00:00if you're in the market for a car you're probably asking yourself whether buying
00:03financing or leasing is the best financial option in this video i'll cover the four main ways to
00:09purchase a car evaluate what the cheapest option is and discuss some of the other factors that
00:14you'll want to consider when making your decision if you're new to this channel i'm matt i've been
00:19a finance consultant for over 10 years i now run my own company and on this channel i talk all
00:24things personal finance so let's start with what the four main options are to buy a car first is to
00:30buy the car outright and to pay the full cost at the start with this option you don't have to make
00:35any ongoing payments to own the car the second is finance or higher purchase which is where you pay
00:41a deposit and then borrow the outstanding amount at a set interest rate which you pay back in monthly
00:46installments over an agreed period of time and at the end of the financing period you then own the car
00:52the third option is to lease the car which is like renting where you make monthly payments and then
00:57at the end of the contract you give the car back in the finance higher purchase option you're paying
01:02the full value of the car as you get to own it at the end whereas in the lease option you're only
01:07paying part of the value of the car and then giving it back the fourth option is something called pcp
01:13with this option you set a term and the time period for the agreement you pay a deposit and then the
01:18company provides the final value for the car and what it will be worth at the end of the agreement
01:23these are then subtracted from the cost of the car to work out how much the loan will be and how much
01:28you'll be paying on a monthly basis at the end of the agreement you have a few options you can decide
01:34to keep the car and pay the final value you could return the car or you can use the final value to pie
01:40exchange the car the question on which option is the best is a difficult one and you may be struggling
01:45to decide what to go for you may think that buying a car with cash up front is the best option as you
01:51get full ownership without having to pay interest on finance like in the other options but on the
01:56other side you may think that leasing or financing is a better option as you don't have to pay the
02:01total cost up front and instead you pay a monthly fee to try to help you with some of the things to
02:06consider when making your decision i've done analysis on an example which i'll go through now
02:12so to compare apples with apples i've based this on an average medium-sized family car and i've
02:17picked the bmw 120 sport which on the bmw website is priced at 31 065 pounds for each of the options to
02:26make it as light for like as possible i've based the example on having the car over a four year or 48
02:32month time period on doing the average annual mileage in the uk which is around 8 000 miles per year
02:39and putting down a 4 500 pound deposit or initial rental payment depending on which option we're
02:45looking at the deposit amount is just below 15 of the car value option one is to lease the car the
02:52upfront initial rent payment is 4 500 pounds and then this is followed by 47 monthly payments of 318
03:00pounds and 64 pence which equals just under 15 000 pounds in this option you don't have the purchase price
03:07or resale value to consider as you just give back the car at the end of the agreement so the total cost
03:13for the lease option is 4 500 pounds plus 14 976 pounds which equals a total cost of just under 19 500
03:25option two is pcp the initial rent payment is again 4 500 pounds and the monthly payments are 327 pounds and
03:3476 pence for 47 months which equals a little over 15 000 pounds to make it comparable to the lease
03:42option i've assumed that the car is given back at the end of the pcp agreement rather than purchased
03:48so that means that the total cost is 4 500 pounds plus 15 358 pounds equaling just under 20 000 pounds so
03:58higher than the lease option option option three is finance or higher purchase based on a deposit of
04:044 500 pounds the monthly payments are 609 pounds for 48 months meaning total payments of just over 29 000
04:13pounds and after paying this you then have full ownership of the car the monthly payments are far
04:18higher than the lease and pcp options because of the way it's calculated as these are based on the value
04:24of a portion of the car whereas the finance higher purchase option is based on paying for the full
04:29car the total cost for the finance higher purchase option is 33 746 pounds with the extra money over
04:37the car value of 31 065 pounds due to the interest paid on financing for this option to make the total
04:45cost comparable to the lease and pcp options let's say we then decide to sell the car at the end of the
04:51agreement the resale value based on the average depreciation curve for a car means that after four
04:57years the car will be valued at 15 243 pounds so if i were able to sell the car for that much the total
05:05cost of having the car for four years would be 4 500 pounds plus 29 246 pounds minus 15 243 pounds which
05:16equals just over 18 and a half thousand pounds so based on this example calculation it comes out as
05:23the lowest cost option of the three financing options but it is dependent on the resale value
05:28achieved the final option we're looking at is option four and that is to purchase the car outright at the
05:34start to calculate a comparable cost over a four-year period it will be to take the purchase price minus the
05:41resale value which equals a total cost of 15 822 pounds buying the car outright comes out as the
05:49lowest total cost option however an important thing to consider is the opportunity cost if you put down
05:5531 000 pounds from the start it's locked up in the car the alternative is paying 4 500 pounds in the
06:02financing options and using the leftover money from the 31 000 pounds to invest in the stock market or
06:08another wealth generating asset the question is whether you can make better returns from investing
06:13versus the additional cost in the financing options pcp comes out as the most expensive option and is
06:19often the one the car dealerships will try to push as they make the most money from it and it also
06:24typically ties you in for longer as at the end of the contract you may upgrade your car or do a power
06:29exchange and enter into a new agreement there are a few different factors which influence what the lowest
06:35cost option is for example how much money you're willing to put down as a deposit what the current
06:40interest rates on financing and the length of time that you plan to have the car and the future resale
06:45value let's go through some of these variables to show how changing them can impact the financial
06:50outcome if the resale value is higher then it's better to own the car ie to purchase outright or the
06:56higher purchase option but if the resale value is lower then leasing becomes more financially attractive
07:02another variable is interest rates if these are lower then one of the finance options could be
07:07better to do rather than buying the car outright as the cost of loaning money for the car is less
07:13and the opportunity cost is higher from not having the money to invest whereas if the interest rate is
07:18high on the finance options then putting down a larger deposit or buying the car outright will mean
07:23larger savings over the lifetime of the agreement it's a good idea to model the cost for the different
07:29options based on your own personal circumstances so when making your decision on the best option
07:34there are a number of different financial and non-financial factors to consider with leasing or
07:39the pcp option one of the pros is that it gives you flexibility you're able to switch or upgrade your car
07:45after a few years and you don't have the hassle of having to sell your car and if you're looking to get
07:51a more expensive car which can have high depreciation values then it can make more financial sense to lease
07:57rather than buy and often maintenance issues are covered by the dealer under lease agreements but
08:02check your contract on this one of the cons of leasing is that you need to keep your car in perfect
08:07condition otherwise you get charged when you return it to the dealer and there are restrictions with these
08:12options as the car is not yours to keep for example there can be restrictions on the amount of mileage
08:17that you can do and if you exceed the threshold then you have to pay more with the finance higher purchase
08:23option some of the pros are that you can own a car with limited upfront costs once you've paid off the
08:28car you don't have the stress of the ongoing regular payments and you have full ownership so
08:33you don't have the restrictions associated with leasing however the con of financing is that interest
08:39payments can be high which can take up a large chunk of your disposable income each month making it
08:44difficult to save anything on top you also have maintenance costs associated with ownership which tend to
08:50increase as the car gets older the final option buying the car outright has the benefits of giving
08:56you peace of mind you own the car fully and you don't have the restrictions or the stress of making
09:01regular monthly payments after you've purchased it this option can work well for people who don't
09:06mind driving the same car for five eight or over ten years however as i've said before the main con of
09:13buying a car outright is needing to pay large amounts of money up front and the opportunity cost of using that
09:20money to invest as well as this cars are in general a depreciating asset unless you really know your stuff
09:26and have something like a rare vintage car one way to try to mitigate this is to buy a second hand car
09:33which is already part way down the depreciation curve at someone else's expense one thing to note is that
09:39this video focuses on the comparison of the cost of purchasing a car when budgeting for a car you'll also
09:45need to factor in other costs such as car insurance fuel costs routine maintenance road tax mot and parking
09:52costs so hopefully the analysis and summary in this video has been helpful in providing some of the key
09:58things to consider when buying a car feel free to leave any comments give the video a like and subscribe to
10:04my channel i'll see you on the next video
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