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Comment by edent | Hacker News Reader

In the UK, most people don't pay the "sticker" cost for a car. They take out a PCP or similar plan. Pay £X00 per month for Y months. At the end of the period, either buy the vehicle outright or hand it back. Or, as many people do, switch to a new vehicle.

That's why you see so many expensive cars driven by people who can't afford them. No one is paying the up-front cost. They splurge their disposable income on a motor and treat it like a mobile phone - upgrade it every few years.

A VW eUP (an electric vehicle) is about £200pcm. The new Mini is about £300pcm. Those are comparable with ICE vehicles.

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I didn’t realise until recently just how engrained this practice is in people’s behaviour.

I was discussing cars with someone not long ago and they were really matter-of-fact about switching to a new car just because the dealership offered it to them. It came across very much as that’s just how it works and everyone does that.

I wonder do any of them realise they’re paying the maximum depreciation every single time too. Losing 20k+ in depreciation every year feels like a great way to stay poor

On the flip side, using PCP means that you get a brand new car and it has a warrantee. You could buy a banger for £500 - but then you're always going to be wondering if today is the day it'll cost you £££ to repair. And if you can't get in to work, that'll cost you dearly as well.

£300 per month to basically not have to worry about any unexpected bills seems reasonable to me.

Plus you get the social value of having a "nice" car. The safety features are likely to be higher quality. And, as mentioned in the article, newer vehicles tend to be more efficient.

Basically, it is a fairly rational way to spend money.

in my city at least, this PCP concept hasnt really taken off because companies arent offering it.

what the people have done informally is something similar.

1. person "buys" a car and Hypothecates the same to a bank for paying the car dealer. usually 80-90-100% of the car value can be paid by bank meaning 0-10-20% of the car value can be given as deposit.

2. now that the new "owner" has taken the car, they start making monthly EMI payments to bank.

3. 1 year or 2 years from purchase, the owner wants to "sell" the car so what they do is, find a buyer willing to accept the outstanding loan amount.

4. the first "owner" has paid 2 things. 1 deposit and say 12 months of EMI.

5. first "owner" tells the buyer that "here, take hold of these future EMI entries and give me a portion of the amount i have paid till now as in #4"

6. the first "owner" takes cheques each dated monthly in future with the amount from the buyer which the first "owner" will deposit every month and if there is any failure, claim default in payment of cheque.

7. car remains in title of the first owner and Hypothecated by bank until last EMI is paid at which point the first owner "transfers" the car to new owner

You don’t have to buy a banger, just buy a new car and drive it for 20 years. You will save vast amounts of momey.

Same difference, after 7-10 years, it becomes a banger, or at least it has enough problems that you worry.

Maybe if you buy British cars?

Everyone I know driving 100k+ 10y+ cars from reliable manufacturers have no issues beyond regular maintenance.

My father's Benz certainly spends more time in the shop though.

I bought a new (made in Japan) Mitsubishi in 2013, still have it, and it didn't have any failure yet whatsoever. If you buy German, American or (shudder) French cars, then yeah, they will become problematic after 7-10 years, or even earlier. Just buy Japanese (so, not Nissan, and sadly also no longer Mitsubishi, since, after a merger, it's now a Japanese-European company), preferably made in Japan.

Or buy lightly used car and then drive 20 years... The savings for getting one or two years old car is already substantial.

I did this and now I'm stuck with manual Kia... But I don't really drive enough to care, so I'm fine...

People here in the US do the same bad math. Leasing is almost always worse even than buying with a loan.

I have a car I bought on PCP so I understand that math, but when the dealers starts calling after one year trying to get you to re-up it’s a poor decision financially

Our car was £40k new. We've been paying £400/month for 2.5 years now. It's a 4 year lease. We still owe £22k. They gave us £7k for our old car - that was the difference between how much we owed and how much previous car was worth. Now the latest one we can buy for around £18k once the lease is up I think. Currently I'm being offered £31k for it. So, rough calculation is that the car cost us £120/month in the last 2.5 years if we sell it today. Pretty good deal I think.

Of course we realise we're paying for depreciation but I consider a car to be a fixed expense and honestly if you take a look at the numbers above it's not that bad and we drive a new, safe, no issues (free servicing) car every 3-4 years.

> if you take a look at the numbers above it's not that bad and we drive a new, safe, no issues (free servicing) car every 3-4 years.

Driving a new car every few years is incredibly decadent.

If you bought a car, paid it off in 5 years and drove it for another 10, you’d be saving thousands every year. Repeat that cycle every 15 years and invest the savings, and you’re talking about hundreds of thousands of dollars in trade-off costs over the course of a lifetime. That might be a reasonable trade-off for folks who are in great shape financially (I’ll certainly be doing it once retirement is funded!), but it’s pure foolishness for the average household.

> drove it for another 10

What about maintenance? There's a lot of moving parts (often the labor to get to the part costs more than the part itself) and a stroke of bad luck can quickly balloon into 4-digit sums.

Paying a flat monthly fee for transport sounds like an attractive option to not have to worry about any of that.

This is exactly it. Worry free transport option. We have a set monthly budget for transport and we get whatever car is we think best available for our budget when lease is up. I never have to worry about service, the car is always in warranty, etc.

I'm driving a 900£ focus, cost me 200£ to service once a year, otherwise it's just ticking a long great...

Maintenance costs are easily managed by avoiding brands which generally require frequent or expensive maintenance. Regardless, they don’t hold a candle to the long term savings.

If one lacks the rainy-day savings to afford a hypothetical thousand-dollar repair bill, one certainly cannot afford to throw away thousands of dollars every year “to not have to worry” about one’s precarious finances.

> one certainly cannot afford to throw away thousands of dollars every year “to not have to worry” about one’s precarious finances.

There are plenty of people who live near paycheck-to-paycheck who also need a car to get to work, where a stroke of bad luck like engine + transmission damage would not only be a significant financial hit but the downtime of the car being unavailable might compound the problem as they can't get to work.

While it's not a great financial situation and ideally nobody should be in it, in reality these people don't have a choice and budgeting away a fixed percentage of their salary on a vehicle that guarantees them to be able to get to work (to pocket the remaining percentage of salary) is a better option than not paying a monthly fee but gambling on the fact that a significant breakdown might completely wipe them out financially and jeopardize the transportation they use to get to work.

It's a bit like insurance - technically it should always be cheaper to self-insure, but insurance exists because for many people perpetually paying the premium is still better than a single event wiping them out completely.

> While it's not a great financial situation and ideally nobody should be in it, in reality these people don't have a choice and budgeting away a fixed percentage of their salary on a vehicle that guarantees them to be able to get to work (to pocket the remaining percentage of salary) is a better option than not paying a monthly fee but gambling on the fact that a significant breakdown might completely wipe them out financially and jeopardize the transportation they use to get to work.

This makes sense so long as it isn't used as an argument for leasing a new car on an ongoing basis. If one actually finds themselves in this situation, the responsible approach would be to find the cheapest possible lease and to save aggressively until they can take the more economical approach.

Leasing is like credit card debt. It makes sense in some rare cases, but in most cases it is wasteful and the average consumer should avoid it.

And yet so many people "can afford" £300 pcm but "couldn't afford" a yearly unexpected maintenance bill of £2000. Even though the latter is half the cost. It's inability to financially plan over more than a monthly horizon. I think it's because financial literacy is not taught. Or is it just human nature that it's harder to choose to put £200 aside every month for future possible repairs than to pay a £300 monthly bill you have no choice over.

As per my calculations our two latest cars cost us around £200/month. That is £2400 per year or £24000 per 10 years. Pretty good for cars costing £30k and £40k new. Buying the same cars and driving them for 15 years would actually cost the same or more. We were lucky as prices of second hand cars were good so we actually came ahead. This might change in the future.

I didn't realise how pervasive this was, but yes 90% of new car purchases are using a PCP.

https://www.thecarexpert.co.uk/car-finance-pcp-explained/

I'm pretty sure finance is what has driven up the costs of a typical car. Parkers (the car valuation people) had an article recently that showed the median price of a car has gone up by twice the rate of inflation over the last 50 years. The price has tracked earnings which tends to indicate people will buy as much car as they can afford.

Didn't know leasing was popular outside the US. That's how a great majority of luxury cars are acquired here. To be fair, given how their asset price depreciates and repair demands increase over time, leasing makes a lot of sense.

>> That's why you see so many expensive cars driven by people who can't afford them

How is it possible to keep possession of the car if you’re not paying the contractual obligation? Is there some exception for cars?

For example, failing to keep up with mortgage payments will eventually see you lose the property.

OP meant "can't afford them" in the sense of "couldn't afford the full price of". There are lots of people here in the UK on medium incomes driving around in £80,000 cars using this finance

Can confirm. Financial literacy is fairly thin on the ground here.

How do the economics work out for the seller? Depreciation is highest at the beginning, when these people are paying the per month price. If they can't afford a loan for the price of the car, how are they making a lease payment that covers the depreciation for the leasor? I'm sure there's a reason but I can't think of it.

I don't think you understand how car loans work?

Let's say a car costs $50,000 and Joe wants to finance it (because he either doesn't have $50,000 or just doesn't want to spend $50,000 right now), so he gets a $50,000 loan to buy it. Let's also say the loan will mature in 10 years, also obviously the loan has interest but we don't need a specific number for this conversation.

The minimum payment per month will be set such that Joe will pay off the loan in 10 years, and Joe presumably can afford the loan's minimum monthly payments since he accepted it to buy that new car.

If Joe wants to pay off the loan sooner and he can afford it, he can just pay more than the minimum due during a given month.

So Joe gets a loan from a bank (oftentimes middleman'd by the dealership), the bank pays the dealer in full, Joe gets his car, the bank becomes the lienholder on the car until the loan is paid off.

Thanks! Indeed I've always paid cash for any new cars I've bought. But I still don't see how companies that provide leases are able to purchase a car, lease it out for cheaper than the cost of a loan to people who couldn't afford the loan, and still make money despite the depreciation?

Imagine a car that costs 50,000 - a 10 year loan will be 500 or so per month according to https://www.calculator.net/auto-loan-calculator.html.

If I want to buy a car and lease it out to make money, but charge half that much so people who can't afford it can still get it, then let's say I charge 250/month. It would take 17 years of leasing it at the rate that it was worth when it was new in order to just break even and get my outlay on the car back.

So it's possible that I'm missing something else key about how car loans work but the numbers don't seem to add up for the leasor that your market is people who can't afford a car loan. Even https://www.bankrate.com/loans/auto-loans/lease-vs-buy-calcu... seems to indicate that you pay a little less for the loan than leasing, so I'm still not getting how leasing is the budget option that helps people get a car they can't otherwise afford a loan for.

EDIT: the answer is here: https://www.thecarexpert.co.uk/car-finance-pcp-explained/. Apparently in the UK, leases work with a small monthly payment, but at the end of the lease term there's a gigantic balloon payment where you pay back the difference between your cheap payments until then and what you actually would have owed if you had a normal lease or loan the whole time - thus making the leasor whole. The system is designed such that the leasor will always have received the cost of depreciation (plus more) at any point in the term.

Answering from a US point of view... Generally, the total cost of leasing a car is going to be more than the total cost to buy a car on a loan and resell the car in the same time period. In a perfect market, I think the difference in the total cost of loan versus lease is essentially the value of transferring risk from the consumer to the lessor as to whether the car retains its anticipated residual value at the end of the term.

With a loan, the buyer pays off the principal and interest and absorbs any discrepancy between the resale value and the remaining debt. With a lease, the lessor absorbs the discrepancy as long as the consumer meets the other stipulations of the lease, such as mileage limits and maintenance. The lessor acts almost like an insurer to charge fees and absorb this risk across a whole fleet of cars.

Are cars ridiculously overpriced in the UK? GBP 80000 is USD 101000 right now, which is basically high-end sports cars or a Mercedes S class or BMW 7 series. I’m a very high earner and have never paid USD 70000 for a car.

Not to be too pedantic about it but that’s not what “can’t afford them” means.

I think what parent is saying is people lease or finance cars so they can drive cars they wouldn't be able to afford in full. That is, those people can afford the monthly payments but cannot afford paying the sticker price.

An easier to understand example would be how most people finance iPhones with their carrier. Most people balk at paying one or two grand for a phone, but don't mind paying ~$50 per month. At the end of the loan when they pay off the balance, or maybe even before that if the carrier offers, they upgrade to the next new iPhone.

Which also seems a bit wild to me.

I won’t buy a new phone let alone a new car.

I only new because buying new means I do not have to worry about its history, it comes with manufacturer warranty.

Buying used is rolling the dice on whether I end up with a Hangar Queen demanding attention I don't want to give.

Time is money, as the saying goes. Buying new is more expensive, but it's cheaper in the long run with the time and money I did not have to waste on unexpected upkeep.

>Buying new is more expensive, but it's cheaper in the long run with the time and money I did not have to waste on unexpected upkeep.

It depends. We tend to buy three year old cars and on the whole they have all the niggles resolved by then. After that they don't start having problems until at least 100,000 miles. So we pay half the price for no extra aggravation.

Doesn’t need to be need for manufacturer warranty.

My certified preowned car actually came with slightly more miles and a slightly longer manufacturer warranty than a new model would have.

There is lot of models one here in different country could be:

Down payment x000

Monthly payment for x months x00

And then final payment xx000 after x months. But the seller has calculated it as such that they can buy it back and get the more by selling it.

So in the end "buyer" only pays for the depreciation and interest, which were low in previously. Much harder model now that cost of loaning has gone up. Quite a lot of people can afford to pay hundreds a month, even if that really doesn't make long term sense...

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