Can A New Car Be Cheaper Than Used? There’s An App For That.

Friday, 6. April 2012

Hi, Graham Hill here, thank you so much for visiting my blog, I hope you learn a lot and as a result end up driving a great car. In order to do so you can get all the information you need by buying my book, An Insider Guide To Car Finance or use me to finance your next car. Happy driving.
Car Dealer, Eastern Avenue, Gants Hill

Car Dealer, Eastern Avenue, Gants Hill (Photo credit: Wikipedia)

When trying to make up your mind between taking a new car on a lease or a used car on standard HP/PCP it becomes quite a complex calculation because in many ways you are dealing with the unknown, certainly when taking a used car.Even on the most basic car if an engine management system fails you can be set back around £1,200, or if an ABS pump breaks down you can expect to pay a similar amount. These are the kinds of items normally covered by the manufacturer’s warranty but become wear and tear replacements as the car gets older.

It wasn’t long ago in my newsletter that I mentioned that the bulb went that illuminated the speedo pointer in my Mercedes making it impossible to see my speed at night.

Under the warranty I took the car into the main dealer, used one of their loan cars for a couple of days whilst they removed the dashboard and replaced the complete instrument pod.

Obviously this was covered by the warranty but I dread to think what this would have cost had it happened after the end of the warranty period. It’s these sorts of failures that worry the life out of those buying used cars. But there are many other reasons why we would prefer a new car.

It will generally be cheaper to run than the equivalent used car as it will have the latest technology incorporated, producing better fuel consumption and CO2 output which in turn will positively affect the cost of Road Fund Licence (road tax) although that cost is generally included in the lease rate but you would have to pay for it annually if you took a used car.

New cars will be safer with more driver friendly safety gadgets. You also have a full manufacturers’ warranty as opposed to maybe part manufacturers and part secondary warranty with less cover.

Don’t forget that items fall off the warranty cover as a car gets older. Service intervals on new cars are not as frequent as they are on used cars and as you may know the law says that you no longer need to have the car serviced at a main dealer in order to maintain full warranty cover.

So servicing costs can be much less on a new car than on a used car. Whilst all of this is accepted and there are likely to be big savings in running costs, can the cost of a new car be less than a used car?

Of course if you were to walk onto a dealer’s pitch and pay cash for a car it would cost considerably more for the same new car as it would for a 12 month old car because, as we know, every car drops most in value in the first year.

On average the drop between what the car retails for to its trade value at the end of the first year is about 30%. So if you bought a new car for £10,000 and part exchanged it a year later, depending on mileage and condition, you will be offered around £7,000.

So although you would lose 1 year of the warranty it would make sense to buy the 12 month old used car, wouldn’t it? First of all if you were to buy your old car from the dealer you would expect to pay around £8,000 for it, so buying used rather than new may not be as big a saving as you might have expected, unless of course you went for a 3 year old car.

But what if the manufacturer and dealer were giving away £2,000 to the leasing company as discount and bonus that he was happy to pass on to you. Suddenly the rate that the leasing company charges looks very cheap.

In fact it isn’t unknown for leasing companies to receive up to 45% discount on a car taking it way beyond the first year’s depreciation, received in bonus.

But it’s still difficult to compare new to used, even if you strip away all the other items discussed above, how can you make a financial comparison between the two that would help you to make a decision?

Well, as always I have an answer. It isn’t perfect but it will help to put the decision into perspective. I won’t take you through the calculation as I intend turning it into an app. But if we take, as an example, the last E Class deal at £309 + VAT per month over 3 years.

For that outlay, including the VAT, you could afford to spend around £17,500 on a 12 month old used car of around a year old from a main dealer. I have calculated this on a breakeven position after 3 years, having taken out a 5 year HP or 3 year PCP.

Don’t worry about the mechanics, it isn’t perfect, but you could either spend exactly the same on a lease car over the next 3 years and be driving a brand new Mercedes costing £34,000 or a used £17,500 car for the same outlay. Let’s look at another car, a Hyundai iX35 1.7CRDi 2WD Premium at a rental of £249 + VAT.

For around the same cost you could spend £14,200 on a used car or you could be driving this brand new £21,000 Hyundai for the same cost. Or the ultimate deal was the BMW 640 Coupe over 2 years at a monthly cost of £444 + VAT.

If you took a forecourt used car and kept it for two years and sold the car for the settlement cost to the finance company, 2 years into a 4 year agreement, you could be driving a £22,000 used car for about the same cost of driving the £62,000 BMW.

Staggering or what? And let’s be clear, I have allowed for no equity in the car when you sell it part way through your agreement, you will simply sell the car for what you owe the leasing company and I have allowed for standard dealer HP interest rates to be factored in.

When I have completed the app I’ll let you know, in the meantime doesn’t it make sense to lease? By Graham Hill

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One Response to “Can A New Car Be Cheaper Than Used? There’s An App For That.”

  1. Gala Try Says:

    There are people in every industry that don’t do the right thing. Public Adjusters EXIST to balance the scales against a history of insurer/adjuster related action or inaction. They would not exist if there wasn’t a need.

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