putting down the same deposit the value  they said this car will be worth in 3s time is 15  

000 So based on my deposit the pre-agreed  car value of 15 000 and interest rate again  

of just under 11 my monthly payment would be 453  pounds if at the end of the contract I decide to  

return the car then to have that car for three  years it would have cost me approximately 21  

000 and if I were at that point to instead choose  to keep the car and pay the final balance of 15  

000 it would have cost me 36 000 pounds the total  cost of the car from those numbers on this car you  

can see if I went for the PCP option at the end  of the contract if I returned the car then I would  

have been better off just going with the leasing  option it would have saved me four thousand pounds  

nearly the car dealership tries to sell you the  PCP because it is the most lucrative for them they  

make the most money from it because it encourages  you to stay with them and when the contract ends  

to upgrade your car and part exchange it so they  keep making money from you they would also try and  

tweak the numbers using dealer contributions or  changing the deposit slightly to try and encourage  

you to go for the PCP option in some cases it  may well be the best option for you it may work  

out better because you're getting a car that holds  its value and you or you want more flexibility but  

it's also important to do the calculation looking  at the total cost of the car as a whole and just  

to further drive this point home no pun intended  if I decide to keep the car at the end of the  

contract I would have been better going for the  higher purchase option that would have also saved  

me money the other option which we spoke about  is buying the car outright for thirty thousand  

if we did this and assuming we could sell it at  16 000 that price in the second hand market then  

this would be the cheapest option at 14 000 to  have the car for three years however an important  

something to consider here is the opportunity  cost if you put 30 000 in day one it's locked  

up in the car the alternative is if you have  thirty thousand and you paid the four thousand  

five hundred deposit and then you have the left  over to invest in something like the S P 500 or  

another cash generating asset the question here  is can you make a better return on that versus  

the additional cost of a financing option other  factors to consider are the psychological factors  

if you are someone who tends to keep your cars for  a long time then going down the higher purchase  

route means you can pay your car off and then you  won't have the stress of having to keep up with  

your monthly payments and you have full ownership  of the car which means you can do what you want  

to it you could drive it as far as you want but  at the same time any maintenance costs do fall on  

you and this cost tends to rack up the longer  you have a car for on the flip side going for  

the lease or the PCP option means you can go for a  newer car with lower monthly payments and you can  

keep changing your car more regularly whilst not  worrying about whether you'll be able to sell the  

car in the future and for how much you also in  this case don't have to worry about the ongoing  

maintenance if you keep trading in the cars before  the warranty runs out which is usually around the  

three year mark however you do need to keep the  car in pristine condition otherwise you'll get  

charged a bump for it when you return it and there  are restrictions also when it comes to the PCP or  

lease so that includes the changes you can make  to the car and also the number of miles you do on  

it if you go over that mile restriction then you  will incur an additional cost per mile if you do  

have the money to buy a car outright then this in  my opinion is a solid option where you don't have  

the stress of any monthly payments if you were to  go down this option unless you really know when it  

comes to cars and you can flip it on for a profit  then instead buying a pre-owned car that's two to  

three years old and has already depreciated  substantially at someone else's expense might  

well be the best option so hopefully this video  gave you some ideas on things to consider and how  

to run the numbers for yourself and which route  you want to go down this analysis has been done  

on the basis that you are buying a car as an  individual rather than as a company or through  

a business if you've got value from this video  please do share it the importance of financial  

education and financial literacy is so important  I'd also love to know how you've bought your car  

how you bought the one that you currently  drive if you do have a car or how you're  

thinking about purchasing your next car thank  you for watching and see you in my next video