Okay, so you’re thinking of buying a brand new motor, huh?
Just for fun, let’s imagine it’s this beauty…
On second thoughts, £250,000 might be a tad unrealistic for the purpose of this article, so let’s settle for a brand new Ford Fiesta ST instead.
Not many of us can just drop £25k on a brand new car, but even if you could… should you?
The answer is in most cases a definite no – and the reason is down to something called opportunity cost.
You’d actually be better off investing the £25,000 and getting a (low interest) loan for the new Fiesta.
By the time the car is paid off, you’d have actually earned considerably more in compound interest than you would have paid in interest on the car loan – ultimately saving you quite a lot of quid.
But loans aren’t always the best option, especially if your credit score isn’t very high or you plan to sell the car after a few years.
Below is a list of pros, cons and scenarios which could affect the way you purchase a car… or any thing for that matter.
Buying a new car outright
If you have the cash (and enough left over for emergencies) then buying a brand new car in full might be the cheapest way to own the car – at least in the short term.
- Cheapest way to own vehicle (short term)
- Fastest, least complicated transaction
- No risk of missing payments
- Better price if paid upfront
- Opportunity costs
- You’ll lose money the moment you drive it out the showroom
If you’ve got a good credit score and you’ve found a loan with low interest, this is probably your best option (even if you do have the cash sitting in the bank).
- Manageable repayments
- No upfront cash required
- Cheapest rates of any lenders
- May affect future lending power (until loan paid off)
Finance / hire purchase
When you finance a car, it’s kind of like getting a loan from the dealer – only difference is you don’t own the car until it’s been fully paid off.
Could be a good option if your credit rating isn’t so good.
- Competitive fixed interest rates.
- Flexible repayment terms (from 12 to 60 months).
- Dealers are eager to arrange your finance
- Deposit required (often 10%)
- You don’t own the car until full payment is made
- Rates are often higher than personal loan
Leasing is essentially renting your car from the dealer for a certain period of time.
When your contract is up, you can choose to either buy the car, lease a brand new one, or walk away.
- Lowest monthly payments of all options
- Worry-free maintenance
- A new car every few years
- No resale worries
- Maximised tax deductions
- You don’t own the car
- Purchase price at the end won’t be cheap.
- Sometime restrictions on annual mileage.
- Restrictions on car modifications / customisations
- Potentially additional costs if in accident which are not covered by your car insurance
And one last little tip for any self employed workers / sole traders out there.
Grab yourself an interest-free fuel card from somebody like iCompario – who will promise to save you money and cut costs.
Just think, save enough money guys and you might be able to afford that Ferarri after all.