When is it right to finance a car

ntlbell

So this is a common argument I have with people in the past I have financed a car and I almost did again but held off as I think it's pi$$ing money against the wall.

So is there any situations where it makes sense to finance a car?

MarkN

If you are not going to get yourself into negative equity and never plan to fully pay off the term by changing your car before the term is up, then I suppose it's as cost effective as any other personal loan.

Anan1

I think it's one step up from getting finance on food. If you can't afford to buy it, don't buy it.;)

MarkN

So should people not buy houses cause they have to borrow for them??

-Chris-

Only 10%(ish) of people will pay for cars out of cash they have, everyone else borrows.

Whether you're getting finance through your dealership, through your bank or through Tesco, you're still financing the car.

Dealers will be able to do things like balloon payments or guaranteed future values (GFV)to keep your payments down, Tesco will offer you lower interest rates, banks will be somewhere in the middle.

Don't look at finance as a bad thing, everyone has to do it. Just make sure the cost of the loan is the best you can get - check the dealer against your bank (get actual quotes, not just their advertised APR figure). Look at the cost of finance.
Your dealer may charge more for the finance, but will probably be able to used the GFV to put a better car within your monthly budget.

Anan1

MarkN wrote: »

So should people not buy houses cause they have to borrow for them??

A house is an investment, with the added bonus that you can live in it. A car is not.

AudiChris wrote: »

Don't look at finance as a bad thing, everyone has to do it.

No they don't. These days, good cars can be bought for pretty small money. Of course, if it absolutely has to be a new Audi...;)

craichoe

Taking into a account a car is a money hole, adding interest on that is more cost.

You have:
Servicing
Fuel
Tolls
Depreciation
Repairs
Tax
Road Tax

I doubt most people add the real cost up / year

Steve

Anan1 wrote: »

A house is an investment, with the added bonus that you can live in it. A car is not.

No they don't. These days, good cars can be bought for pretty small money. Of course, if it absolutely has to be a new Audi...;)

+1 with the added bonus that (generally) a house appreciates more than the interest you're paying on the loan.

When you finance, you add the depreciation to the loan interest to work out how much it's costing per year - can be quite substantial on a new car.

Personally, I think the only time you should use finance is when you absolutely need to - e.g. if you change jobs and lose the use of a company car and still need a means of transport.
Otherwise - set up a direct debit into a high interest account (no different to paying off a loan) and use the cash every 3 years or so to upgrade the motor.

-Chris-

Stevec and anan1, you're both correct and prudent, but very few people can afford to buy the car they want outright. For those people, finance is a fine idea.

If you have the cash, use the cash.

Alternately if you had €15,000 in your account, you may find it better to get a car loan for 7%ish and then invest the money or use it to pay down your mortgage or something similar where the gains from those things will outweigh the cost of the financing.

Ntlbell, you'll need to make your own call based on your circumstances.

maidhc

AudiChris wrote: »

Alternately if you had €15,000 in your account, you may find it better to get a car loan for 7%ish and then invest the money or use it to pay down your mortgage or something similar where the gains from those things will outweigh the cost of the financing.

No one is paying 7% on their mortgage, and few people get 7% return on any investment unless they are quite lucky.

It makes no sense to borrow for a car, unless you want a car and don't have the money. It is a heart over head thing.

Eoin

So it makes more sense to save for a few years and then get a car, rather than get a loan for a few years and get the car immediately?

Riskymove

eoin_s wrote: »

So it makes more sense to save for a few years and then get a car, rather than get a loan for a few years and get the car immediately?

it generally always makes sense to save and spend than borrow, regardless of what you are buying

you don't pay any interest

Eoin

Riskymove wrote: »

it generally always makes sense to save and spend than borrow, regardless of what you are buying

you don't pay any interest

I realise that, but not having the car for a few years may make even less sense. Public transport alone could wipe out any savings. I doubt that everyone saying it's dead money is actually driving the most cost effective car they could drive.

seamus

eoin_s wrote: »

So it makes more sense to save for a few years and then get a car, rather than get a loan for a few years and get the car immediately?

If you can operate without the car for those few years, then yes that makes the most sense. Public transport costs would probably be equivalent to private motoring costs, but you're also saving the money that you didn't borrow.

Borrowed money will always have more interest applied to it than saved money, so it makes sense to borrow as little as possible and save as much as possible.

That is, if you have €5k savings and a €5k loan, then the amount of interest on the loan will *always* be more than the interest on the savings, giving you a net loss each month. So you will save more money by offsetting the two accounts rather than sitting on the €5k savings. This is easy to miss as it doesn't necessarily make sense in people's head - how are you saving money by getting rid of your savings?

I've never understood people buying new or painfully expensive cars using mortgaged money. Yes, mortgaged money is the cheapest you'll ever buy, but unless you increase your mortgage repayments when you remortgage, then you're stretching a car loan out over 15 or twenty years, which will be more expensive in the long run.

General rule is borrow money to buy a vehicle if you have to, but never if you can't pay it off in five years. And borrow within your means. Don't buy a new €25k sports car when a five year old, five-door hatchback will do fine.

Eoin

seamus wrote: »

I've never understood people buying new or painfully expensive cars using mortgaged money. Yes, mortgaged money is the cheapest you'll ever buy, but unless you increase your mortgage repayments when you remortgage, then you're stretching a car loan out over 15 or twenty years, which will be more expensive in the long run.

General rule is borrow money to buy a vehicle if you have to, but never if you can't pay it off in five years.

Yes, I completely agree with that, but not this all or nothing concept that if you have to get any loan for a few years, then you shouldn't be getting the car.

seamus wrote: »

And borrow within your means. Don't buy a new €25k sports car when a five year old, five-door hatchback will do fine.

The first doesn't preclude the second. If you enjoy motoring, then you don't have to go for the most cost effective car. If the repayments on a 25K car are comfortable over a few years, then why not?

jimmycrackcorm

Finance is ok if you are getting a car allowance from your company to pay it.

Anan1

jimmycrackcorm wrote: »

Finance is ok if you are getting a car allowance from your company to pay it.

It makes no difference where the money is coming from.

Steve

eoin_s wrote: »

The first doesn't preclude the second. If you enjoy motoring, then you don't have to go for the most cost effective car. If the repayments on a 25K car are comfortable over a few years, then why not?

Because once you start on that route, you're committed. When the loan is paid off, you'll want to change again so another loan.

That has worked out OK in recent years with interest rates at record lows, what happens if interest rates double?
The guy who saves gets double the interest and so has more buying power to get the car he wants and the guy who borrows has to either pay more or settle for a cheaper car.

If you're starting out your motoring life, whats wrong with getting something cheap and cheerful for the first few years. It'll hurt less when you scrape it off the gate post as well.
Save the cash until you can afford the car you want - by that time you'll also have gained enough experience to avoid the learner dents.

There is a frightening attitude of "I want the best and I want it NOW" in this country - I know at several people who went down the finance road and got shiny new cars for 20K odd, TPFT insurance and then either wrote them off or couldn't afford the repairs after crashing them. They are now commuting by bus for the next 3 yrs as they pay off the car loans.

Anan1

eoin_s wrote: »

The first doesn't preclude the second. If you enjoy motoring, then you don't have to go for the most cost effective car. If the repayments on a 25K car are comfortable over a few years, then why not?

This is a good point. That said could most of the cars being financed really be described as 'enthusiasts cars?' Real enthusiasts don't tend to spend that much on buying cars - I know i've never gone over €15,000, and my last one cost €7,000. Compare this to €40k for a new leather-and-MPacked 318i..

Eoin

stevec wrote: »

If you're starting out your motoring life, whats wrong with getting something cheap and cheerful for the first few years. It'll hurt less when you scrape it off the gate post as well.
Save the cash until you can afford the car you want - by that time you'll also have gained enough experience to avoid the learner dents.

I'm not saying that should be a first car! I'm saying that just because a cheaper car may serve the purpose of getting you from A to B, there's nothing wrong with getting a nicer car if you can afford it, and if you realise that it's not an investment.

stevec wrote: »

There is a frightening attitude of "I want the best and I want it NOW" in this country - I know at several people who went down the finance road and got shiny new cars for 20K odd, TPFT insurance and then either wrote them off or couldn't afford the repairs after crashing them. They are now commuting by bus for the next 3 yrs as they pay off the car loans.

There's a massive difference between stretching to get a loan that you may not be able to afford if there are expensive repair bills, interest rate hikes etc, and being able to comfortably afford a loan. A €5000 car loan over 3 years should cost in or around 160 per month. I don't believe that just because you don't have 5K in cash means that you shouldn't be spending 160 or so a month on a loan.

Anan1

eoin_s wrote: »

A €5000 car loan over 3 years should cost in or around 160 per month. I don't believe that just because you don't have 5K in cash means that you shouldn't be spending 160 or so a month on a loan.

This makes perfect sense to me too, on the basis that €5,000 may well be necessary to buy a safe, serviceable car. What I wouldn't recommend is borrowing €35,000 (as many do) to buy a car that provides few extra benefits over the €5,000 car.

TCP/IP

Anan1 wrote: »

This makes perfect sense to me too, on the basis that €5,000 may well be necessary to buy a safe, serviceable car. What I wouldn't recommend is borrowing €35,000 (as many do) to buy a car that provides few extra benefits over the €5,000 car.

Its about getting enjoyment out of your car. Some people drink, smoke, gamble others like to spend there money on cars. I for one love cars and would not blink at spending 60k - 70k on one if I felt like it, where maybe you have other things you would like to spend money on. Each to there own my friend.

Anan1

TCP/IP wrote: »

Its about getting enjoyment out of your car. Some people drink, smoke, gamble others like to spend there money on cars. I for one love cars and would not blink at spending 60k - 70k on one if I felt like it, where maybe you have other things you would like to spend money on. Each to there own my friend.

Of course. But we're not talking about spending money here, we're talking about borrowing it.

seamus

TCP/IP wrote: »

Its about getting enjoyment out of your car. Some people drink, smoke, gamble others like to spend there money on cars. I for one love cars and would not blink at spending 60k - 70k on one if I felt like it, where maybe you have other things you would like to spend money on. Each to there own my friend.

If someone borrowed 60 or70k to drink, smoke or gamble, then you know what we'd call them

Seriously though, you can be a car enthusiast all you like, but a bit of common sense needs to be applied. How much fun can a hobby be if it eats up all of your spare cash? I would completely understand someone who buys cars, invests their time and money in them to repair/modify them and then sell them on, but there's no financial sense in borrowing that kind of money on something that will *always* depreciate.

Anan1

I don't think it's the enthusiasts who are financing all the new cars...

pburns

MarkN wrote: »

So should people not buy houses cause they have to borrow for them??

If you're spending serious, serious money you don't have on fancy cars you got a hole in your soul man!

I recognise your handle I think - you're the guy who kept an S3 for about a year (or less?) and chopped it for a 335i? And you proposed a Jag XK in 'reasonably priced good-looking saloon/coupe' thread:D. I assumed you were a loaded builder or IT company founder. Or both!:) Maybe you are?!?

I haven't taken out a car loan since my first set of wheels (not that I deserve a medal or anything!). I just can't countenance spending money I don't have on a non-essential depreciating asset. Especially when it's the thick-end of 60-80K. What if your business/job takes a nose-dive - you're foooooked!

And your comparison of car and houses leaves me...speechless...

TCP/IP wrote: »

Some people drink, smoke, gamble others like to spend there money on cars. I for one love cars and would not blink at spending 60k - 70k on one

When people come out with this 'i don't drink or smoke' lark to justify (to themselves mainly) spending oodles of cash on clothes, cars, DIY stuff...whatever...it just makes me laugh! We're talking €000000s not the price of a few drinks and a smoke or two!

Guys think they're rich cos they're earning a six-figure salary but that can all go to crap overnight if you don't have a lotta dosh tied up in something more substantial than 4 wheels or a dingy little flat in D6.

Me? I spend all my spare cash on hookers and coke - much more enjoyable than a Teutonic ponce machine!:D

antodeco

pburns wrote: »

When people come out with this 'i don't drink or smoke' lark to justify (to themselves mainly) spending oodles of cash on clothes, cars, DIY stuff...whatever...it just makes me laugh! We're talking €000000s not the price of a few drinks and a smoke or two!

Whilst thats true, if on average someone smokes 20 a day (€7 a pack) and doesnt drink (assuming 2.5 pints a week totally €10) equates to €15,000 over a 5 year stretch (average length of car loan). To me that is worth thinking about it. I neither smoke or drink much (maybe 2 pints a month) but I spend alot of money on my car (possibly 5k + servicing a year).

MarkN

pburns wrote: »

And your comparison of car and houses leaves me...speechless...

I was just throwing it out there with Anan, don't take that comment seriously.

I'm lucky enough to own property so I'm well aware of the difference between the two but I was merely saying you know, yes bricks are an investment but Anan said if you can't pay for it don't buy it. On the surface, if we all went by those rules nobody would spend money on anything and the economy would be on its knees.

On the Jag coupe, I actually just read the title of the thread and threw it up there, it's not reasonably priced.

I'm just don't get sinking €80,000 of your own cash (if you had that money why would you dream of plouging it into a car - SSIA people I am pointing at you!!) into a car when you could pay off 400 or 600 or 800 or 1000 quid a month, leave it at the door of the garage 2 years later and walk away. Of course, you'd still have a chunk of that 80k back once you sold the car but is that not swings and roundabouts then?

Cheap credit will always be attractive to people. But there's people that lace themselves up in balloon payments and no deposits on Fiats and have them repossessed and then there's people that are wealthy enough but choose to finance a car because a) they can afford the cost per month and b) they might not have huge savings as they are doing up a house or go on 4 holidays a year or donate it guide dogs for the blind.

All that said, don't get me wrong I think fully financing a car is madness and I doubt there's many people out there that fully finance/borrow bank loans for cars with 60/80/100k price tags because the repayments alone would be HUGE! :eek:

Eoin

Anan1 wrote: »

This makes perfect sense to me too, on the basis that €5,000 may well be necessary to buy a safe, serviceable car. What I wouldn't recommend is borrowing €35,000 (as many do) to buy a car that provides few extra benefits over the €5,000 car.

Unless you're lucky to have the kind of salary that means a €35K loan isn't a burden. Anyway, that's not really my point - putting a figure on what's an affordable loan can't be done as it varies for everyone.

The main point I'm trying to make is that saying that "if you need to get a loan, you can't afford the car" is nonsense. I know a few people who recently qualified as solicitors or accountants. Their salaries have pretty much doubled, so can now afford a monthly repayment on a car loan very easily. Yes, it makes a bit more fiscal sense to save for the three years and then buy a car, but I bet the people suggesting that don't buy the cheapest of everything.

-Chris-

MarkN wrote: »

...I doubt there's many people out there that fully finance/borrow bank loans for cars with 60/80/100k price tags because the repayments alone would be HUGE! :eek:

I'd be interested to see finance penetration figures for a prestige brand versus a mass market brand or used-car superstore.

I think the finance pen figures for the prestige brand would be 30-40%, while a Renault dealer (not picking on them, I just have a mate who works in one and tells me his experience) is experiencing 80%+!

Those who have loadsa money don't have to or need to finance. Those who need mobility and want a new car, but are mere mortals, need to borrow.

Also, I think we're probably getting off the OP's topic slightly. Are we wondering if Finance is good or bad or are we debating the merits of diversified investment portfolios built up with the proceeds of a tee-total life?

PixelTrawler

Don't think anyone has mentioned zero % interest finance available from some marques now... opel 50:50 etc

If someone wants a new car, has to finance it and is concerned about interest - thats an option...

That being said you may have less room to maneuver with the garages then in terms of getting a discount.

Elstemed

it good to finance a car if the rate quoted is cheaper than the equilivent money that you are currently borrowing money. last year i spent 60k on a machine and financed it a 5%. now thats 60K at 5%!!!!! where else can you get 60K to spend on business or the likes at 5%

MarkN

AudiChris wrote: »

I'd be interested to see finance penetration figures for a prestige brand versus a mass market brand or used-car superstore.

I think the finance pen figures for the prestige brand would be 30-40%, while a Renault dealer (not picking on them, I just have a mate who works in one and tells me his experience) is experiencing 80%+!

When I got my S3 I traded in a 2006 Golf GTI which I owned every penny of. The sales guy commented how a guy a lot older than me and you'd think with more sense was picking up an RS4 and had it full financed. 115,000 - imagine the interest on that!

You really wouldn't know who does what. Mr. Bentley Conti GT might own every inch of it or he might have a huge final repayment and write a lot of it off in tax and depreciation but then again if he was changing cars regularly (which these wealthy lads clearly do - look at the turnover of prestige cars in Richford for example) then big balloons wouldn't be an option as the nagative equity to change every 6 months would be colossal.

Joebloggs4817 wrote: »

Don't think anyone has mentioned zero % interest finance available from some marques now... opel 50:50 etc

If someone wants a new car, has to finance it and is concerned about interest - thats an option...

That being said you may have less room to maneuver with the garages then in terms of getting a discount.

You have to have a huge deposit though. People desperate enough to have a new car and who are financing the whole thing don't have huge deposits.

Steve

Nobody will have >100k sitting in a bank, so yes, at this scale financing makes sense. Leasing probably makes even more sense as it can be put through business accounts easier. (assuming you're a director or consultant etc that can afford the payments).

The average joe goes with finance because he doesn't have the cash in the first place - it's a lifestyle thing and the same guy is likely living on credit card limits and taking out credit union loans to pay for holidays.

I've always been the opposite, I dont buy things I can't afford. I dont finance stuff that I'm going to lose money on.
I guess I'll never own a brand new car - I can't justify the toll you pay to get out of the garage forecourt. I'll leave that burden to the next guy and buy the car from him in a few years when the depreciation has settled a bit.

unkel

Personally I'm quite prudent. I've never had a term car loan although I've used (pretty large) overdrafts to temporarily finance cash flow issues when buying a new car before selling the old car

Having said that, I don't see a problem with people borrowing to buy a car per se. You need a house and you don't have the money to pay for one, so you get a mortgage. Generations of Irish people saw the 700 pounds they invested in their house turn into 7 figure assets, but recent first time house buyers will never be as lucky

So you pay 5% interest on a mortgage. And 8% on a car. Not much difference between the two in my book, these days

Financial stupidity is paying with store cards or not paying credit card balances off in full each month. We're talking 15-30% interest here. What a waste!

AudiChris wrote: »

Only 10%(ish) of people will pay for cars out of cash they have, everyone else borrows

I take it that's your experience of selling new Audis? I reckoned that kinda percentage but I haven't come across any statistics

unkel

Anan1 wrote: »

i've never gone over €15,000

Not even for the Porsche?

-Chris-

unkel wrote: »

I take it that's your experience of selling new Audis? I reckoned that kinda percentage but I haven't come across any statistics

That's the figure our finance rep gives us, so far it seems relatively accurate...

unkel

Thanks Chris. This forum can do with many more people in the trade that come on here and tell us all the way it is!

Mr.Boots

Here is the way i look at finance,
I would never borrow more than i could afford to pay off if needs be.
I always prefer to buy cars with other peoples money and use my owen money to to earn money for me.As long as im earning more or as much return on my owen money as the interest im paying out on the loan im happy.
Another way to look at it is its like saving in a piggy bank with a l hole in the bottom......buy a 80k car and after 5 years you will have a substantional asset (so long as you didnt blow it on a citroen c6) which you have enjoyed and you now have a good wedge to get another....and a smaller loan if you like.
Of course this only realy refers to cars coasting over 10/15k

MarkN

unkel wrote: »

So you pay 5% interest on a mortgage. And 8% on a car. Not much difference between the two in my book, these days

As low as 6.5% these days ! :eek:

Dub13

What I do is this.My child benefit is around 550 a month,that goes into a account and then gets split into two 250 going into a long term account to pay off the mortgage early and the 300 into another account we use to get a new car.

Every 4 years we have about 16k saved up for the car plus whatever our current car is worth probably going to be about 13k.So that gives us 29k every 4 years for a new car with no loan.

TwoShedsJackson

I'd do something similar to Dub13 there. Never get a loan for something that's only going to decrease in value.