Opinion: why not buy an older used car rather than finance a nearly-new one?

For almost three years it’s been omni-turmoil. You know the causes, but indulge me with the drama of spelling them out. A pandemic, chaos in supply chains, a war, an energy squeeze, inflation and spiralling interest rates. Plus, for the car business in particular, the chip shortage and logistics – even now, freshly built cars are piling up outside factories because there are too few lorry drivers for the transporters.

Strangely, the car companies didn’t mind too much. They no longer had to fight for customers. In the face of chipageddon, they throttled right back on making low-profit cheap cars to make sure the scarce chips were used on their more profitable models and brands. Carmakers also nudged prices up, and stopped giving discounts. But now we’re into a new phase, with climbing interest rates. Nearly all new cars are bought on some kind of credit. Thing is, when you drive out of the showroom the rate is fixed for the term, so you won’t be hit immediately. The blow comes when you go to replace your car and find that the new monthly payment has jumped up because of a higher price, lower discount and raised interest rate.

But new car sales haven’t crashed. Not yet, anyway. New car buyers are mostly pretty well-off, or are able to imagine they’re immune to the storm. They stick their fingers in their ears and sign for a new car on a hugely raised monthly payment.

Well, most do. Some don’t. At the end of the PCP, they instead pay the balloon payment. With new cars in short supply, more people are turning to secondhand options, so those prices have shot up too – the average selling price is half as much again as it was in 2019. So people at the end of a PCP find their car is worth much more than the balloon payment. Happy? Not really, because their gain is notional: they can realise it only by selling up immediately and trading down. If they want to keep the car they probably have to take out a loan to pay the balloon.

Which takes us to the big new trend: many more people are buying their secondhand cars on finance, either PCP or lease. Auto Trader, which gathers mountains of this data, tells me some of these secondhand buyers have been shoved out of new by the prices and waiting lists. Some would have paid outright for a secondhand car, but they’re now so committed to other cost of living spikes they don’t have the cash. Some are just being snared by increasingly sophisticated financial products. Auto Trader reckons this new dynamic is looking permanent.

Whatever, it strikes me as scary. People are riding a gravy train of credit. Their mortgages and card payments go up, and food, heating and the rest too. So they take out yet more credit for a car. They seem surprisingly confident of their financial stability, in what are (see above) immensely unstable times. Why not just go and buy a six-year-old Volkswagen Golf or Ford Focus instead? They’re still good cars, and even if no longer warranted, they’re cheap to look after too.