Time was, new or used cars were advertised quoting a price for that particular vehicle. As a car buyer, you might ask for a better price, or arrange a trade-in, but you had a clear idea how much you had paid for the vehicle. Now, many car buyers would be unable to say how much the car they are driving cost them.
This is because personal contract hire and personal contract purchase have led to a blurring between the costs of running the car, the costs of buying the car, and the large depreciation factor on new cars. All three costs are bundled up in a deal that involves one monthly payment to account for the depreciation, servicing costs and possibly even insurance. Yet many buyers are unaware that the monthly payment isn’t actually buying the car.
Unfortunately, the arrangement has a nasty sting in the tail known as the balloon payment. Because of the bundling up of running costs, depreciation and car payment costs, the monthly payment falls way short of what’s needed to pay for the car. These are new cars, so they are getting frequent services at main dealers. And the buyers are often younger drivers who would have fairly hefty insurance premiums.
But the real killer in these deals is the depreciation. The Money Advice Service reckons that the depreciation on a medium sized NEW family car is typically 15-35% in the first year, and up to 50% over three years. When you buy a used car, someone else (the initial owner) has taken the main hit on the depreciation. What many buyers using lease forms of finance don’t realise, is that they are principally paying for the depreciation on the new car when they make their monthly payments.
At the end of two or three years, depending on the agreement, the leasing contract buyer faces a choice. They can return the car and get another new one. This is fine as long as they accept they are throwing money away on depreciation again. If they want to own the car they face a balloon payment. This is the amount it’s going to cost to buy the car, and at this point many buyers discover they have paid either nothing, or very little, towards actually owning the car.
Therefore the seemingly low monthly payment on new car HP or leasing is deceptive – it isn’t actually buying the car which is why balloon payments are so large. Yet these buyers could have got a great finance deal on a used car and ended up owning it. Which would mean that when they wanted to trade it in, they had an asset that was worth something, not a liability which is what the outstanding loan on the lease purchase cars represents.
We’ll be seeing the reality of this hit home in the next year or so, as the balloon payments kick in for the large number of buyers who chose this route three years ago.
A New Car With A Balloon Payment At The End, Or A Pre-Owned Car With No Balloon. Which is better?
November 23, 2017 at 2:06 PM
New Car Leasing Has A Sting In Its Tail
Remember, if you want to buy a used car with peace of mind knowing that all the finance options available to you will be explained openly and transparently come to 4Front Car Sales and put us to the test!