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Covid Car Finance: The old ways don’t work anymore! But what does?

Covid Car Finance: The old ways don’t work anymore! But what does?

8 March 2022 Concept Car

Wouldn’t you like a magic solution to the Covid car finance crisis?

A recent article in newspaper The Guardian seemed to promise just that. Titled “Car finance: how to get a deal on a new or secondhand vehicle,” it offered a handful of tips on how to make the best of a bad situation.

The article starts off well enough, outlining the key problem of today’s market:

“The price of secondhand cars has rocketed, rising at “unprecedented rates”, according to the AA – amid a shortage of new vehicles rolling off the production lines.”

The thing is: What follows is essentially a list of the typical run-of-the-mill solutions to car finance. And these simply don’t work anymore!

In this article, we want to show you how and why car finance is no longer the same – and what to do about it.

Haggling: What the Guardian recommends - Concept Car CreditHaggling: What the Guardian recommends

“Don’t pay the list price,” the article suggests, “Dealers will often be looking to hit targets and may be able to juggle figures to increase their chances of closing a deal.”

Instead, they suggest, you should negotiate with the salesperson.

This is what this look like in practise:

  • Don’t even think about the sticker price. Instead, look for the cheapest online prices you can find and take them as your point of departure.
  • Alternatively, something like What Car?’s target price can make for a decent enough indication.
  • Focus on any issues/defects you can find. Next to mileage, condition is probably the most important aspect determining the value of a used vehicle.
  • If the dealer is unwilling to budge on the price, try to get a few nice add-ons instead.

Sounds sensible? Unfortunately it isn’t!

Why haggling no longer works

All of this is wishful thinking. The article openly admits that car prices across the board have skyrocketed. In other words: It’s a seller’s market. Or, to put it even more bluntly:

Dealers can ask pretty much any price for a car.

Haggling assumes the that dealers face one of two choices:

  1. Sell the car to you now at a reduced price, or
  2. Risk not selling the car at all.

But currently, cars are flying off the lot. Some dealers no longer even advertise them on the web because by the time the ad is online, the car has already been sold.

We hate to say it … But in 2022, haggling is something you should not waste your time thinking about.

Pay by credit card: What the Guardian recommends - Concept Car CreditPay by credit card: What the Guardian recommends

Paying by credit card, the article suggests, is great for three reasons:

  1. It gives you the highest level of consumer protection of any payment method.
  2. It is an underappreciated alternative to a traditional bank loan.
  3. Some credit cards offer an interest-free period. Which means that if you pay off the loan within this time frame, you won’t have to pay any interest on your loan.

We’ve written about credit cards a lot on this blog, and we’re highly critical of considering them a serious alternative to traditional loans. This is even more so during the current pandemic.

Why credit card payments are not really an option right now

For one, the 0% deals mentioned by the Guardian are rarely an actual option. They are only available for very attractive customers and they typically come with a lot of fine print attached.

In finance, if something looks to good to be true, it almost always is.

Secondly, many people with bad credit – precisely those who are currently facing the biggest issues – will often not be able to get a credit card at all. The reason is simply that many card issuing institutions consider them too risky.

Thirdly, for most customers, credit cards are probably the most expensive payment option when it comes to car finance. This is because every payment you make is essentially a micro loan. And it obviously becomes worse the higher the price.

Many, if not most, dealers don’t even accept credit cards.

This is not just because of the aforementioned buyer protection, which often extends well beyond the already quite excellent government protection.

But also because dealers will usually have to share in the credit card fees. This reduces their profit – especially if compared to a situation where they are the ones actually extending the loan.

Credit card payments during Covid? For most of us, it’s not going to happen.

PCP & HP: What the Guardian recommends

PCP is by far the most popular car finance method in the UK. These payments plans are not usually directed towards ownership. Instead, you pay for the depreciation of the vehicle over the time of use.

For the majority of users, it’s simply a variation of leasing a car.

So, if you buy a £20,000 car and drive it for four years, you pay for the loss in value it experiences. Usually, this amounts to roughly half of its initial value (it obviously depends on the make and model). So, in our example, you would pay off around £10,000. Then, you’d be left with a balloon payment of another £10,000 at the end of your lease.

The Guardian recommends against using PCPs.

They quote a car finance expert as saying: “HP is the best option, as payments are spread evenly across the term – with PCP, you face paying the lump sum balloon payment.”

In other words, with a Hire Purchase plan, you actually become the owner of the car at the end of the contract – and you don’t face a nasty large repayment which you need to cough up at once.

This is all true in theory. We agree that PCPs are usually not a good idea.

However, ask yourself an important question:

Why consider PCPs or HP at all?

What is so weird about the recommendation of HPs is that neither HP nor PCP are, on paper, particularly cheap options. In fact, they are among the most expensive financing options available to you.

The reason especially PCP has taken over from personal loans as the dominant car finance plan is that monthly payments are so low that almost anyone can afford them – and drive a fantastic new car to boot.

PCPs do tend to lock you into a cycle of new contracts every few years. But for many UK households, they are the only way to afford a new car.

HPs, in comparison, have the benefit of ownership. But monthly payments are higher. Plus, if you can no longer afford the loan payments, you will loose not just the car but also all the money you already invested in it.

This is also why we keep insisting that used cars are always the best options for those with bad finances.

What about the exploding second hand car prices? - Concept Car Credit

What about the exploding second hand car prices?

In the opening paragraph, the Guardian article makes an important claim:

“Incredibly, some models now cost more used than they would new.”

This is not wrong entirely. But in no way does it reflect the usual price level of the UK car market.

On average, used car prices are still well below those for factory new counterparts.

And don’t forget that these truly outrageous prices only apply to the most popular models. There are plenty of fish in the water and by going for something older and less trendy, you can always still get a decent deal.

To even pretend that HP could ever be a more sensible option than simply being patient and waiting for the right second hand model to come around, is surprising to say the least.

We certainly wouldn’t advise it.

Leasing a car: What the Guardian recommends

Towards the end of the piece, the Guardian puts forward leasing as viable alternatives to buying a car.

These deals, it says, are often “cheap and flexible”, allowing you to “sign up for shorter terms of only a few months to trial a car.”

Leasing, according to this logic, is a viable alternative, if you do not actually want to own a car. Although the feature doesn’t talk about possible reasons why this would be the case, the typical arguments are as follows:

  • Leasing offers you the possibility of getting a different car every so many years.
  • You always get to drive a new car, not a used one.
  • Monthly rates are not as high as loan payments for the same car.
  • You get additional support and service.

Why leasing is not really an attractive option

Leasing does sound good. And it is, in many respects. But what it certainly isn’t is one thing: Cheap.

In fact, leasing is pretty much the most expensive option at your disposal, if we forget about renting for a second, which is more short term.

We are particularly surprised about suggesting leasing as a great option for the average UK driver.

Here are our reasons:

  • As we indicated before, PCPs are a form of leasing as well. For most drivers, they will be cheaper and better than leasing. Yet, the Guardian recommends against them.
  • Leasing requires a deposit. So do PCPs, of course. Which of the two is better depends on the deal at hand. Typical PCP deposits amount to 10%, typical lease deposits are 3 monthly payments or a fixed cash payment of up to £3,000. None of them are great for most UK households.
  • The leasing and renting industry have been hit particularly hard by the pandemic. It took a while before potential customers trusted them to be able to effectively sanetize passenger cabins and make them covid free after use by the previous driver. This has squeezed dealerships and reduced available offers.

Summing up, leasing remains a great choice for anyone with plenty of cash. For the average UK driver, it’s hardly the way to go.

Setting up a Covid car finance plan - Concept Car CreditSetting up a Covid car finance plan

So, if all of these recommendations are all problematic – how else can you get the best possible car deal under the current circumstances?

Before looking at specifics, let’s think about the bigger picture for a moment. Here are the key points:

  • Used cars and new cars alike are getting more expensive.
  • Both used and new cars will remain expensive for at least 1-2 years, until the industry catches up with demand.
  • Used cars on average are still cheaper than new ones. This is unlikely to ever change.
  • The most popular models are particularly badly affected. As are select manufacturers.
  • Although the used car market relies on new cars, it is by no means stagnant. People are still selling cars every day, so it’s not like the well will dry up any time soon.
  • Pure EVs are less affected by the supply issues – and their percentage of the UK market is growing fast.

Based on this, we can now devise a general strategy.

This is what it looks like:

  1. Buy the cheapest possible used car that meets your needs now.
  2. Then, hold on to it for as long as you can.
  3. Finally, look into getting a used EV as your next car as soon as they become affordable

Now, let’s take at the concrete steps you can take to put this plan into action.

Covid car finance step 1: Cash in your old car

This is one of the recommendations from the Guardian article that are actually really useful.

When we say that it’s currently a seller’s market, that’s obviously not just bad news. It means that dealers all around the UK are looking to buy up used cars. They are simply running out of products to sell!

If you choose your car wisely, you can make the most of the situation by buying a cheap car and selling your own car at a good price.

It pays to wait just a little. Car prices are higher in the Summer, so you may be able to ask for more in just a few months’ time.

Covid car finance step 2: Compare

It makes a lot of sense to compare finance deals and cars on offer.

At this point in time it is not very sensible to split up the process among too many vendors. Buying your car at one place with money borrowed at another and selling your old model to a third party? It may look smart and sophisticated. But it’s not ideal at the moment.

Instead, try to get a great deal from one place. At CCC, our strength is based on our ability to offer you cars at affordable prices, while also taking care of finance and giving you a great trade-in deal.

Covid car finance step 3: Make a down payment

At CCC, we don’t demand a down payment. Instead, we decide on this on a case to case basis. If we are confident you can keep up the loan payments, we don’t think it’s fair to deny you access to mobility.

Still, we do always recommend one.

Deposits have the big advantage that they reduce the cost of a loan significantly. Which means you’ll pay less interest and drive debt-free a lot sooner.

Down payments don’t need to be excessive. Most UK households can afford a 10% deposit for their PCP plan. If you can, too, then make use of this great opportunity.

Covid car finance step 4: Pick the right car

Picking the right model for you is the most trivial recommendation when it comes to buying a car. Still, so many drivers get it wrong.

They will buy a car that’s too big, or not big enough. A car with a low purchasing price but high running costs. A car that does not have enough power or which has obvious defects.

In these trying times, the following considerations are vital:

  • Go for a less popular model.
  • Look for the right model generation. Some are remarkably less expensive without any apparent reason.
  • Consider if you really need a big car all the time. It can be a great option to buy a smaller and cheaper vehicle and then rent a bigger one for those occasions when you need it.
  • Ask a knowledgeable friend or expert to accompany you on your visit to the dealer. Use a vehicle inspection checklist so as not to miss any potential defects.

Covid car finance step 5: Realism is everything

Experts tend to give you recommendations based on an ideal world. However, as we all know, the world is anything but perfect. If you want to get a decent car finance deal during the pandemic, you need to be realistic about your options.

What this means is not to cast all expert tips aside.

Rather, it means that you may sometimes have to compromise to get behind the wheel.

A realistic car finance strategy should take the following into consideration:

  • Paying back your loan as quickly as possible is nice. But aiming high only to come crashing down is not. Pick a manageable goal and then stick to it.
  • Of course, we all want to pay as little interest as possible. However, you want to be able to afford your monthly instalments at all times and without fail. So, base the hight of your repayments on what you can safely afford even if you run out of income for a while.
  • The same goes for interest rates. Yes, sometimes interest rates can seem very high for those with limited resources. But if this means you can get a deal with affordable monthly rates, a good car and without an overly high deposit, it may still be the best option available to you.

At CCC, all we want is to get you behind the wheel again. If you’d like to find out more about our unique combination of car finance and car deals, get in touch with our team.

Call us at 0800 093 3385. Or send us a message using our contact form.

8 March 2022 Concept Car