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vs Used Car HP Part
1 I have recently had a
spate of potential clients who toy
with the idea of taking a new car on a lease against
acquiring a used car on HP or a PCP because this
means that they can OWN the car because obviously we like to
OWN
our cars!! I try to 'Janet & John' the examples I show but they
still umm and ahh! By the way for my younger readers Janet &
John
were a series of books that we were given when in primary school to
help us to understand reading and numbers. Obviously didn't work for
some out there! Moving on!
First of all let me be
clear, if you take out an HP or
PCP agreement you do not
own the vehicle at any point until you
reach the end of the contract term when you have to pay an option to
purchase fee in order to own the vehicle. (the name HIRE purchase kind
of gives the game away). So up until then the car is owned by the
finance company. In law you cannot sell the car at any point during the
agreement unless you have the permission of the finance
company or
unless you own the vehicle by paying off any outstanding finance, along
with the option to purchase fee. You can then legally sell the vehicle
as title is passing legitimately and lawfully from the HP company, to
you then to the final buyer.
So whilst a leasing
company owns the car you drive when you
lease it, an HP company owns the car you drive when you HP it,
so
stop fooling yourself. OK this is quite minor but a point
worth
making!
Another point worth
making is the way an HP deal is
structured by a car dealer in order to keep the monthly payments down.
It's a fact that if a dealer sells you a car for £5,000 he
may
stand to make say £700 to £1,200 with
maybe a couple
of hundred pounds finance commission if financed over 3 years. But if
he can sell you a £10,000 car and finance it over say 5
years he will increase his profit to anything up to
£2,000
along with some increased finance commission for the same amount of
work.
Let's look at a
practical example. You want to buy a car on
HP, you have a budget of £250 per month and a deposit of
say £1,000 but you want to fund it over 3 years,
what can
you buy? Well, after netting back the interest charges your
£250 per month and £1,000 deposit will allow you to
spend just under £8,500. But finance a
car over 5 years
at £250 per month and you can now spend just over
£12,000
after netting back the interest and adding the deposit.
Kerching thinks the
salesman as he explains that whilst you
might only want to keep the car for just 3 years before part exchanging
it, as the car is more expensive and probably newer it will be worth
much more after 3 years than the £8,500 car leaving
you with
quite a lot of equity (profit) in it when you settle out the finance.
What a loud of bull. The truth is that in most cases if you take out a
5 year agreement on a car from a car dealer and settle the finance
after 3 years you are unlikely to have more than a few hundred pounds
equity left in the car when you part exchange it. In many cases the
deal is what's known as 'upside down'. This means that more money
is owed to the finance company than the car is worth.
So to sum up take out a
5 year HP and settle the finance
after 3 years will probably result in a break even between the part
exchange value of your car and the amount of money
the
finance company requires to settle the finance. Forget what a
salesman may tell you - it's a fact! You end up in exactly the
same position as you would if you leased a car.
So let's look at a
simple example. Take our 4WD offer on the
Tiguan above. The monthly rental is £249.99 + VAT =
£300
inc VAT. You pay an initial rental of £1,800
(6x£300) and make 35 payments. In return you get to
drive a
brand new £24,000 VW Tiguan for 3 years. But let's
say you
want to own a used car because that's our culture, what will
exactly the same amount of money get you?
You take out a 5 year
HP that you will settle after 3 years
leaving you no equity in the car as established above. In other words
the HP settlement figure will equal the value of the car. So after
netting back the interest charges and adding in the deposit of
£1,800 you have £15,133 to spend. The lease also
includes 2
years of road tax worth a further £250 so after taking that
out of your budget you have £14,883 left to spend on
a used
car. According to Autotrader this should buy you a 3 year old 2010 VW
Tiguan with about 40,000 miles on the clock! Remember, you have paid
the same initial payment, the same monthly payment and by settling the
finance after 3 years of a 5 year HP agreement you have no equity in
the car, the same position you are in with a lease when you simply hand
it back to the leasing company.
The choice is
therefore, for the same amount of money would
you prefer a brand new VW Tiguan for the next three years or a three
year old used Tiguan for the next 3 years?
There are of course
other factors to consider other than
your ego! With a new car you have a car with new tyres, new
clutch, new discs and pads, in fact all is new with a more up to date
engine, better CO2 output and better fuel consumption. So no buying new
tyres or brakes within 6 months of taking the car as well as lower
running costs. You also get the latest technology and a full 3 year
warranty. Servicing and repair costs will be minimal and even insurance
can work out cheaper. No annual MOT tests to worry about
either as
the first MOT is only due at the end of 3 years.
Have I made my case for
leasing? Let me know.
Part 2 On my 21st birthday my
parents bought me what every boy of
my age dreamed of, a complete, top of the range, socket set. Why would
I want a complete socket set? Because in those days we repaired and
serviced our own cars and with a socket set you could do virtually
anything - and between Chris and I we did. After a Friday night out and
a little worse for wear on a Saturday morning, he and I could
remove a mini engine from his car, strip it down, exchange the 'block'
for a re-conditioned one, put it back together and be out on the pull
by 8.00 in the evening! And both of us were qualifying as accountants
at the time. It's what you did.
But would you and can you do it these days? For the vast majority the answer is no so these days a major part of your car running costs is service and maintenance. But do you know something very strange? Most people that consider changing from HP of a used car to lease of a new car see this cost as a reason to take a used car! How crazy is that? So here in part 2 I'm going to explain a major misunderstanding and more reasons why leasing a new car is so much better for you financially, psychologically and in terms of safety for you and your family. "I wouldn't ever take a
new car because of the initial
depreciation it suffers, I'd rather get a 2nd hand car after it has
lost its initial depreciation!" OK I have covered this off in part 1
but there is one last thing I want to mention here but now to the other
common miss-understanding, "I wouldn't get a new car because I couldn't
afford the service and maintenance costs, if I get a used car I can get
my little local garage to service and repair it at nothing like main
dealer costs."
It is true that a car
suffers the most amount of
depreciation from the retail price the moment the tyres hit the road
(so to speak). In very general terms the depreciation follows the
following simple formula (depending on the make and model) year 1
- 30%, year 2 - 20% and year 3 - 10%, with pretty much 5% -
10%
thereafter. So in theory a 3 year old car is worth around 40%
of
the retail price with about a third of the value lost in year 1. But
what if I told you that some cars are sold to the leasing companies at
anything up to 45% discount, after factoring in their
various bonuses with the more usual discounts being
around
the 25% figure. As you can see, the dynamics change and it
gives a
reason why you are able to compare directly a 3 year lease on certain
new cars with the 3 year HP cost of a used, 3 year old similar car.
But the 30,
20, 10 relate to the part exchange or trade
value of the car so whilst it may seem that you suffer a lot of
depreciation on a new car when 'the tyres touch the road' the same
applies to a used car that you buy from a dealer. Lets take a new
£20,000 car that you part exchange after 1 year, you can
expect,
using my formula, to receive £14,000 which is the trade
value.
Much of that depreciation would take place the
day you take
delivery, however, if you chose to buy the used car after a
year,
i.e. after the initial depreciation has been suffered by the car, you
would not buy the car for £14,000, you may have to pay up to
£17,000 on the forecourt, but the car still only has a trade
value of £14,000 so you still suffer that initial
depreciation as
you would with a new car, just not as much. Does that make sense?
Moving on to the other
misconception and that is the cost of
servicing. If we first look at a new car you are obviously starting
from scratch, everything is brand new, new tyres, new brakes, new
exhaust, new battery etc. Let me be clear, under the EU Block Exemption
rules you do not have to get the car serviced at a main dealer in order
to retain full warranty cover. You could in fact have the car serviced
at a service centre such as Kwik Fit or Halfords or indeed by
your
little local garage as long as the service is carried out in
line
with the manufacturer's recommendations using manufacturers'
or
equivalent parts.
But here's the thing, the first service on a new Tiguan is simply an oil change and a main dealer will charge a fixed cost of £149 for the service according to their website. The market has moved and dealers have had to become more competitive or lose the vast majority of their business to garages and fast fit centres. So you shouldn't be in fear of Main Dealer rates. The chances are that
over a three year lease on a new car
you will have maybe 2 services (depending on your mileage and the car),
the second service may require some new brake pads on the front of the
car, an oil change and fluid/filter changes. The fact is that your
services will be relatively low cost compared with a used car. As you
start with new tyres the chances are that you will also only need 2
tyres during the 3 years. On top of that if anything else goes wrong
during the warranty period the repairs will be carried out free of
charge unless you have caused the damage.
When it comes to used
cars expect the unexpected. As I
mentioned above servicing is now something that requires an expert and
a computer, not just a set of sockets and a manual. Even cars that are
three years old are packed full of technology so there is plenty that
can go wrong. When the speedo pointer bulb went on my Mercedes, soon
after it was delivered, it was repaired under the warranty. It required
the removal of the whole dashboard and replacing the instrument pod. It
was in the dealership for 3 days.
If the car had been 3 years old and beyond the warranty it would have cost a fortune but these are the sorts of issues you may face with a used car. A low mileage diesel may mean that the car wasn't driven at over 50mph for at least 20 minutes each month in order to clear the particulate filter. So when you take the used car it may be under performing, using more fuel and could result in a replacement exhaust being needed. And with all the precious metalls in the filter - that isn't cheap. You are talking hundreds of pounds of repairs. You don't know how the car has been driven so you could buy into 3 years of abuse and of course you are more likely to not only need brake pads but also discs. Some other things that will need attention that you wouldn't need with a new car are: Cam Belt Replace
Air Con Refresh/Service
Air Filter Replace
Battery Replace
Fuel Filter Replace
Brake/Clutch Fluid
& Filter Replace
Suspension Dampers
Clutch
CV Boot Replace
4Wheel Alignment
4Wheel Drive Oil Change
MOT Test
etc.
Other items that could
go wrong and be expensive to correct
are ABS pump, power steering, even the Radio/CD player no
longer
covered by warranty.
So whilst the servicing
costs can be measured in a few
hundred pounds for a new car it could run into several thousands for a
3 year old car. On that note I rest my case.
Part 3 Many
of you are confused over one further issue, that
of VAT. It would seem that whilst understanding the benefits of leasing
you have avoided it in the past as you either wish to finance
your new car privately or through a business that
is not VAT
registered. So at 20% doesn't this eliminate all the
advantages? Clearly if you take HP or even PCP you will not
pay VAT on the monthly payments which is what you do when you take the
car on a lease.
Let
me start by giving you a very simple example. You
want to buy a new TV, the cost of which is £360 which
actually
breaks down to £300 + £60 VAT. But you can't afford
the
£360 so off you trot to have a word with your very friendly
bank
manager who lends you the £360 which you repay over 3 years
at a
monthly cost of £12.10 per month with no VAT to pay. But
supposing a leasing company came along and said we can lease the TV to
you? The fact is that they can reclaim all the VAT that they pay so the
TV only actually costs £300 onto which they apply interest to
work out the monthly lease rate. But hang on a mo, the Customs and
Excise chappies aren't happy, they need to recover the £60
they
just gave back to the leasing company so they tell the leasing company
to apply VAT to the monthly rentals. So applying the same rate of
interest the repayments come out at 36 x £10.08 + VAT =
£12.10 per month including VAT.
So
you see, as the leasing company claims back all the
VAT applied to the purchase price of the car, as demonstrated
above, you are no better or worse off when it comes to taking
HP
and having the loan calculated on the VAT inclusive purchase price and
paying no VAT on the repayments than taking a lease and having
VAT
added to the monthly payment. However, in the case of a leased
car
the leasing company, due to the economies of scale, is more likely to
be able to buy the car you wish to finance at anything up to 50%
discount. And that is where the real benefit of leasing kicks in.
If
your company is VAT registered you have an
even greater advantage because you can reclaim 50% of the VAT
payable on the rentals. And if you can show that the car is
not
available at all for personal use you can reclaim all the VAT
but
I have to say the chances of getting away with that is remote.
The Treasury aren't that daft!
Part 4 Whilst many of you now
'get it' and understand the benefits
of leasing I have had several notes asking about the difference between
a PCP (personal contract purchase), which many understand to be a lease
for consumers and personal contract hire (PCH) also a lease for
consumers. You have also asked why they are different, why dealers seem
to push PCP and don't seem to understand PCH and which is best?
First of all both PCP
and PCH are a form of lease. In both
cases you make an initial payment followed by a number of monthly
payments and at the end of the agreement you simply hand the car back
to the leasing company. You agree an annual mileage for the duration of
the lease and are given the excess mileage charge if you exceed the
contract mileage, expressed as pence per mile. In the case of a PCP,
as with HP you have the right to buy the vehicle at the end of
the
agreement if you wish. In the case of HP you will simply pay an option
to purchase fee from £25 - £150, depending on the
lender.
In the case of PCP the monthly payments will be lower than HP as you
defer roughly what the car will be worth at the end of the contract
till the end, which you can pay along with the option to
purchase
fee in order to own the vehicle. Or you simply hand the car back and
the leasing company stands any loss but also benefits from any profit
made on the sale of the vehicle.
Simple so far.
In the case of PCH
having made all the payments you can ask
the leasing company if you can buy the car. Most will allow you to do
so but not at a pre-determined figure but based on the trade value of
the car at that time. If they are going to collect the car and sell it
through auction it makes good economic sense to sell the car
to
the driver. It costs around £600 to inspect and collect the
car,
prepare it for auction and pay the auction house for storage and
selling the car. So if they can sell the car to the driver for a little
over what is expected at auction everybody gains. But don't assume that
they will sell you the car, after all they would prefer it if you took
out a new lease.
The big difference
between the two lease schemes is
that in one (PCP) the VAT is added to the
cost of the
car whilst there is no VAT added to the monthly repayments.
But
with PCH the VAT on the purchase price is reclaimed by the
leasing
company so VAT is added to the monthly payments. But be
careful
when making comparisons because if you take a 3 year lease a PCH will
normally be 3 + 35 payments and the road tax is included throughout the
lease whereas PCP is normally 3 + 36 (one extra payment) followed by
the optional final 'balloon' payment if you want to keep the car. Not
only is there one extra payment but the road tax is only
included
for the first year, you pay years 2 and 3, unlike PCH whereby the road
tax is included for the term of the lease.
The financial mechanics
are very similar, however,
I now need to get a little technical. When a car is supplied
on a
PCH the VAT can be recovered from the purchase price, as I've shown
previously. But because the vehicle is what is known as VAT
qualifying, at the end of the lease, when the leasing company sells the
car it has to net out the VAT from the proceeds of sale. Sorry
to
go all technical on you but let me explain with an example. Let's say a
new car is bought for £10,000 + VAT and the leasing company
puts
the car on a PCH, it reclaims the £2,000 VAT that it has paid
to
bring the cost to them back to £10,000. The market price for
the
car after 3 years is £4,000 which is what the car is sold
for.
But the leasing company has to show the VAT as a separate item on the
invoice so they only receive £3,333 + VAT. The depreciation
on
the car is therefore £10,000 - £3,333 =
£6,667 which
is what is factored into the calculations. Does that make sense?
However, when a car is supplied on a purchase scheme such as PCP the
VAT cannot be recovered so the purchase price is £10,000 +
VAT =
£12,000. At the other end of the equation the leasing company
makes no adjustment for the VAT in the sale of the car assuming that it
is sold to the lessee, so in the case of PCP the depreciation charged
to the customer is £12,000 - £4,000 =
£8,000. So
there is an immediate advantage to PCH over PCP with £1,333
less
depreciation. But there's more!
You see when a dealer
provides you with a PCP he must show
on the documents any discount given away and a net selling price after
discounts, part exchange and deposit paid (if any). There is of course
a limit as to how much discount they can give before it impacts upon
the value of their used stock. Clearly if they have a new car costing
£20,000 including VAT they could only give a discount of say
10%
as they probably have 12 month old cars on their forecourt for
£16,000 so customers must see a tangible saving between new
and
nearly new costs in order to buy the used, 12 month old car. And
of course there is a knock on effect on all their
used cars.
Even if they could give away more money they won't because if they gave
away £4,000 who would buy a 12 month old car for
£16,000 if
they could buy a brand new car for the same amount of money? So with
PCP the discount will always be limited.
Of course with PCH (as
with business contract hire) you are
never given the price of the car, just a monthly rental. So the
manufacturer could, and does, give away massive bonuses in order to
move cars, sold by dealers without any affect on the selling prices of
the used car stock on their forecourts. But do the manufacturers give
away huge bonuses - yes they do, adding to the advantages of PCH over
PCP. I can give you a couple of examples as neither cars are now sold
in the UK. The first was a Renault Laguna with a retail price
of £20,010. Provided we only put the car on a
contract hire
agreement we could buy the car for £11,250, brand new,
supplied
by a main dealer and delivered to the customer. The dealers probably
had 12 month old cars on their forecourts for £15,000.
Imagine if
the dealer put the car on a PCP at £11,250, the value of his
used
car stock would plummet. So the same car on a PCP would show maybe a
15% discount maximum. Putting it crudely it is a way for manufacturers
to 'dump' cars into the market place whist manipulating the market and
more or less forcing customers to but certain models into which they
have given away large bonuses. But it is also a great way to move the
last of old model cars before the new models arrive in the showroom,
again without affecting the price of their used stock.
So there you have
it the reason why PCH can be cheaper
than PCP but only when a big discount is available on the car. You see
the manufacturer can make PCP cheaper by using the extra discount to
subsidise the interest rate which has to be declared on the documents.
The price of the car remains high but the monthly payments drop. Of
course you never know what interest has been
factored into
the PCH rate which would be their cost of money rate before taking a
margin. So on very rare occasions it is possible to have a
PCP cheaper than a PCH.
I have been asked why
dealers don't seem to promote PCH or
only seem to understand PCP. The answer is simple - profit! If they can
keep more of the discount themselves there is a
huge incentive to ignore PCH and sell you into
PCP. So if in
your wildest dreams you would prefer to deal with a dealer than me,
don't let them fob you off with lame excuses why PCH is either not
available or not good for you - they are probably lying - what am I
saying (reaching for the soap to wash out mouth) - a dealer, lying!
Perish the thought!
Part 5 As you could see from
the recent BMW deals leasing
works best when the manufacturers give away substantial bonuses making
the rentals ridiculously cheap. A £37,000 brand new BMW 330d
M-Sport Auto for £279 + VAT per month. Using my 'app', and
only
expecting to keep the car for 2 years (a different calculation) you
would have £14,500 to spend on a used car. That would buy you
a
2008/9 car with about 60,000 miles on the clock! You would have to be
nuts!
I'm going to touch on the psychological aspect of new car leasing vs used car HP. I'm going to get a little heavy, not good for a Monday but hopefully it will get you thinking about your next car in a completely different way, not just the financial implications. I should give you a bit of a health warning here that unlike the measurable financial affects that I have mentioned so far these are purely my views which you may or may not agree with but I'm going to share them anyway. Because I'm like that! Years ago
I attended a Dale Carnegie course in
management and public speaking. You may know of Dale Carnegie who wrote
the book, 'How To Win Friends & Influence People'. I
did quite
well and was asked to become a graduate assistant helping new course
attendees. After a couple of years of doing this I was invited
to
train as an instructor, which was amazing and transformed my life! I
became fascinated with the way business is done - from a
psychological viewpoint. Not the medical aspects, I left that to those
far better qualified than me, but the real life applications of
attitudes and more important perceptions.
At the time, in my
early 30's, I was still in industry as
Group General Manager for a large(ish) PLC. I had a transport
department reporting into me, responsible for around 500 vehicles. I
had moved the bulk of our fleet over to contract hire (lease) which
annoyed our chairman as we had always bought our cars even
though
we leased out all of the equipment we manufactured
(typical) but I
proved the savings and he had to agree. We still ordered our cars
through local dealerships and I was constantly being called by dealers
or my transport manager telling me that a salesman, due for a car
change, had asked the dealer if they could have the model
designation on the back of the car changed from GL to GLS, or if the
dealer would throw in alloy wheels making the car look more
expensive etc. It was about then that I realised, using the skills
taught by Carnegie, that not only from my point of
view but
also from the point of view of every salesman, cars were not just a
means of getting from a to b. They were a measurement of status. The
better the car the better the driver felt and the better he was likely
to perform.
After meeting with our
leasing company, then with our sales
director and other members of our board I negotiated a deal
that
enabled our salesmen to drive Vauxhall Carlton's as opposed to their
usual, salesman type car, Vauxhall Cavalier L models for the
same
rate. My company, Sound Diffusion PLC, trusted my judgement. I
had anticipated a good response, having discussed my proposals
with salesmen and sales managers, but the results were staggering. Our
sales figures shot through the roof. The salesmen and women had greater
confidence when they parked next to the competition in the customers'
car parks, driving maybe a Sierra or Cavalier L. The Carlton's had the
opposite effect on the competition, disadvantaging them before they
went in to see the customer. The sales staff loved driving the cars,
they couldn't wait to receive the next sales lead because it meant
another trip in their luxury car to see a client. Staff
retention
was at an all time high as salesmen would prefer to drive the better
car than leave for an extra couple of grand a year and be forced to
drive a Cavalier or Sierra. The perception of family, friends and
neighbours that they had been demoted was too much to accept.
So what is my point? It
matters what car you drive, not only
to you but also your clients and those around you. Whether you are the
boss or a salesman, cars are motivating and give us perceived status.
Years later I was apparently responsible for the turnaround of a small
engineering company near Uxbridge in Middlesex. The owner needed two
cars for sales staff and asked for the cheapest Vauxhall Cavaliers.
He needed to save money as sales were down so the cheaper the
better. Whilst in the company I met the two sales people, a girl and
lad both in their early 20's. I told them what cars they
would be
getting to a joint sigh, they are old people's cars the lad whinged, so
I asked what cars they would like to drive. Without blinking
they both said VW Golfs. Thinking back to my Industry days I
negotiated two Golf GTi's for about the same rate as the Cavaliers. The
owner of the business was reluctant because it meant the insurance
would increase by about 20% but he could see the two salespeople were
excited about the cars and told the staff that they would need to work
extra hard for him to be able to afford the GTi's (the little liar).
The results, as with Sound Diffusion, were staggering. The
salespeople were never in the office, busy on the road selling
with amazing results. As a result I supplied all their
vehicles as
well as a lot of capital equipment. Everyone was happy.
You see, it's all down
to perception. The way you perceive
yourself and your own success, the way others perceive you and the way
your staff perceive you and themselves. We may not like it
and you
may not subscribe to my analysis but these are facts. When one
of
my customers turned up for a meeting to discuss a maintenance contract
with a large property rental company driving a new, nicely signwritten,
Ford Transit and parked alongside his only competitor driving
a 10
year old battered and bruised Nissan van he won the contract.
Not
because he was any better and in fact, as he later found out, he wasn't
the cheapest. It was down to the image he created and the perception of
being better.
We all have to look for
cost savings but as I have shown
already, in many cases, for the same cost you could be driving a used 3
year old car or a brand new, latest model of the same car. As anyone
who has driven a new car will tell you, there is something special
about being the first driver of a brand new car as opposed to
the
driver of someone else's used car!
Oh and if I haven't won
you over with this particular
argument because we shouldn't be judged by the car we drive just think
of yourself as providing those less well off with more
affordable
motoring! It's true. You see if you are responsible, along with others
like you, for registering more new cars it reduces the demand
for
used cars which in turn forces down the cost to those who can only buy
used cars. The knock on effect pushes down prices all the way down the
line to the little runabouts that are synonymous with young drivers,
first time drivers, single parent drivers etc. So by driving a new car
you are being a philanthropist!
Part 6 This part is a very simple video that gives a better idea as to what leasing is all about, click below to watch this simple video: Part 7 I am now coming towards
the end of this series of articles
and videos comparing the many advantages and
few disadvantages of leasing a new car compared
to hire
purchasing a used car. As promised a couple of weeks ago I said I would
address a few areas of misunderstanding and talk about the flexibility
of leasing including, initial rentals, part exchanges, miles per annum,
maintenance and other interesting stuff. This week I'm going to start
with initial rental and the confusion that surrounds this strange
phenomenon.
Initial Rentals: Let me
first explain a simple truth. A
leasing company will look to recover a fixed amount of money over a set
period in order to make the deal worthwhile. This earns them on average
£600 profit per vehicle so there isn't a great margin for
error.
Now, from the leasing company's point of view it doesn't matter whether
the customer pays 3 rentals up front, 6 rentals up front, 9
rentals up front or a fixed sum of say £2,000.00 as long as
they
recover the full amount. So let's say the leasing company wants to
recover £10,000 over 3 years )depreciation, admin, interest
etc.). If you were to pay on a profile of 3+35 this equals 38 rentals
with the first rental representing 3 months. So if we divide
£10,000 by 38 we end up with £263.16. So
in this case
you would pay 3 x £263.16 = £789.48 up front
followed by 35
monthly rentals of £263.16.
Does that make sense?
Now if you opt to pay 6
rentals up front followed by 35
monthly rentals the monthly figure changes. The total number of rentals
= 6 + 35 = 41. So in this case we divide the amount the leasing company
wants over 3 years, i.e. £10,000 and divide it
by 41. We end
up with £243.90. In this case you would pay 6 x
£243.90 =
£1,463.40 up front followed by 35 monthly rentals of
£243.90. So whilst you pay more upfront you pay £20
less
per month.
Finally on this subject
let's say you want to pay an initial
rental of £2,000, this would leave a balance of
£8,000 to
recover over the next 35 payments = £8,000 divided by 35 =
£228.57 per month.
OK I have ignored VAT
in the above as it is applied to all
the figures. As you pay more up front the monthly repayments
will
be a little less than those shown as there is a
little less
interest applied over the 3 years (as you are borrowing
less) but
you understand the principle behind the up front payments and the fact
that it isn't a con! I would also add that the higher the initial
rental the softer the underwrite. We all know that a car heavily
depreciates the moment the tyres touch the road. So let's say that in
the above example the car we are leasing depreciates from the retail
price to its trade value by £4,000 the moment you drive it
off
the forecourt. The manufacturer & dealer have given
the
leasing company a discount of £2,000, so the leasing
company
is exposed to the tune of £2,000. Now if you paid 3 rentals
in
advance the leasing company would receive £790 up front from
you
as your initial rental. This mans that he is exposed to a loss of
£1,210 if he has to repossess the car as you paid nothing
further. So he needs to be fairly certain that you will make your
monthly payments or face a relatively substantial loss. If you paid 6
rentals in advance his exposure drops to just £536 so not
such a
risk and if you paid £2,000 the exposure on day 1 is zilch!
So he
can be a little more relaxed. So if you feel you may be on slightly
dodgy ground, credit wise, offer to pay more upfront. it may just tip
the balance in your favour.
Part 8 This week I'm going to
explain things you may not
know about maintenance agreements. It wasn't long ago when
most lease agreements had a maintenance pack attached to them
as
they helped to spread the relatively high cost of having your
new
car serviced at a main dealer. Then the EU changed the law regarding
warranties, known as the Block Exemption rules. This enabled drivers of
new cars to have their vehicles serviced and maintained by non
franchised dealers/garages or even quick fit centres such as Kwik Fit
and Halfords and still retain full warranty cover. Provided they
performed all service and maintenance work in line with the
manufacturers' handbooks the dealer could not reject a legitimate
warranty claim. This increased demand for leases to be provided without
maintenance allowing the driver to have the car serviced more cheaply
through a quick fit centre and buy replacement tyres from the new
cheaper on line sellers.
Seeing that they were
losing huge amounts of business the
manufacturers devised their own 'service packs' which could be taken
out when buying the car by paying cash for a period and mileage
constrained service pack. To begin with, as many manufacturers are a
bit dopey, they provided just labour costs within the packs,
you
had to pay for brake pads, oil and replacement tyres
etc. compared
to a full maintenance agreement, with a leasing company, which would
include all service and maintenance costs including replacement tyres,
exhaust, batteries and parts. As a result the manufacturers had to
revise their packages to include everything but you still need to be
careful as not all manufacturer based service packs include everything,
they may not include tyres or other wear and tear items so know what
you are buying. A service pack may be just that, only a standard
service, so if changing wiper blades was not part of the standard
service requirements from the manufacturer and they needed changing you
may find yourself having to pay. Just be very careful you read the
small print.
Service intervals can
be anything up to two yearly or 20,000
miles whichever comes first so taking out a maintenance package on a
car covering just 10,000 miles per annum may not be worth it so always
check the service intervals. Please note that within all maintenance
agreements is an admin element. This can range from £5 -
£30 per month but this is offset by the discounted cost of
parts
and labour negotiated by the leasing companies so may still be cost
effective. My general rule of thumb is not to take a maintenance
package unless the car is covering over 20,000 miles per annum but that
isn't true of all companies. And here is a bit of inside information,
some leasing companies have found that statistically if a maintenance
package has been included in the agreement the cars are serviced at a
main dealer and on time. Whilst those that don't have maintenance
included often have cars serviced late, because they can't afford it
when it's due, and maybe at a quick fit centre in order to save money.
This may affect the resale value of the car so the leasing company
plays with the figures, increasing the expected resale figures if
maintenance is included which therefore subsidises the maintenance
charge. So this can mean that the additional cost of the maintenance
package on a car covering just 10,000 miles per annum can be as low as
£7 or £8 per month. So it is often worth obtaining
a with
maintenance quote. If you took a service pack from a main dealer it
would simply be an additional cost as it is with some leasing
companies. So worth checking out or taking advice from the
broker
(if he knows in the first place).
Another piece of useful
information that you may not be
aware of is that standard manufacturers' warranties start dropping
cover after a year. Your standard warranty may last for 3
years or
60,000 miles, whichever comes first, but you may find items
drop off after 12 or 24 months that would not be replaced
under
the warranty. An obvious example would be say bulbs, windscreen wipers
or brake discs. They may be covered by the 1st year warranty
but
you may have to pay after 12 months. Other less obvious items are shock
absorbers, clutches etc. Whilst these may not be covered by
the warranty they will be replaced as part of the full
maintenance
package so it takes off some of the financial pressure. It also means
that any warranty claims are dealt with by the leasing company. They
also normally include a relief vehicle whilst your car is having repair
work carried out but check the maintenance agreement.
If you are a VAT
registered business you can only claim 50%
of the VAT on the finance portion of a lease agreement but
it's 100% of the maintenance portion. Not a lot but every
little
helps. So watch out for service packs, check to see what is
included. The same applies to full maintenance agreements.
Also be
aware that some of the cheap lease rates including
maintenance are
achieved by specifying where the car is to be serviced and who
is
to supply the replacement tyres as well as dictating the brand
of
tyre. So tread carefully (get it!).
Part 9 This week I'm going to
talk about annual mileage which can
be a little confusing to those taking out a lease for the
first
time. You need to be very careful when selecting your annual mileage
because I have seen excess mileage charges of more than
£4,000,
charged at the end of the lease. So to ensure that you don't
end
up with a massive end of lease charge you need to follow my advice and
be aware of the ways that the excess mileage charges can
be manipulated in order to make more money out of you.
First of
all you may ask why leasing companies
need to make an excess mileage charge at all? Well, when the
leasing companies set their rates they set a resale value as
part
of the monthly rental calculation. This end of lease resale calculation
is based on the total mileage that is expected to be on the
clock
when the car is returned at the end of the agreement. Over 3
years
a car that has only covered 30,000 miles is worth substantially more
than the same car that has covered 60,000 miles (the difference between
10,000 miles per annum and 20,000 miles per annum). So if you enter
into an agreement with a monthly rental based on 10,000 miles
per
annum but you actually cover 20,000 miles per annum you need to make
good the difference in value at the end of the agreement as the car is
now worth less than expected. The simplest way to do this is
with
an excess mileage charge. But this is where the leasing company can
make money out of you. If you take the above example applied
to an
average car, say a Ford Focus or Vauxhall Astra, the difference in
value in auction between a car with 30,000 miles on the clock and
60,000 would be between £1,500 and £2,000
which
suggests an excess mileage charge of around 5 pence per mile to 7 pence
per mile. But if the leasing company applied an excess mileage charge
of say 10 pence per mile you would end up with a bill of
£3,000.
And it can be worse as I'll explain in a moment. The frightening fact
is that this charge can range from as little as just over 1 pence per
mile to as much as 45 pence per mile on some prestige cars
reflecting the excessive depreciation on expensive
cars with
high mileage on the clock.
So my first rule is to
avoid the excess mileage charge
altogether because of the dangers I've explained above and I'm
about to explain below. In order to avoid the charge you could
over estimate the annual mileage, something often done by clients when
they have never leased a car before. The problem with this is that you
could end up paying more for the lease over the lease period
than
you need to, handing over a nice profit to the leasing
company
when the car is returned well under the contracted mileage. The fact is
that most leasing companies will allow at least one change of mileage
throughout the lease term, however they are far happier if you need to
increase your mileage and your monthly payment than if you want to
decrease your monthly payment because you over estimated the mileage.
So let's say you have worked out your annual mileage and you believe
that you cover around 13,000 - 15,000 miles per annum. You could set
your annual mileage at say 12,000 miles per annum and test over the
first 6 months of the agreement. You then find that you are covering
around 15,000 miles per annum (1,250 per month) so you speak
to
the leasing company who re-work the monthly cost over the remainder of
the lease to reflect an end of contract mileage based on 15,000 miles
per annum. You will normally find that the increased rental means you
pay substantially less than if you simply left the rentals as they
were and paid the excess at the end of the agreement.
On the
other hand if you agreed an annual mileage of 15,000 but found you were
only covering 12,000 miles per annum the leasing company would be less
happy about reducing your rentals although most that I use will do it
but your savings may not be so great. But don't
keep changing
your mind as they may simply tell you they won't change the annual
mileage any more so if the annual mileage is wrong -
tough! Most leasing companies will allow you to adjust
mileages
and payments up to six months before the end of the contract.
End of contract excess
mileage charges are still often seen
as a way for the more dubious leasing companies to make money
out
of you having sold you their lease based on a cheap as chips headline
rate. As I've shown time and again not every car you buy is
the
same and every contract hire (lease) agreement is different. A cheap
headline rate could hide all sorts of frightening terms and
conditions within the small print of the contract. Another
anomaly that you need to check out is the 'stepped excess
mileage
charge'. Some leasing companies increase the pence per mile as the
excess mileage gets larger. For example they may say that the
excess for the first 10% is 4 pence per mile, on 10,000 miles per annum
over 3 years (30,000 miles) this would obviously be the
first 3,000 miles. But beyond that the excess increases to say
10
pence per mile, a huge jump and potentially a very expensive one. There
can be several break points so check your contract carefully.
So in summary most
quality leasing companies will allow you
to change your contract at least once through the contract term so
there is no excuse for being stuffed with end of lease excess mileage
charges. This makes sense as people's circumstances change
over 3
years, you may move house, extend or decrease a sales area or open a
new office, these can all substantially alter your annual
mileage. But beware of the 'bucket shop lenders' who
see the
excess mileage as a cash cow and don't allow you to increase your
mileage allowance as they will screw you with the charges at the end of
the agreememnt or won't allow you to decrease your
mileage/rentals as they smell a profit in the car when it is returned.
Finally, as a leaving
tip if you really are unsure about
your mileage, say somewhere between 10,000 and 15,000 per annum, get a
quote on both. If you then find that you have covered close to
15,000 miles per annum but contracted 10,000 you have a stick
to
beat them with if their excess mileage charge is greater than the
difference you would have paid had you taken the higher mileage
contract in the first place (hope that makes sense).
There is a point that
has
been raised over personal contract hire and VAT. When dealing with
consumers, sellers are supposed to display prices including VAT. I have
always refused to do this even though I'm kicking around in the grey
area of consumer law. The contracts when sent out will always include
the VAT in the figures but this confuses customers. They often think
that the VAT, because it has been added to the rental on the
contract, remains fixed for the term. But it doesn't. You are
effectively invoiced monthly including VAT so if there has been a drop
in VAT rate part way through the agreement you will pay the
increased or decreased VAT on the date of your direct debit payment. We
have seen temporary drops in VAT rates in the past in order to boost
the economy, if this were to happen again your repayments would reflect
this drop throughout the period of dropped rate.
Part 10 In case you missed it I
was quoted in an article that appeared in the Daily Express on
Wednesday. In case you would like to read it I have shown the links
below, split into two parts. However, as happens with these sorts of
articles, the journalist takes views from several industry experts and
brings them together to create a feature. However, not all 'experts'
are as expert as others so you sometimes find yourself contributing to
something that isn't totally accurate. For example, this is an extract
when referring to personal contract hire (PCH) compared to
PCP by someone called Rupert Russel:
“You
don’t have the option of buying the car at what could be a
favourable price
at the end of the finance term. However, if you don’t plan to
keep the car then PCH can be notably cheaper.”
This isn't strictly
correct so I have explained it below in part 10 of the New Car Lease vs
Used Car HP series.
Here are the articles
So the question is; can
you buy the car you have leased on contract hire at the end of the
agreement in the same way as you can with a PCP?
The answer is no - in
the sense that the leasing company isn't obliged to sell the vehicle to
you as it is with a PCP but in a roundabout way most leasing
companies will sell the car to you at a very favourable figure.
With a PCP you will
have a figure provided that is based on your contract mileage, known as
a balloon payment or by some, a Guaranteed Future Value. You then have
the option to purchase the car at the figure shown on the contract or
simply hand it back. On the other hand, if you take out a contract hire
agreement the agreement will simply state that you hand the car back at
the end of the agreement and pay for any excess mileage (where you have
exceeded the contractual mileage) and any damage repairs that are
needed over and above 'fair wear and tear'. Simple so far but what if
you or a friend or say family member wanted to buy the car, you know
its condition and that it has had a very careful driver
(that's you) so it would make a good purchase if you could buy it at
the right price. Now whilst the leasing company is not legally obliged
to sell the car to you, you can make an offer or ask if they will sell
the car to you.
I won't go into great
technical detail but if you are a business and finance your car on
contract hire the car is accounted for 'off balance sheet' as
the business has no risk in the car. In other words the
leasing company stands to make any profit or losses on the sale of the
car when disposed of. This is beneficial to the company but if the
company or an employee were to buy the car at a
preferential price there is an argument that the vehicle
should be accounted for 'on balance sheet'. To get around this leasing
companies tend to sell the car to an independent company and they, in
turn, will sell the car to either the driver or the
company, thereby not selling the car to the lessee direct. As there is
no business accounting involved if the car was on a PCH you could buy
it direct from the leasing company but to make things simple the
leasing companies often use the 3rd party company to sell on their end
of lease cars to lessees, whether they be business or personal.
Why would a leasing
company want to sell the car to you at a preferential price? First of
all they avoid a lot of work arranging for inspections,
collections, preparation,
administration, auction sales etc. They simply
invoice whoever the buyer is, for the car. They also avoid the costs
which can be around £600 per vehicle helping their bottom
line. They avoid any conflict with the customer over end of contract
charges and often make more money. They will normally charge a little
over trade money to the driver but if entered into auction they often
achieve less than trade. So you, your friend or family
member get to buy the car at around trade money. and the
leasing company is quids in. You also avoid excess mileage charges and
any damage repair charges. And if you take your car to the dealer
who has been servicing the car he may well offer more than the
cost to buy the car, thereby making you a profit.
So in summary the
leasing company is not legally obliged to sell the end of lease car to
you but the chances are that he will and you will also buy it at a
bargain price.
Part 11 I have mentioned before
that the cost of servicing a new car will be less than the cost of
servicing a used car because certain components need replacing at
fairly predictable or fixed intervals. However, these
intervals are normally after the lease car has been handed
back to the leasing company. A good example is a cam belt that usually
needs replacing at 60,000 miles, which for most drivers is beyond the
end of a 3 year lease term. However, this replacement could be
determined by the way that the car was driven in the first few months
of its life, something you will never know if you buy a used
car.
Health and safety and
the demand for more gadgetry means that each year you have
more equipment in used cars that may need replacing and/or
repairing, much of which won't be covered by a standard extended
warranty once the manufacturers warranty has run out. Years ago car
brake discs would virtually last the life of the car because of the use
of asbestos in the pads that caused very little wear to the
discs themselves. However, since the banning of asbestos you need to
replace discs more frequently, often with every second set of
pads, not a cheap exercise and again the wear is often down to the way
that the car has been driven in the first few months
of its life.
Moving on to the
gadgets that are these days standard on many new cars and are therefore
becoming more frequent fitments on used cars. Items such
as keyless entry, all round electric windows, folding door
mirrors, parking sensors, heated and electrically adjustable seats,
stop/start, ESP, traction control etc. If something goes wrong on a car
that is generally less than 3 years old and under 60,000 miles, unless
there are signs of abuse or accidental damage, all of those items
mentioned would be covered by the manufacturer's warranty. Even if the
manufacturer has covered the car with a 5 year warranty you
still need to establish which items fall off cover after 3
years - because some do. And try getting a seat with electric
adjustment fixed, it costs a fortune. And I previously gave the example
of my own Mercedes. After a couple of months the bulb blew
that lit the speedo needle at night, as a result I couldn't see what
speed I was driving when it got dark. It was repaired under warranty
but to 'repair' it they had to remove the whole dashboard and ended up
fitting a new dial pod and resetting the mileage. The car was in the
garage for three days and I dread to think what the cost would
have been, all because a bulb blew.
Each new generation of
cars has more to go wrong and more to service. As I mentioned in my
last newsletter, when you buy a used car you don't know how it has been
driven. A little old lady or gentleman who has done no more than 5,000
miles per annum has probably caused damage to the particulate
filter (if fitted) and/or the
expensive battery if the car is fitted with stop/start. And
with more stringent MOT rules being applied you may find yourself with
some hefty repair bills following an MOT failure as the car grows older
than 3 years. So you see, there are lots of reasons to at
least consider a new lease car over a used car financed on HP.
Please contact me on: Telephone: 01444 235132 Do you understand all there is to know about car finance? Is a personal loan better than HP? Do you know where to find the cheapest guaranteed used cars? Why can leasing a new car be cheaper than owning a used car? Answers to these questions and many more are in my paperback or Kindle book: Click the book title to link to the Amazon sales page Thank you for your time, I look forward to hearing from you soon. Oh and feel free to 'forward to a friend'. Sincerely, Graham Hill 01444 235132
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