Freedom, the wind in your hair, the excitement of exploring new places, the anticipation of coming home.
Or bumper to bumper commuting, congested traffic, unexpected expenses, and potholes.
Your feelings about cars might be accurately captured in the first list, or they may be better represented by the second. Whatever thoughts run through your mind when you think of cars, it is typically your second biggest purchase in life, after a house.
Like buying your house, buying a car is a balance between an emotional want, logistical need and financial constraint. While this blog won’t delve into the emotional and logistical side of car-buying as there are numerous other blogs available, it will attempt to provide you with some food for thought when it comes to the financial implications.
The question you may be asking yourself is whether to buy the car outright or whether to finance the purchase. Personal contract purchase (PCP) has rocketed in popularity in the UK in recent years and is the main means of acquiring a car via finance. In fact, 82% of all new car registrations are completed via PCP.
The drive behind the newly-found popularity of PCPs is the structure of the product. Essentially, drivers only pay for the depreciation of the car over the period of their ownership. Cars that depreciate little can, therefore, be owned for a lower price than you might expect. Let’s look at an example and make this real.
The Audi A8 has proven to be a popular car in the premium market.
The table below shows what it might cost to buy an A8 outright and what it might cost to run the car under a PCP plan.
This is only an example of a current deal available in the market.
| Cash | PCP | |
| Upfront cost | £69,000 | £1,000 |
| Ongoing monthly cost | 0 | £600 |
| Term | Until you choose to sell. | 48 months |
| Permitted mileage | As much as you want | 8,000 per year |
| Remaining Value After 4 years | £35,000 | Judged by PCP provider |
| The total cost of ownership | £34,000 | £29,800 |
| Ownership cost per year | £8,500 | £7,450 |
In the above example, after the PCP contract ends, the cash buyer has a car worth about £35,000. The PCP-buyer has nothing. It has ‘cost’ the cash buyer more overall, but they are still ahead on the deal. The cash buyer has lost deposit interest over four years (at the time of writing, not very much).
If you’re the type who fancies a new car every few years, you may find a PCP arrangement to be more cost-effective. However, if you find yourself quite happy with the same car for nearer 10 years, then PCP might not be for you.
Because PCP car finance relies on a ‘balloon payment’ at the end of the contract if you want to own the car, you start a new PCP contract on an upgraded, newer model. A disadvantage is that cars depreciate at a faster rate when new. See the link if you want to check out the depreciation on different cars: Depreciation by Make and Model
The table below shows the decreasing annual ‘effective’ ownership costs of an Audi A8 if bought in cash for £69,000. The longer the car is held, the lower the effective annual cost.
| Audi A8 | 4 years | 7 years | 10 years |
| Remaining sale value on the open market | £35,000 | £25,000 | £18,000 |
| The total cost of ownership due to depreciation | £34,000 | £44,000 | £51,000 |
| Ownership cost per year after depreciation | £8,500 | £6,300 | £5,100 |
You may be thinking: “Why should I pay so much for a car to not even own it?” Well, there is great freedom in not owning something. For example, many choose to forego buying a holiday home to instead enjoy the freedom of more varied holidays in hotels of their choice. In the same way, if you abide by the rules of your PCP contract, you can simply walk away at the end and enjoy a variety of different cars.
The simple comparison table below might help you decide:
| FACTORS | PCP | CASH |
| Variety | Absolutely, walk away at the end of the contract | Sorry, only once you sell it |
| Breakdown Costs | Typically covered under the contract | Yours to cover, unless you have the manufacturer’s warranty |
| Hassle | Minimal besides at start and finish | All issues are your burden, but you don’t have to revisit the dealership at end of the contract |
| Overall running costs | Quite low, newer cars are typically more fuel-efficient and less likely to break down | Usually, increase over the period of ownership as things go wrong and more fuel-efficient models become available |
| Short term ownership costs | Flat and quite low | Can be expensive |
| Long term ownership costs | Balloon cost at end of the contract typically makes this unfeasible | Much more cost-effective |
It all boils down to horses (or horsepower) for courses. Each option has its merits as well as its drawbacks. If you want to adopt battery power but feel the time isn’t right, the PCP may work for you. Go for petrol now and then review electric cars again in 3-4 years’ time.
If you are about to go through several lifestyle changes: family runaround to midlife crisis two-seater, to a retirement smart city car, then once again PCP may be ideal for the regular changes.
Apart from a very few classic cars, your owned car will be a depreciating asset.
Here’s a handy calculator we found online to calculate car depreciation.
If you would like to test the affordability of spending a large cash sum, or a high monthly after-tax payment and see where it fits into your financial affairs, contact Capital today.
