Is this a valid way of thinking about car finance?

Honest John Back Room » Motoring discussion
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Tue 6 Sep 2022 17:32
Is this a valid way of thinking about car finance? - Spikymikie

Hi. I am buying a new car and ordered it some months ago when the APR on the Personal Contract Plan (PCP) finance package was 4.9%. That was locked in and will be the rate I pay for the next 3 years if I go ahead with the finance option when the car arrives in a few weeks after the long delivery lead time. Obviously 4.9% is less than the rate of.inflation is at the moment and for the foreseeable future. My alternative is paying cash and buying the car outright when it arrives. With inflation reducing the real value of payments is it a no brainer that I should borrow at 4.9% because inflation will reduce the real value of payments, which are set out at the outset, more than if I paid interest at 4.9% over and above the cash price?

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Tue 6 Sep 2022 17:54
Is this a valid way of thinking about car finance? - Adampr

I think so, but I have been told not to think along those lines in the past. Your best bet is probably to sign up to the PCP (so you get the deposit contribution or whatever), then get a personal loan at less than 4.9% and buy the PCP out. That way your interest is even lower and you have an asset you can sell if you change your mind.

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Tue 6 Sep 2022 19:04
Is this a valid way of thinking about car finance? - Terry W

If the alternative is paying cash rather than a PCP deal, the real question is will you earn more than 4.9% interest by putting the money on deposit than would otherwise be paid for the PCP deal.

There are other considerations, albeit less easy to judge - eg: is it likely you will want to buy the car at the end of the period, what about the risks of excess mileage charges and minor damage that will cost at the end of contract.

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Wed 7 Sep 2022 09:36
Is this a valid way of thinking about car finance? - Moodyman
The case for inflation eroding the APR, only applies if one’s earnings exceed 4.9%. If the buyer’s earnings remain below this %, then only the finance company loses out.
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Thu 8 Sep 2022 00:58
Is this a valid way of thinking about car finance? - SLO76
Strange logic to me. Why borrow and pay interest if you have the money sitting earning next to nothing in the bank and depreciating thanks to inflation? Buy the car outright with savings unless there’s a big manufacturer backed subsidy to take the PCP, even then you can usually hoover it and pay off the loan.
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Thu 8 Sep 2022 09:42
Is this a valid way of thinking about car finance? - John F
Strange logic to me. Why borrow and pay interest if you have the money sitting earning next to nothing in the bank and depreciating thanks to inflation?

Depends how much sits there. If rainy day savings are completely exhausted and an unexpected prolonged monsoon arrives, you might end up paying considerably more than 4.9% to borrow the money needed to dry out.

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Thu 8 Sep 2022 09:59
Is this a valid way of thinking about car finance? - Cris_on_the_gas

If you have got the money in savings and are earning more than 4.9% which is highly unlikely then keep the finance.

If you don't have the cash and expect your income to rise by more than 4.9% for the term of the loan then keep the finance

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