Thinking of buying a new car?

If I offered you a loan of £20,000 at 15% Apr over 3 years and then gave you only £14,000 but then charged you £23,000 to pay back the loan, would you sign the loan agreement?

 

No? well thousands of people buying new cars on finance are doing this and worse every day.

 

Not understanding what you are financially committing to is causing individuals and business’s to be saddled with vehicles which cannot be driven because of the penalties and running costs not realised at the outset Buying an investment from a financial advisor and FSA regulation states that must be made aware that“ The value of your investment can go down as well as up and you may not get back what you put into the agreement” However Car finance agreements although are subject to FSA regulation, at no point during the purchase process is the individual made aware of how much value the vehicle will lose over the course of the agreement and what substantial negative equity you are exposed to once that car has been driven away Car manufacturers have done an excellent job in making new cars affordable through creative finance agreements, but scratch beneath the surface at the numbers and you’ll be shocked at the loss you will make.

 

Car values have gone into freefall over the past year, for example if in 2008 you bought a Saab 93 convertible (retail approx £29,000 - on hire purchase at 16.9% over 3 years), you have already lost over £18,500 in depreciation and will pay over £4500 in interest payments for the privilege of losing that money. The term depreciation in relation to cars typically refers to the amount of value the car loses in its first 3 years i.e. how much is the car worth now compared to when you bought it? It’s simple; buying a new car on finance has never been a good investment however you are responsible for understanding the intricacies of running costs, depreciation, mileage penalties and interest charges when purchasing a new car.

 

So what should you do if you’re looking for a new car? Well Money Mentor Michael Taylor advises we should do the following:

 

(1) Never take out finance on a car worth more than £20,000 where you are only putting in a small deposit (10-30%) this is a clear indication that you can’t afford the car or the loss it’s going to make you

(2) Even if you are looking for an average family car look always consider smaller cars(VW Golf/Polo, Peugeot 206/307, Mini One etc) and the costs associated with them compared with the prestige/exec cars (BMW, Mercedes, Audi) that you’d probably prefer. Do not buy a petrol or diesel car with an engine bigger than 2 litre as you will struggle to sell it later

(3) Check out the cost of tyres (average mileage is 2 new tyres every year depending on model), average servicing cost, warranty and test drive the car properly

(4) Pull together the cost now, find out the depreciation on the vehicle over 3 years and work out how long you are planning to keep the vehicle for

(5) Check road tax and insurance costs and fuel economy

(6) Now do a detailed investigation into what the finance is costing you combined with the above costs. Look at the interest costs and depreciation costs and then ask yourself can you afford this and do you really want this car and will it meet your needs?

(7) Now do the same exercise with a 2 or three year old car that’s the same or similar and compare all costs

 

So what are the best and worst cars to buy new on finance?

Best

(1) Smartcar for two (diesel or hybrid)

(2) Mini One

(3) Volkswagen Polo 1.2

(4) VW Golf 2.0 diesel

(5) Peugeot 307 diesel

 

Worst

(1) Alfa Romeo 159

(2) Audi A6 (all models)

(3) BMW 5 series (all models)

(4) Mercedes C class

(5) VW Passat