There are many ways to have a financial car crash. One of the best is to actually go and buy a car. A couple of years ago, we bought a second hand motor from a local dealership. Before signing on the bottom line, we had to choose our financing preference. We’d quite a few options, from paying cash (ouch!), to borrowing through extending our mortgage, to taking on a bank loan, or some sort of combination of these. There was also the option of taking the dealership’s Personal Finance Plan. Somehow, at the time, the latter seemed the most attractive offer for us, despite me knowing in my heart that I should bite the bullet and simply write a cheque. If only we could practice what we preach.
Nevertheless, it was the Personal Finance Plan we went for, paying a small deposit and relatively painless monthly contributions. The main stipulation that we had to watch was that we had to stay within an agreed annual mileage. The way these things work, providing you maintain payments and don’t exceed the mileage you commit to, the dealership “guarantees” to buy back your car in three years for a stated sum, given to you when you sign up. How can you lose? A very short summary: I paid a £1,000 deposit, signed up to pay 42 months Direct Debit at £230 a month and would have a final “balloon payment” of £4,700 at the end to purchase the car outright. Or, at that point, I could hand the car back, buy a new one, and enter into a new Personal Finance agreement.
Imagine my surprise, then, when last week I received a nice letter from the garage telling me our credit agreement was up and offering, as agreed, to “buy” our car back from us at the stated price they committed to. You’ve heard of a wake up call? I kind of remembered the detail of the agreement….but I kind of forgot that I’d have to hand the car back when the time came in order to pay the money I still owed on the Personal Finance Plan! Yes, they “buy the car back” from you, and take the proceeds to pay off the debt you still owe them. Great, I have cleared the car loan. Not so great, I now have no car.
This final payment is nicely termed the “balloon payment”. What they don’t tell you is that the chances are you are the balloon in the equation. I admit it, I had completely forgotten that despite paying a decent deposit, despite staying within our mileage agreement and despite paying our direct debit every month without fail, I would still owe the garage what now looked like a shitload of cash three and a half years later! Either that, or they’d take the car off me to cover it. How had I deluded myself?
Well, there was another party complicit in the delusion and they were now asking me to come in to discuss “upgrading” to a newer model. Oh how seductive it sounds. I hand the old car back to them. This can now both pay off the remaining debt and possibly act as part of the “deposit” on the next Personal Finance Plan (because the car’s resale value is well above the £4,700 owed, giving some negotiation wriggle room). I then don’t have to worry about writing a cheque to them for £4,700. Note the psychology here: my outstanding debt of £4,700 has now morphed, somehow, into a “deposit for a new car”. We can now choose our next car, sign up a new direct debit and drive it straight off the forecourt into a joyful motoring future.
Some key points here, all the same. The old car has now become part of the next deposit. I still have to stump up some additional cash to add to that deposit though, maybe £2,000 this time, to secure the newer motor – but hey, that’s a lot better than paying them the £4,700 I owe to keep my current (much older) model, isn’t it? It’s “double bubble”! My old car not only pays off the cash I owe, it also contributes toward a new one. How good is that?!
Secondly, the revised Direct Debit will be about £30 a month ahead of the current one, taking it from £230 a month to £260. In the scheme of things, that isn’t too bad, is it? I could cut £30 off the monthly grocery bill without breaking sweat.
Finally – although let’s not focus on this too much as it’s way in the future – at the end of this new agreement, I’ll owe the garage about £6,000 as a balloon payment on my “new” car. Or not. Because I can just repeat this cycle again! All I’ll have to do at that point is stump another new deposit (£2,500?), a new Direct Debit (maybe up to £280 a month) and I can have yet another new car! Oh brave new finance world that has such deals within it!
Right now, I am fuming at myself for being a schmuk. Of course, I should – and could – have paid cash. I fell for the easy, short term, pain free, option that only comes home to roost way in the future. Unfortunately, “the future” has turned out to be “today”. Now I have to face up to my previous idiocy, pay off the debt, be stuck with my old car and lick my wounds.
Or I can sign up to a new Personal Finance Plan and have a new motor.
Don’t bet that I won’t!