We’ve all heard the stories.
“Frank bought a BMW just 18 months ago and lost £8k on depreciation.”
“You lose 60% of the value of a new car in just three years.”
That second one is actually true. That’s right. 60% of the value, three years and poof! Gone. It makes you wonder why anyone in their right mind would buy a new car straight out of the showroom unless they had money to burn for fun.
Getting your hands on a new car comes with a long list of benefits. It comes newly built with near-zero miles on the clock, and you get the latest in-car technology, safety systems and alternative engines (should you opt for a hybrid or electric vehicle). You also get a full warranty, certain history, and it can be customised to your specifications.
In this article, we weigh up the pros and cons of buying a car against leasing a car as it stands in 2021.
Buying a Car Outright
Pros
You Own It
If you have a lot of cash, you can opt to pay for your vehicle in one lump sum. You own the car outright immediately, and there’s a lot less paperwork and fuss. You can get on with enjoying your car without the headache of monthly payments.
It’s Cheaper
If you’re not borrowing money to finance your new car, you will make a significant saving from not incurring interest charges. You pay one lump sum and you own the vehicle. When buying with cash, the savings can be in the thousands.
No Limits
Finance deals come with mileage limits, wear and tear policies and other finer details you need to be aware of. Exceed the annual mileage limit, and you will get charged for every mile you go over. Any damage to the car, and you’ll get charged for that too upon return. Buy your vehicle outright, and you can drive as far as you want and you needn’t worry so much about minor damage or wear and tear.
Cons
Depreciation
This is the big one, and the one worth taking into consideration the most. From the moment the car leaves the showroom or is delivered to you, the car’s value plummets. And continues to plummet. As mentioned at the start of this article, you can lose up to 60% of the vehicle’s total value within just three years. If you’re buying outright, you need to make sure it’s a car you will be sticking with for at least five to 10 years.
There Are Better Ways to Use the Cash
Having cash to spend is great, but it’s not always the best idea to spend it all at once. In fact, if you’re savvy, you can turn that cash into significantly more money by saving or investing it instead.
Let’s say you have £20,000 for a new car. You could use £5,000 of it to pay the deposit on a car leasing deal with a low monthly repayment. The remaining £15,000 could be used to buy stocks in a low-risk investment fund or a high-interest savings account. Do your research, invest wisely, and you could see significant dividends for years to come.
Goodbye Nest Egg
Are you about to spend all your savings on a new car? If so, you may want to think about your financial security first. Having a lump sum of money in the bank to fall back on is invaluable. A nest egg can protect you from unprecedented events, such as losing your job or severe damage to your home.
Leasing a Car
Pros
A Brand New Car for Less
Leasing a new car typically has lower monthly payments than other finance methods such as a personal loan from a bank. If you contribute a decent deposit at the start of the deal (£2-5k), you can have your chosen car for a more than reasonable monthly price.
No Depreciation
You don’t own the car, so you don’t have to worry about the depreciation. Once your lease deal is up, you can switch the car for a newer model. You will never own the vehicles you lease, but who would want to give the current depreciation rate discussed above?
Driving in Warranty
New cars rarely have issues in the first few years of their life on the road. As your lease deal will typically last two to five years, you will be driving under the manufacturer’s warranty. Should anything happen to the car, the leasing company can arrange the repair for you — no eye-watering repair bills!
Cons
You Don’t Get Anything at the End of the Contract
At the end of your lease deal, you return the car to the leasing company and you don’t get to keep the vehicle. Some may see that as wasted money but must consider the rate of depreciation and factor it in the cost of owning the car.
You’re Limited on Miles
When you take out your lease, you must set the number of miles you expect to drive each year. This is typically between five and 10 thousand miles. Under the terms and conditions of your contract, should you exceed the number of miles you agreed to, you will be charged a small fee for every single mile you go over. The charge can be anything from three to 30p, depending on the leasing company. Although it is typically around 3-5p.
You Have Monthly Payments That Can’t Be Missed
People’s circumstances change, and sometimes that includes losing their job or taking a pay cut. If you can’t make the monthly payments, you will face several issues. Your credit score will be affected, you will rack up monthly payments that are missed, and the leasing company will likely charge you for missed payments.
You should ensure that you’re able to make monthly payments before signing any leasing deal on a car. If your circumstances change and it’s out of your control — such as a job loss — you can speak to the leasing company and arrange an early contract termination. This may incur a fee, t it will be cheaper than paying missed payment charges and racking up your monthly payments.
