ACCOUNTANT EXPLAINS: Should You Buy, Lease or Finance a New Car

the question of whether you should buy a finance or lease a car is surprisingly controversial on one side you're making that buying a car is the best option because it means you get full ownership of the car and it works out cheaper in the long run but on the other side you may think that leasing is a good idea because it means you pay far less on a monthly basis and you get to drive around a brand new car after doing a thorough analysis and running the numbers on all the various options I was pretty

surprised at what I found and the difference in savings between going for what a car dealership tries to sell you and what is actually the cheapest option so in this video we're going to cover four of the main ways to purchase the car what they are which one's the cheapest and finally the psychological factors to take into consideration this is part of a series of accountant explains videos where we discuss all things personal finance and Building Wealth part one what are the main options the first way to purchase a car is just by buying it

outright pay the full price of the car on day one and you don't have to worry about any payments or interest going forward pretty straightforward the second way to buy a car is through finance and in the UK this is often referred to as higher purchase and it works in a similar way to a personal loan so you pay a deposit towards the car you borrow the outstanding amount at a set interest rate for an agreed period let's say three years and then over the three years you make monthly repayments and then at the end

of that period you own the car the Third Way is to release which is essentially like renting you make monthly payments to use the car and at the end of the contract you give the car back the monthly payments here are calculated slightly differently than in the finance option in the finance higher purchase option you are paying off the full value of the car because you're going to own the car at the end in the lease option you are only repaying part of the car and that's the part that the car depreciates during the time

you have it for you then divide that amount into monthly payments and add some fees on top the fourth option is PCP and for this you set a term for the agreement you pay a deposit and then the company provides a final value for their car and what it will be worth at the end of the agreement these are then subtracted from the cost of the car to work out how much the loan will be and how much you'll be paying on a monthly basis at the end of the contract you have a few options

for the PCP you can decide whether you want to keep the car and pay that final value you can choose whether you want to return the car or you can use that final value to part exchange the car now we've covered the foundations let's go into the financial implications and the cost of each of these so to compare apples with apples I've done this analysis using an average medium-sized family car so that is the Audi of these options I'm using a 15 deposit so 4500 pounds and a three year term to make it as like

for like as possible the first financing option we discussed is the higher purchase so I put down a deposit the interest rate I was quoted was just under 11 which brings my monthly payments for a three-year term to 810 pounds a month that means the total price I pay for the car at the end of the contract is just under 34 000 and at this point I now have full ownership of the car let's assume now I want to sell the car I'm going to say looking at comparables on the market I can get 16

000 pounds per eye online on the second hand car market this car three years old is going for a fair bit higher than this twenty thousand pounds plus but I don't think this is an accurate representation of what we can get for the car in three years time because secondhand car prices are going through the roof at the moment and I don't believe this will continue for the next three years I think this bubble will burst before then so if I were to sell the car for that much then it would have essentially cost me

around 17 500 to have the car for three years the next way we spoke about is buying a car through a lease in the lease option assuming I put down the same deposit the monthly payments are 345 pounds a month far lower than the finance higher purchase option because of the way we say it's calculated only on a portion of the car and it's no interest so in this case to have the car for three years it would have cost me around 17 000 pounds sometimes you have the option to buy that car at the

end of the term but this isn't guaranteed and you won't know how much the dealership is actually going to give you for that car until the last few months of the lease term unlike the next option which is the PCP this is the most popular one the one that most people take up and one of the reasons for this is because the car dealership pushes you to take this one on because it is also the most lucrative for the them but it definitely may not be the best option for you if you are just looking

at it in terms of a total cost perspective let's run through the numbers putting down the same deposit the value they said this car will be worth in 3s time is 15 000 So based on my deposit the pre-agreed car value of 15 000 and interest rate again of just under 11 my monthly payment would be 453 pounds if at the end of the contract I decide to return the car then to have that car for three years it would have cost me approximately 21 000 and if I were at that point to instead choose

to keep the car and pay the final balance of 15 000 it would have cost me 36 000 pounds the total cost of the car from those numbers on this car you can see if I went for the PCP option at the end of the contract if I returned the car then I would have been better off just going with the leasing option it would have saved me four thousand pounds nearly the car dealership tries to sell you the PCP because it is the most lucrative for them they make the most money from it because

it encourages you to stay with them and when the contract ends to upgrade your car and part exchange it so they keep making money from you they would also try and tweak the numbers using dealer contributions or changing the deposit slightly to try and encourage you to go for the PCP option in some cases it may well be the best option for you it may work out better because you're getting a car that holds its value and you or you want more flexibility but it's also important to do the calculation looking at the total cost

of the car as a whole and just to further drive this point home no pun intended if I decide to keep the car at the end of the contract I would have been better going for the higher purchase option that would have also saved me money the other option which we spoke about is buying the car outright for thirty thousand if we did this and assuming we could sell it at 16 000 that price in the second hand market then this would be the cheapest option at 14 000 to have the car for three years

however an important something to consider here is the opportunity cost if you put 30 000 in day one it's locked up in the car the alternative is if you have thirty thousand and you paid the four thousand five hundred deposit and then you have the left over to invest in something like the S P 500 or another cash generating asset the question here is can you make a better return on that versus the additional cost of a financing option other factors to consider are the psychological factors if you are someone who tends to keep your

cars for a long time then going down the higher purchase route means you can pay your car off and then you won't have the stress of having to keep up with your monthly payments and you have full ownership of the car which means you can do what you want to it you could drive it as far as you want but at the same time any maintenance costs do fall on you and this cost tends to rack up the longer you have a car for on the flip side going for the lease or the PCP option

means you can go for a newer car with lower monthly payments and you can keep changing your car more regularly whilst not worrying about whether you'll be able to sell the car in the future and for how much you also in this case don't have to worry about the ongoing maintenance if you keep trading in the cars before the warranty runs out which is usually around the three year mark however you do need to keep the car in pristine condition otherwise you'll get charged a bump for it when you return it and there are restrictions

also when it comes to the PCP or lease so that includes the changes you can make to the car and also the number of miles you do on it if you go over that mile restriction then you will incur an additional cost per mile if you do have the money to buy a car outright then this in my opinion is a solid option where you don't have the stress of any monthly payments if you were to go down this option unless you really know when it comes to cars and you can flip it on for

a profit then instead buying a pre-owned car that's two to three years old and has already depreciated substantially at someone else's expense might well be the best option so hopefully this video gave you some ideas on things to consider and how to run the numbers for yourself and which route you want to go down this analysis has been done on the basis that you are buying a car as an individual rather than as a company or through a business if you've got value from this video please do share it the importance of financial education and

financial literacy is so important I'd also love to know how you've bought your car how you bought the one that you currently drive if you do have a car or how you're thinking about purchasing your next car thank you for watching and see you in my next video