Toxic car finance could work out the best way to pay for a new car

I pinched the headline straight from the Torygraph, and I have searched the page to see if it is an advertorial. [ref]If it were, it’s against Queensberry rules to take the piss, because the whole point of of an advert is to make you buy shit that you don’t need with money you don’t have to impress people you don’t like[/ref]. But no, this financial foolery is being prosyletised in the name of money/consumer affairs. The article goes into great length to find a financial edge case where you buy a brand new Mercedes E-Class saloon with an on-the-road value of £35,205 and if it all goes right then you pay £19,255 in depreciation if you pay cash and £18,404.24 using a PCP. Thus saving being ripped off less by a whopping £851 using PCP.

If you need to borrow for a consumer good, you can’t afford it

The rule was codifed by that Wilkins Micawber chap, and it’s good. It’s one of the deep tragedies about personal finance that if you are desperate enough to need to borrow the money, you usually can’t afford to buy what you want, with two exceptions, housing and education.

How to decide if borrowing money to buy it is a good idea

The most toxic thing about borrowing to buy a new car is that half the value of the car falls off it in three years, which is why buying new cars is a mug’s game. If you want to do that sort of conspicuous consumption of an expensive wasting asset you should be rich enough to pay cash, and face up to burning half of it in one go, rather than trying to stretch it out. If you need to ‘save’ £851 putzing about with PCP then you’re not rich enough to do it in the first place. As the lede says

More and more drivers want to be driving the newest cars available

Well, yeah, I’d like world peace and there to be half as many humans on it as there are now[ref]this was roughly the number of people on earth as when I was born[/ref]  so as we get to keep that peace, but what you wants is not what you gets, eh? They talk a good talk about PCP giving you a saving on £851, about 3% on the price. To be honest, if you are going to spunk 18 grand of capital depreciation to drive a car for three years, you’re not the type of person who is going to squeeze the lemon for that £851. If the PCP looks attractive to you it is telling you one thing only.

You are not rich enough to piss away that much money on running a new car for three years.

The reason you’re not rich enough is that Bad Shit can happen to you, you get to lose your job or get sick or any of the vicissitudes that can affect a fellow who spends more than you earn. All of a sudden some of the break clauses in the PCP contract come to bite you on the ass if you stop paying. Whereas if you really are rich enough to pay cash up front, paradoxically you can actually use the PCP to save yourself the 3%. If Bad Shit happens you just carry on paying the instalments from your vast wealth until the balloon payment is due and then you do whatever’s the best at the time. In that case knock yourself out and put the money to work.

I understand the principle of what the Torygraph is saying, because I’ve done it. Many moons ago, in 1981, a young ermine bought a secondhand Audio Research preamplifier on an interest-free loan for half of his annual net salary, saved up over a while. In personal finance terms that was an extremely dumb thing to do, Mr Money Mustache would have reached back in time and punched me in the face,[ref] MMM would tell me that had I invested the money at a 4.5% real terms ROI then as Monevator’s compound interest calculator tells me I would now be sitting on £25,000. I think the old Ermine would have socked him on the mush back because I had 36 years of enjoyment from that thing[/ref]but I wanted it there and then, and there were fewer consumer gewgaws for youthful excess in those days than now. What made it less dumb was that I was rich enough to afford it, because I had saved up first. I paid the finance company on time each month until the principal was redeemed.

A grizzled ermine sold that preamplifier on Ebay earlier this year for about half the nominal price, so it gave me good value for thirty-six years. So I do understand the principle – you can save money using finance, because I had the cash saved up when I bought it. I parked it with the Nationwide Building society and in those distant times you could earn interest on your saved money. It actually cost me less to take the interest free loan than if I’d bought it cash.

Sad fact is, most people borrow money for consumer purchases because they haven’t got the money at the time of purchase. It is a rare consumer indeed who buys on credit to stooze the cash they saved up for the item beforehand. It was right up there in the credit card ads on the 1970s

Access takes the waiting out of wanting

If that’s you, you are about to borrow from your future self.

To use PCP properly, have the cash to buy the car outright when you sign for the car loan

And then you need to park that cash somewhere safe. Ideally earn interest on it 😉 Alternatively, you need to have at least the depreciation in cash, and have insurance against the sorts of events than would write the car off while you’re still potentially on the hook for the balloon payment, should the car get trashed. If you’re doing anything else, then you are driving more new car than you can afford. If you’re lucky, you’ll make it to the balloon payment without Bad Shit happening in your life. That’s the sting in the the tail. Driving more car than you can afford is a risk nobody needs to take. PCP conceals the downside in all the messy stuff in the small print that nobody thinks will happen to them.

Micawber was right. Save up for you car first, even if you do use PCP 😉 In the edge case of people who are rich enough to be able to pay cash, toxic car finance is probably the best way to pay for a new car. For everybody else, PCP is just…toxic. Imagine listening to Britney on loop for three years 😉 That’s how toxic…

24 thoughts on “Toxic car finance could work out the best way to pay for a new car”

  1. 2 posts in one day.

    Yep, I have lost 25K over 4 years on a new car. Do I regret it, only a little, but I had a life altering pay off from the sale of my company and prior to this extravagant purchase I had been driving old (and I mean old) cars for all of the time I was building the business, I was doing ‘mega frugal’ for many years before all of these blogs started appearing, it came natural. But I could afford it easily and paid cash. My one and only splurge in my entire financial life, but it has been fun holidaying in Europe the last 4 years so in my mind worth it. The thing is the dealership were desperate for me to buy it on PCP, I ran the numbers and at 6.9% it would have cost me more in absolute terms, they said things like ‘even accountants do it this way’ I replied that my business was run by engineers with very simple accounting, always in credit, loads of working capital, never borrowed a penny, and sold the business for a handsome profit, accountants when we bothered to listen to them wanted us to borrow money ‘because it was cheap’ extract way more from the business than we were doing and all sorts of obfuscated jiggery pokery. No thanks I will pay cash. No doubt the dealer had a kick back with whatever evil finance company was behind this. I am with you, borrowing can only be justified for housing and education. I would ban consumer credit if I had my way, the comedown from the finance drug would be painful but society would be better off in the long run.


    1. I like the cut of your jib. Way back when I bought a secondhand car from a dealer I found a similar fight to push back on finance and had to work hard to get them to take a cheque (because I was too tight to pay the credit card surcharge)

      I think they should change the rules – if you’re going to buy a new car then you have to pay unborrowed cash. If you can pay cash then you can afford it 😉


  2. Cutting to the chase – How can anyone think that losing £19,255 in depreciation makes any kind of sense???

    The 3-year old car at circa £16k looks much better value and would still feel and look new. (although I’d still never buy a car like that due to the “premium brand” tax)


    1. I’ve never managed to purchase a new car for precisely that reason, it’s not that I couldn’t, but the clang of half the value dropping off as it leaves the forecourt would just hurt too much.


  3. Worth reading the telegraph reader’s comments on the article. Best summed up by one comment regarding the author of the article – “knows nothing about cars, nothing about finance, and certainly nothing about car finance”.

    Good to know that not eveyone is toxic debt fodder.


    1. Sadly – or perhaps not, depending on what I’m saved from – Ad block plus cans the reader comments on the DT specifically but it’s good to hear that.


      1. Thanks for that, it does seem to load FF less. Turns out it’s ghostery that cans the DT comments, but I do have a slightly faster browsing experience now


  4. Hi ermine (I’m assuming county but not mustelid is changing)

    Just wanted to say thanks for returning to blogging – I’ve missed my fix over the summer.

    Hope you enjoy your new place – looking forward to hearing about SLS(omerset) adventures.


  5. The piece that I’m trying to figure out if I’m crazy or everyone else is crazy is the depreciation assumptions.

    Mercs, BMWs and the ilk have previously depreciated slowly. This isn’t a direct factor of the superior engineering, but solely the amount that people will pay for a three year old car. That is all depreciation is in this market: the difference between the sales price for a new vs a 3yo model. This is why the leasing prices are so low for these cars (compared to the cheaper models), because it is based on a rearwards looking depreciation model.

    The reason that these luxury models held their value is that there were a relatively high number of people willing to buy a 3yo BMW compared to the number of owners looking to sell 3yo BMWs. My gut tells me that many of this cohort will be leasing their new BMWs, not waiting on a second hand version. Unless a lot of these cars end up getting written off (possible), there is going to be a glut of supply and and reduction in demand, so the 3yo price has to fall. This invalidates all the assumptions that the finance teams behind the shiny salespeople have used to generate the low low monthly payments, meaning that there will be an almighty crash further down the road when the repossessed cars don’t cover the amount outstanding and the car dealerships are trying to flog a bunch of 3yo cars with a book value far higher than anyone will pay for them. Or people forced to make balloon payments far higher than the value of the cars that they are “purchasing”. My understanding is that while some of these balloon payments are optional, others are not. It is negative equity for cars, and looking at the car park for my modest street, everyone is getting involved.

    Am I the only person thinking that this is a problem?


    1. Do you not get told the balloon payments when you buy the new car? If not, that’s beyond toxic, it’s financial suicide. As you say, negaitve equity for cars! I’d assumed you are told that value at the outset, in which case then at least the guys who will get hurt there will be the finance companies, and I couldn’t imagine a nicer bunch of guys for that to happen to!


      1. I read one tale (a case study in the middle of a similar looking article to the one you reference) where the purchaser had no idea that they had a balloon payment and that it was mandatory. I can’t find the source, but expect that the individual had signed a piece of paper with the terms on it, while being distracted by the car seller dangling shiny things in front of them. My understanding is that the value is fixed at the outset, as you suggest.

        I agree that I will struggle to shed a tear for the poor exploitative financial companies when this whole business model falls over.


  6. Great to see you back again, Ermine – congrats and mazel tov on the new house!

    Several of our friends, who are otherwise sensible people, have these car financing arrangements and we can never understand why they can’t see that they are being had over.

    We buy new cars (ok, I know, but bear with me…) which we then keep for something like 15 years and sell at a good price because we have pretty low mileage and keep the cars in very good order. We choose a modest vehicle that will hold its value well, and we buy strictly cash – which makes the salesmen’s heads virtually explode.

    When we last did this, in 2009, the salesman literally could not understand why we would not take his ‘advice’ to use our cash as a deposit on a much flashier vehicle and finance the rest.

    Ironically, we could actually have afforded to buy any of the fancy cars in the showroom for cash as we have been tightwads for decades and so are gently minted. But we wouldn’t actually *do* that – we’re not madzers.

    It was quite good entertainment watching other customers looking at what appeared to be large armoured personnel carriers and asking about how much they could borrow to get them. These other customers were probably feeling a wee bit sorry for us, of course…



    1. I think even MMM would let you off the face punch for the new cars if you pay cash and amortize over 15 years 😉 I usually get about 12-13 years out of a motor so you’re doing better there.


  7. Yes good to have you back old chap, was beginning to think you’d even retired from retirement. Learning from other peoples experiences (or mistakes) is for me, a great help in making decisions and avoiding pitfalls. So I thank you for your valuable insights and humour.
    I had some money in my bank account earlier this year and decided that I wanted but not needed to update the old Berlingo van for something newer.
    I purchased an ex demo Transit Connect ( as the dealer was running the exact spec and colour I wanted, (metallic grey with autobox….flash b’stardio I know). So saved a bit on depreciation. I paid cash as I couldn’t be sure if there was a saving to be had any other way. So now even if it all goes bosomskyward I can sell the van and buy some turnips for the winter without any involvement from anyone else.
    Keep up the good work.


    1. Thanks! I’m with the approach – cash is basically the only way to buy depreciating assets live vehicles – well done of ducking the initial new->1 minute old depreciation


  8. It took me a little while to get my head round that PCP article, I think because the premise is so ridiculous. As you say, it’s comparing getting ripped off a lot to getting ripped off a little less.

    I mean £20k over 3 years! That’s a lot just to be owning a new car that you don’t keep at the end of it. I can think of far better things to spend my money on. I think it’s Jacob from ERE who says that on average people spend 20% of their income on cars so if the average working life is 40 years then that means people are working 8 years of their life just to own a car. That’s 8 years you don’t get back.

    I bought my car – a very pretty red Hyundai Coupe – about 4 years ago for £4.5k. It was 7 years old at the time and had about 30,000 miles on the clock. These cars have a 5 year warranty on them so you know if there are any major problems they’ll have been fixed in that time. Looking back over my spreadsheets I’ve spent about £1500 on the car over the last 4 years on things like new brake pads, tyres, a new cam belt, new aircon.

    Anyway I guess my point is I’ve spent probably less than a third of what they’ve spent, and my car should last a few more years yet. That seems a far better deal to me.


    1. It’s amazing isn’t it – you can buy a new small car for £10k cash and get to keep it. Heck, a BMW 1-series is listed at £22k new. I just don’t know on what planet losing 20k in three years is a great idea for your average grunt. I’ve had four cars in 35 years and none of them were new, but they generally did the job!


  9. Dear Ermine
    I am a great admirer of your style and I am very happy that you have returned to blogging. Congratulations on your move and I hope that you find the South west enjoyable.
    Greetings from Plymouth


  10. I’ve a colleague who despite being intelligent in every other way is a car-crash with respect to money matters; there’s just so much psychology involved in people’s attitudes to finance. What follows is a true story:-

    Buddy’s banger dies on the motorway and he’s then forced to use the train to get to clients for a few months as he’s a consultant and generally has to travel far for his type of work. He soon hates the loss of the illusion of control over your life that the ‘freedom’ of a personal vehicle gives you, once acquainted with the casual contempt the railway barons treat their victims with. Is it really your own car though when you have £50 000 debt on a credit card at an ~20% annual interest rate and an interest-only mortgage at 60?

    So, driving past a garage forecourt with his beloved one day, he sees a sign saying ONLY £89 A MONTH !!! on a little second-hand hatchback, which doesn’t seem bad; no harm in just checking it out. Like the Light Brigade, he plunged fearlessly into the showroom led by his wife, exiting not long afterwards covered in a blanket of fairy-dust with the ink still wet on a contract for a new car for ONLY £159 A MONTH !!!. Twas in a colour she chose, but in his name because her credit record’s shot (so he’s legally on the hook too) which she drove off in, leaving him with her banger. She’s a lot younger than him, so a cynic might say there’s a pattern there, upgrading to a better model you can’t afford and never learning from your mistakes, but hey, YOLO buddy.

    He lost his contract soon afterwards and is now sweating the high maintenance of the car he is not currently using, the home he barely lives in (stays in a B&B most of the time when in work) and keeping honeybun sweet. Small print on contracts is eye-test sized for a reason, similarly the narcolepsy-inducing levels of boring legalese have a purpose; these contracts are a legal tax on the impatient, the desperate and the less bright.


  11. It can be well worth borrowing to buy if the inflation rate far exceeds the interest rate on the loan. As in the seventies: will we see their like again?


  12. In my bad old days of debt, I used to pay off the PCP balloon with the credit card….I know, ouch!

    With my current car, I didn’t have the money outright but had a 3 year plan to save up, so I was able to pay the balloon when the time came. I also paid above the minimum deposit required to reduce the amount financed. It was always my intention to own the vehicle at the end of the agreement so I would never go for something flashy or in the £20k bracket, which would be beyond my financial capacity!

    I’ve never really been concerned about car depreciation – it’s not like I’m buying it as an investment. Would I go down the PCP route again? Possibly, depending on the rates offered, although I’d certainly have the cash to buy outright next time so would have that option.


  13. Ermine! Congratulations on the move. I hope you both enjoy a happy and healthy life in your new domain.
    By the way – still use that flowchart for my learners- thank you. You never know, some of it may sink in and there’ll be a few less people who will be ripped off.
    will Mrs Ermine still have a small holding? Hope so.


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