- Published 29 May 2020
- 5 minute read
- By Gavin Braithwaite-Smith and Murray Scullion
According to recent figures released by Auto Trader, the average price of a used car in the UK is around £13,500.
To put that into perspective, it’s roughly the same price as a new, mid-range Kia Picanto supermini, a small car from an ordinary brand.
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This highlights why so many people choose to buy used over new. Spending the same amount on a used car could get you behind the wheel of something much larger, faster and flashier than a city car.
Examples include a two-year old Vauxhall Mokka, a three-year old Audi A4 Avant, or a four-year old Mitsubishi Outlander PHEV.
But there’s a problem if you plan to pay monthly, because used car finance is expensive.
Buying a used car on finance
Used car finance is expensive broadly because APR rates are much lower with new car finance schemes. In fact, these can be as low as 0% APR because they’re backed by big car companies.
When you take out a used car finance loan, it’ll generally be more like 6-12% APR.
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Let’s assume you borrowed £13,500 from a popular car finance company at 9.5% APR. That may seem high, but that’s the APR rating used car finance companies offer to people with ‘excellent’ credit scores.
Over a 48-month agreement, you’ll accrue £2,673 in interest payments. This means the total you’d pay for a £13,500 loan is £16,173.
Suddenly that used car doesn’t seem like such great value.
Buying a new car on a PCP deal
A Personal Contract Purchase (PCP) is the most popular form of new car finance, not least because it gives you the opportunity to get significantly more for your money.
Most PCP deals require a deposit, but because a large chunk of the cost is deferred until the end of the contract, the monthly payments are significantly lower. At the end of the deal, you have the option to pay the balance owed, but most people choose not to – simply handing the car back, or swapping it for a different one, instead.
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You could spend the £16,000 from the above example on a brand-new new car instead.
If you took advantage of a 0% APR deal, you can even split the cost over a period of months.
For instance, at the time of writing a mid-spec Renault Clio Iconic is available with 0% APR. With a £3,000 deposit, you’ll pay £189 monthly over 25 months. And assuming you can afford the optional final payment of £8,357, you’ll own a brand-new car with nearly three-years left on its warranty for the total of £15,895.
Leasing a new car vs buying a used one
If you have no desire to own a car outright, a leasing deal could be the answer. Often called Personal Contract Hire (PCH) or HP (Hire Purchase), you’re essentially renting the car for the duration of the contract, so the monthly payments are more affordable.
In common with a PCP deal, excess mileage and damage charges apply. It’s also possible to include servicing and maintenance in the monthly fee.
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Leasing is by far and away the least complex answer to driving a new car for the cost of a used one. If we go back to the £13,500 used car loan, you’ll be paying £337 per month to buy the car.
Now, with leasing you’ll never own the car. But if that doesn’t bother you, then leasing provides a simple solution. Instead of paying £337 per month for a £13,500 used car, you could spend half that amount and still be driving a new Skoda Kamiq SUV or even an electric Renault Zoe.
Or, if you did really have £300ish per month burning a hole in your pocket that you just need to spend on a car, premium offerings like the Range Rover Evoque and Mercedes-Benz CLA are abundant for that amount.
We’re not saying that a new car is the best choice for everyone. We can certainly understand the appeal of buying something second-hand and driving away with the feeling of getting more for your money.
Buying used with cash, or with a low-rate APR bank loan, still offers brilliant value for money for car buyers - especially in the long-term.
Our point is that used car finance is often significantly more expensive than new car finance because of the high interest rates that come with it. So think carefully and do your homework, and you could be pleasantly surprised by what your monthly car budget could afford.
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