ACCOUNTANT EXPLAINS: Should You Buy, Lease or Finance a New Car
Summary
TLDRThis 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
🚗 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.
💰 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.
Mindmap
Keywords
💡Ownership
💡Lease
💡Finance (Higher Purchase)
💡Depreciation
💡PCP (Personal Contract Purchase)
💡Interest Rate
💡Deposit
💡Total Cost
💡Opportunity Cost
💡Psychological Factors
💡Maintenance Costs
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
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