Car Finance Fun - seems a bit mad to me
Her Indoors bought one of those big white SUV cars two-and-a-half years ago on the never-never (HP or finance lease or PCP or whatever names they dream up for what is essentially the same thing).
I don’t know the exact numbers, so I’ll simplify a bit.
List price = £27,000
Deposit = £5,000
Three years @ £333 a month = £12,000
Final payment* = £12,000
* Depending on which variant, this might be called ‘loan outstanding’, ‘balloon payment’, ‘purchase option price’ or whatever, you can pay these off over three years, £333 a month.
I’ve checked Autotrader and the second-hand of that make and model is about £12,000 for three years old and £6,000 for six years old.Let’s ignore VAT for now, it sort of nets off.
So if she sees it through, the total finance cost was negligible at £2,000 (works out mathematically at 2.9%) and she owns a car worth £7,000.
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Here’s where it gets weird, looking at it from the point of view of the dealer/manufacturer.
The chaps from the dealer rang her a couple of days ago, and said that if she pays another £1,000 she can swap it for a similar new big white car (even though she’s only two-and-a-half years into the initial three years) and the monthly payments stay the same. The current second hand value (two-and-a-half years) old is £14,000.
Let’s assume this repeats itself, for ever. Every two-and-a-half years, she pays them £11,000 (£1,000 cash plus 30 months @ £333) and ‘enjoys’ £13,000′s worth of depreciation.
The dealer/manufacturer collects £11,000 and loses £13,000 of depreciation, i.e. they give up £2,000 of the nominal profit margin when they sell the car, a kind of negative interest rate.
Source: http://markwadsworth.blogspot.com/2018/09/car-finance-fun-seems-bit-mad-to-me.html
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