Has the soaring prices of cars (used and new) changed the equation on financing?

[MrOnyx]

I know the conventional wisdom insists that financing a car is a no-no, and I have a natural inclination to never go into any kind of debt whether it’s credit, loans, or deferred payment/ownership of an item. Obviously not including mortgages.

But I have to wonder, with the costs of buying even a 3-year-old car being several times higher than it was before the pandemic, has the age-old rationale changed at all?

Again, I’d always look to just save up for something and buy it outright if I can. Beforehand this was doable even for cars. Just knuckle down for a few months and you’d have a reasonable budget. But unless you’re looking to buy a car that’s the better part of a decade old at this point, it’s just not viable anymore. Personally I’d probably be having to save for over a year (even if I pause my normal FIRE savings, probably, which is ill-advised I’m sure) to buy a decent nearly-new car.

I’m looking for advice. For some background info, I’m currently driving a 3dr Skoda Citigo that I’ve had since 2017. Bought it for around £4000, and it was around 3 years old at the time. It has about 74k miles on the clock so it has plenty of life in it, but I think it’s time I moved onto something that had, at the very least, a couple more doors. This weekend, I was looking at a couple of Skoda Octavias (the sedan/saloon shape). Ranging from 1-4 years old again. I mean one of these was £17k. I don’t actually know what the end cost would be if I had it financed etc., and how much I’d save (this particular dealership offers services and MOTs as part of their finance package), but I’m looking to hear some opinions from like-minded individuals because saving up £17k is not really an option.

To be brutally honest I’m lucky enough to not NEED a new car, but once in a while it would really help to have a little more room and for passengers in the back (who are sometimes elderly) to have a little more comfort.

What do we think? Am I going soft? Caving to the lure of luxury?

TIA.

[RWD]

Whether or not to finance should always be a separate question to how much car to buy. If you can't afford a car without financing you probably can't afford that car.

I also disagree that paying cash is the conventional wisdom. If interest rates are favorable then it makes a lot of sense to finance while keeping your capital invested.

[Freedomin5]

Would it be more economical to just rent a car for those times when you would like a little more room in the back? I mean, unless you’re chauffeuring elderly passengers daily, buying a bigger car for those few times when you have passengers is like buying more house than necessary for those rare times when you have more than one guest staying with you.

[MrOnyx]

Thanks both of you for saying a lot with few words. Some great points made.

Whether or not to finance should always be a separate question to how much car to buy. If you can't afford a car without financing you probably can't afford that car.

I think I'd reached a point of despair to be honest. I hadn't looked too seriously, but my cursory looks at nearby used dealerships seemed to reveal that the only cars that were reasonably priced were ones that were around the same age and grade as my car. I see little point in replacing my car for one with the same problems.

However you've made me take a more serious look and it turns out there are more reasonably priced cars out there. I don't have to break the bank, I just have to not get tunnel vision.

I also disagree that paying cash is the conventional wisdom. If interest rates are favorable then it makes a lot of sense to finance while keeping your capital invested.

I guess I've always been sceptical that finance interest rates are ever reasonable, which fed a feedback loop between that and me having never looked at them seriously to see what I can get.

Thanks for making me challenge my beliefs - which were generated from a reluctance to accept debt. I wasn't looking to sell my investments to fund a car purchase. As far as I'm concerned, my investments are locked up with the key thrown away until I either desperately need it or to buy my retirement.

Also just a quick appreciation note for the links in your signature - a lot more wisdom and rules in those!

Would it be more economical to just rent a car for those times when you would like a little more room in the back? I mean, unless you’re chauffeuring elderly passengers daily, buying a bigger car for those few times when you have passengers is like buying more house than necessary for those rare times when you have more than one guest staying with you.

Possibly, yes. We rented a car for a work trip a few months ago and I think it only cost around £2-300 to rent a small SUV for a day or two? I just looked and actually, a 4-door car - even a compact SUV - can be rented for less than £200 for the weekend.

I try to bike to work rather than commute by car but it does happen - especially lately as I've had a good spate of illnesses. So the majority of my car usage is the weekly shop and the occasional leisure trip, with holidays and travel related to our martial arts being very rare (3-4 times a year for the bigger, luggage-heavy trips).

There's only going to be a handful of times per year I would say where we really feel the limitations of my Citigo. It CAN manage the trips we throw at it, but at less comfort for some of us.

If we assume even at the more excessive end that I rent a car 7 times per year at around £180 per go, £1260 is a lot more affordable than buying and owning a car that goes beyond 90% of my needs.

Thanks again! I'm taken aback by how much my eyes have been opened by two short comments. Anyone would think I've forgotten all the advice in the, what, 400+ MMM blog posts I'd read back in the day?

Cheers.

[Affable Bear]

This sounds like me about 4-5 months ago!

Although different budgets... Long story short in my previous job (5 years ago) had company car and my wife just bought a new Focus on finance, when I found my current role. It was perfect commute going from 1-2 hours down to 30 mins on the bus (or so I thought!), at the time justified the focus purchase as wife got a work discount and 0%, plus we were going down to 1 car (plus tax savings from no longer having company car).

A lot happened since then, however buses have just been getting worse and worse, driving past me fully loaded with people, turning a should be 30 min commute to nearly 2 hours. So January 2024 I started hunting for a small cheap run around (£4500 or less), funnily enough something very similar to your car!  And was shocked, the last time I seriously looked at used cars (2018ish) you could get a nice little motor (citigo or the like) 3-4 years old low mileage for around that price, shocked to find out that those same cars were the same price or more with 80k+ miles and 6 years older..

It was a tough pill to swallow to be honest, just poor value in the lower end of the market, I think you can get 70 plate super minis with 20-30k miles on for 7-8k but people want 5500 for a 63 plate with 80k+ miles, just madness!!!

I looked into cycling too but there’s a fast B road in which I don’t trust drivers enough to not kill me (I am also chicken).

We paid the focus off recently so I bit the bullet and got a small personal loan to buy a newer one, I spent more than I wanted or expected but I am just going to keep it as long as its economical to fix. I am not a fan of debt or monthly payments so will clear it off quickly, but that’s me, I like having low monthly bills.

A prime example of how poor the UK infrastructure has become, £7k outlay, Maintenance, servicing, tax, insurance and the damage to environment because I cant get a bus reliably to travel a couple miles into work and back.. The hilarity of it all was the fact our regional mayor ran on the basis he had 'improved' public transport, depressing.

(Also sorry, ranting a bit here!!!)

[GilesMM]

It's basically never a good financial move to buy new.  I understand used cars are quite affordable in the UK (e.g. depreciate quickly).  I would just look for what I could afford in a reliable 5 year old model in decent condition.

[MrOnyx]

Thanks for your comments @Affable Bear, crazy isn't it! hopefully things will improve sooner or later because this is not really feasible. And make no mistake - £17k is not my 'budget'! I don't have one as such because I haven't got as far as earmarking an amount to buy a car with. Much like yourself, I was hoping that perhaps a few thousand plus what I'd get for my car will land me something a similar age and grade to what mine was when I first bought it... nope! I'd be buying something that has the same or more miles on the clock.

It's basically never a good financial move to buy new.

Hear, hear. Lest there was any confusion - I was not looking for new cars :)

I understand used cars are quite affordable in the UK (e.g. depreciate quickly).  I would just look for what I could afford in a reliable 5 year old model in decent condition.

That's kinda the problem... I am. I guess there's a difference between 5 and 3 years old, but the Octavia I mentioned in my original post was a '21 plate (early 2021). Had around 25k miles on the clock. Don't get me wrong, it looked lovely - perhaps too lovely, perhaps that's the problem.

Brand new cars USED to depreciate very quickly, yes. Practically halving (or worse) in price as soon as you drove off the forecourt, but uh... not so much anymore by the looks. I have no idea what's going on in other countries (honestly I assumed this was a worldwide thing) but that's certainly the story here.


Having looked properly, I certainly CAN get a slightly more practical car, but I'll still be paying the better part of £10k for the liberty, and it won't be as new as I would want a car of that price to be.

I'm sold on the advice in this post though - which is to rent short term when my needs exceed the levels that my Citigo can reasonable achieve. Which will not be very often at all, really. I'll at least give it a go next time a need arises.

[RWD]

I also disagree that paying cash is the conventional wisdom. If interest rates are favorable then it makes a lot of sense to finance while keeping your capital invested.

I guess I've always been sceptical that finance interest rates are ever reasonable, which fed a feedback loop between that and me having never looked at them seriously to see what I can get.

Thanks for making me challenge my beliefs - which were generated from a reluctance to accept debt. I wasn't looking to sell my investments to fund a car purchase. As far as I'm concerned, my investments are locked up with the key thrown away until I either desperately need it or to buy my retirement.

I don't know what rates are like in the UK but the last four cars I've owned I financed at 2.9% (new), 1.69% (used refinance), 1.49% (used), and 0% (new promotional deal). This was from the years 2013 to 2021 so current rates are certainly higher. At times even my savings account was paying me higher interest rates than the car loan. If you can find a loan under 4% I think it's a no-brainer to finance instead of paying cash. Under 5% is worth considering. At 6% I feel it's a bit of a wash and probably not worth the hassle. 7% and above starts getting quite expensive to finance.

A car loan doesn't have to be a long-term thing. My last used car purchase was only a 2-year loan (on $11k or ~£8.6k). You often get the best rates on these short loans too.

Also just a quick appreciation note for the links in your signature - a lot more wisdom and rules in those!

I'm happy to hear those are useful. Unfortunately I'm not familiar with the best UK resources for car shopping, but I'm sure there are equivalents.

[reeshau]

I don't know what rates are like in the UK but the last four cars I've owned I financed at 2.9% (new), 1.69% (used refinance), 1.49% (used), and 0% (new promotional deal). This was from the years 2013 to 2021 so current rates are certainly higher. At times even my savings account was paying me higher interest rates than the car loan. If you can find a loan under 4% I think it's a no-brainer to finance instead of paying cash. Under 5% is worth considering. At 6% I feel it's a bit of a wash and probably not worth the hassle. 7% and above starts getting quite expensive to finance.

A car loan doesn't have to be a long-term thing. My last used car purchase was only a 2-year loan (on $11k or ~£8.6k). You often get the best rates on these short loans too.

Just to say, particularly on promotional rates: these are often paired against cash rebates, if you are paying cash.  They can be quite good, as there are industry incentives for the dealer to get you to finance, even at 0%.  But, for example, I took $6,500 off my car paying cash. (In 2021)

The numbers are there for you; you just have to crunch them.

[RWD]

I don't know what rates are like in the UK but the last four cars I've owned I financed at 2.9% (new), 1.69% (used refinance), 1.49% (used), and 0% (new promotional deal). This was from the years 2013 to 2021 so current rates are certainly higher. At times even my savings account was paying me higher interest rates than the car loan. If you can find a loan under 4% I think it's a no-brainer to finance instead of paying cash. Under 5% is worth considering. At 6% I feel it's a bit of a wash and probably not worth the hassle. 7% and above starts getting quite expensive to finance.

A car loan doesn't have to be a long-term thing. My last used car purchase was only a 2-year loan (on $11k or ~£8.6k). You often get the best rates on these short loans too.

Just to say, particularly on promotional rates: these are often paired against cash rebates, if you are paying cash.  They can be quite good, as there are industry incentives for the dealer to get you to finance, even at 0%.  But, for example, I took $6,500 off my car paying cash. (In 2021)

The numbers are there for you; you just have to crunch them.

I did not have the option for taking a cash rebate instead. But that is definitely something to be aware of.

Not that buying a new car is typically a good financial decision in the first place... The new car I bought at 0% has cost me more than three times as much per year to own as the used car I financed at 1.69%, despite relatively similar initial purchase price. New car depreciation is brutal.

[MrOnyx]

Well folks, having looked at a couple of finance providers and the like here in the UK... those interest rates are simply fairy tales to me!

The best I could do was about 9%... on a long term deal with this you end up paying about 150% the cost of the car.

I could look for longer and see if I could find something better but... yikes.

* bear in mind I was only looking at the rates for used cars. I know some new cars are marketed at having 0% finance but this is me leaning on old memories of TV ads, no idea how prevalent this is nowadays. Also don't actually know what the score is on EVs, which I know are somewhat subsidised by our government.

[Affable Bear]

The best I could do was about 9%... on a long term deal with this you end up paying about 150% the cost of the car.

Wowza thats crazy!

I know some credit report services offer more personalised and potentially better deals if you have signed up to one of them. I have a Clearscore account and I know they have a loan/finance offers section, I havent used them before but could be worth a look?

[vand]

Cars are a moneypit even if you pay cash... don't turn them into a black hole by buying on credit.

[charis]

Cars are a moneypit even if you pay cash... don't turn them into a black hole by buying on credit.

Agreed.  Bought a used car last year and best loan options were around 8%. 

You may be expecting too much if you think a car shouldn't be a better part of a decade old to buy for a reasonable price.  That's typically how you get it for a reasonable price these days. 

[MrOnyx]

You may be expecting too much if you think a car shouldn't be a better part of a decade old to buy for a reasonable price.  That's typically how you get it for a reasonable price these days.

Sadly, I think you're right. Unless things change in the future, this is the new truth.

Again, I'd love it if we did have access to these low single-digit interest rates. Is this related to the Bank of England's Base Interest Rate? Because if so then perhaps once things settle we can hope for some nicer deals?

To reiterate, I've been successfully talked down from replacing my car lest there's any confusion, but I'm still interested in an academic discussion on this.

[PhilB]

You may be expecting too much if you think a car shouldn't be a better part of a decade old to buy for a reasonable price.  That's typically how you get it for a reasonable price these days.

Sadly, I think you're right. Unless things change in the future, this is the new truth.

Again, I'd love it if we did have access to these low single-digit interest rates. Is this related to the Bank of England's Base Interest Rate? Because if so then perhaps once things settle we can hope for some nicer deals?

To reiterate, I've been successfully talked down from replacing my car lest there's any confusion, but I'm still interested in an academic discussion on this.

I'd also add that used cars tend to wear a lot better now than they used to.  Corrosion protection has improved massively.