Buy Supercar Outright OR Lease Purchase Balloon (Advice)

[oo7ml]

Hi,

I'm somewhat new to the forum, so a BIG thank you to all who have replied to my posts so far, it's much appreciated... and apologies to those who are getting tired of my excitement and questions :-)

I'm hope to pull the trigger early in the new year. I'm trying to decide whether to buy the car outright or avail of a finance option, particularly the Lease Purchase Balloon option?

DISCLAIMER
Please lets not get into a debate about being in a position to 'afford' such a the car or not. It's a case of being smart with your money and weighing up whether or not to put £200,000+ cash straight into a car, or avail of a finance option... no matter how much cash you have in the bank. I have and continue to work very hard at what I do, and I am very lucky to be in a position to buy such a car, but it has come from hard work, and not from my parents or anyone else. Hence, I want to explore all options before choosing the right car and the right option to purchase it.

QUESTION
How does the Lease Purchase Balloon option work? Let's use the following numbers as an example:

- Car: £200,000
- Deposit: £50,000
- Finance: £150,000
- Term: 24 months
- Balloon: £110,000
- Monthly: ?

A - what exactly is a 'balloon' in terms of Lease Purchase?
B - what happens at the end of the 24 months?
C - what is the monthly repayment / figure based on?

Thanks again for your help

[Wonderman]

https://www.moneysavingexpert.com/car-finance/pers...

[Rob F]

My understanding:

A) You are deferring a large amount of the finance until the end of the term of the loan. The balloon just means that rather than your monthly payments paying down the whole loan balance (£150k) over the course of the agreement (24 months), the monthly payments only cover the non-balloon amount (plus interest) e.g. £40k. As you are not paying down the total balance of the finance, you can make the monthly payments lower by using this structure. But ultimately if you decide to buy the car outright at the end it will cost you a lot more because you are storing up more interest on that balloon amount.

B) You are liable to pay the balloon (which is different to PCP). So you either pay the £110k or you sell the car prior to that point to cover the liability.

C) As above, monthly payments basically based on £150k less £110k = £40k + Interest.

[mike01606]

Same applies to any car purchased on it....

Check the small print about future value. I’ve had cars in negative equity when it’s come for renewal.
It can work well if the car has an accident in the term as you shouldn’t have to worry about it’s impact on future value whereas no one wants to buy a straightened Ferrari.
Read your rights on voluntary termination and make sure the finance structure will allow it. Under law you can hand the car back once you’ve paid 50% (?) of the finance off. Usually in the final few months of the deal due to the balloon. This gets around any negative equity issue but will wind the finance house up and they will cry foul

https://www.thecarexpert.co.uk/car-finance-volunta...

They will try to chip you on minor damage when you hand back (scuffed wheels, minor scratches) which on a super car could be painful. The flip side, I’ve handed perfect cars back and you get nothing extra. It’s called win-win for the dealer.

Basically go in with your eyes open.....

My last PCP went like.....

Hand the car back - no, it’s perfect and worth 20% more than the balloon.
Trade the car in - no, dealer offer was worth less than the O/S finance.
VT the car.....thought long and hard about it but no.
Pay the balloon - yes, only sensible option.

Edited by mike01606 on Thursday 6th December 18:45

[oo7ml]

Thanks all... that’s a massive help, thanks.

[andrew]

mike01606 said:

Same applies to any car purchased on it....

Check the small print about future value. I’ve had cars in negative equity when it’s come for renewal.
It can work well if the car has an accident in the term as you shouldn’t have to worry about it’s impact on future value whereas no one wants to buy a straightened Ferrari.
Read your rights on voluntary termination and make sure the finance structure will allow it. Under law you can hand the car back once you’ve paid 50% (?) of the finance off. Usually in the final few months of the deal due to the balloon. This gets around any negative equity issue but will wind the finance house up and they will cry foul

https://www.thecarexpert.co.uk/car-finance-volunta...

They will try to chip you on minor damage when you hand back (scuffed wheels, minor scratches) which on a super car could be painful. The flip side, I’ve handed perfect cars back and you get nothing extra. It’s called win-win for the dealer.

Basically go in with your eyes open.....

My last PCP went like.....

Hand the car back - no, it’s perfect and worth 20% more than the balloon.
Trade the car in - no, dealer offer was worth less than the O/S finance.
VT the car.....thought long and hard about it but no.
Pay the balloon - yes, only sensible option.

Edited by mike01606 on Thursday 6th December 18:45

you're describing a pcp : the op is asking about a lease purchase !

[mike01606]

andrew said:

you're describing a pcp : the op is asking about a lease purchase !

A very good point!

The main issue with one of them is your stuck with the car at the end of the lease period with no option to hand back.

Options are pay/refinance the balloon or part-ex.
Personally I’m not sure I’d want one for a supercar but I depends on the terms and if they suit your finances.

[Never you mind]

Surprised there hasn't been the usual, if you can't buy it outright don't buy it posts. Anyway, OP, speak to JBR Capital they will explain all the options open to you.

[Taaaaang]

The issue with large loans is large amounts of interest.

Often when you look at the actual figures most of what you're paying on these cars is interest.

Irrespective of how much money one has, paying £1000pcm in interest is a bit of a downer.

[oo7ml]

Never you mind said:

Surprised there hasn't been the usual, if you can't buy it outright don't buy it posts. Anyway, OP, speak to JBR Capital they will explain all the options open to you.

There hasn't been any comments on this, because I outlined it in the orginal post.

It's not a case of not being able to afford the car... I am grateful that I am in a position to buy it outright, BUT because financing part of a car means that you have more cash in the bank, I view it as should I finance half of it, so that I have an extra £100,000 in the bank account which I am confident will earn more than 30% interest by using that money for something else (an investment) VS paying 8% interest on borrowing £100,00

i.e - it's 8% cost vs 30% gain

[wilwak]

30% gain? How?

I’m looking at something very similar. Apr is 6.9%

I can’t be sure to beat 6.9% on investments so paying all cash makes sense.

If the money is stuck in a savings account earning 0.5% then definitely pay cash rather than borrow at 6.9%.

If you know you can earn more than 6.9% post tax on your money then you’re best to borrow to buy the car.

[muppetman74]

Taaaaang said:

The issue with large loans is large amounts of interest.

Often when you look at the actual figures most of what you're paying on these cars is interest.

Irrespective of how much money one has, paying £1000pcm in interest is a bit of a downer.

Although not necessarily a downer if the capital you'd otherwise have invested in buying the car is earning you more than #1k pcm elsewhere. Then it makes perfect financial sense.

[Pistonheader101]

Never buy it outright if you plan to do trips abroad to Europe.
Police have seized and impounded many cars due to speeding etc, with no chance of recovery and no insurance payout. If there is finance on the car it’s not yours and therefore legally they cannot take the car as it belongs to the finance company.

Just something to keep in mind.

[troika]

If you are going Lease Purchase (with or without balloon), use a balanced payments agreement to keep flexibility i.e. variable rate interest so you can overpay / clear at any time with no penalty.

[oo7ml]

troika said:

If you are going Lease Purchase (with or without balloon), use a balanced payments agreement to keep flexibility i.e. variable rate interest so you can overpay / clear at any time with no penalty.

Thanks Troika, would you mind elaborating on this a little further please, thanks again.

[Superleg48]

Pistonheader101 said:

Never buy it outright if you plan to do trips abroad to Europe.
Police have seized and impounded many cars due to speeding etc, with no chance of recovery and no insurance payout. If there is finance on the car it’s not yours and therefore legally they cannot take the car as it belongs to the finance company.

Just something to keep in mind.

The solution here is not to speed excessively, surely? 130kmh is about 80mph. You wouldn’t normally face a ban or risk car being impounded up to around 150kmh, although a fine is certain if caught. Why go faster than that, when the risks beyond 150kmh become so much higher?

Cars can be recovered, usually but not by you...as if your car has been impounded it means you are banned. If you have a passenger at the time, who is insured to drive and you can provide proof of this, they will usually be allowed to take over the driving and you’ll be on your way. All of this is irrelevant and nothing to worry about if you refrain from making like Lewis Hamilton on the public road. Simples.

[troika]

oo7ml said:

troika said:

If you are going Lease Purchase (with or without balloon), use a balanced payments agreement to keep flexibility i.e. variable rate interest so you can overpay / clear at any time with no penalty.

Thanks Troika, would you mind elaborating on this a little further please, thanks again.

OK. In simple terms, interest can be fixed or variable rate. The majority of vehicle finance is written on a fixed rate basis (makes lots of money for the dealer). If you want to overpay or settle early, there will be penalties. With a variable rate deal interest is charged on a daily basis on the balance outstanding. This means you can overpay at any time or settle early without penalty (not so good for dealers as commission is far lower). An interest margin is agreed over Bank of England base rate or, more commonly, Finance House Base Rate (FHBR). Now, if interest rates fluctuate over the term, this would mean that monthly payment fluctuate, which is what happens with a straightforward variable rate lease purchase. However, a balanced payments agreement keeps the monthly payment the same and makes any adjustment at the end or upon early settlement. It’s just a way of keeping cash flow fixed.

I used to write loads of this business about 20 years ago when I was in that part of the leasing industry. It’s typically used for high value vehicles and really is the best way to fund them because of the flexibility. Margins were typically between 1% and 3% over FHBR. With this sort of balance I’d want it towards the lower end. It may not be offered by many banks now but is worth finding one that does. Maybe speak to Lombard as a starting point, they used to write a lot of it. Deal directly with them for the best deal. Hope this helps.

Edited by troika on Saturday 8th December 11:43

[James_B]

oo7ml said:

There hasn't been any comments on this, because I outlined it in the orginal post.

It's not a case of not being able to afford the car... I am grateful that I am in a position to buy it outright, BUT because financing part of a car means that you have more cash in the bank, I view it as should I finance half of it, so that I have an extra £100,000 in the bank account which I am confident will earn more than 30% interest by using that money for something else (an investment) VS paying 8% interest on borrowing £100,00

i.e - it's 8% cost vs 30% gain

Any investment that suggests a 30% gain will come with a significant risk that you actually lose quite a lot of that investment. You are writing as though your expectation is of a 30% gain, not your hope.

What’s the probability of a 30% gain rather than a large loss?

[Julian Thompson]

Surely, as a guy who is making enough money to buy a £200k car outright and with the skill to create and be involved with investments that return 30% you know enough to weigh up the opportunity cost of laying out a given amount of your capital?

If you’re buying a modern non limited edition off the shelf car for £200k to use and enjoy it’s going to cost you an absolute tonne of cash, regardless of how you finance it. It’s just a question of whether you want to take monthly pain or pain on the day of purchase and subsequent sale.

I think, amongst others, there was a phrase about boats. “The two best days of boat ownership are the day you buy it and the day you sell it!” Maybe super cars are the same!

There is no better person than yourself to make this decision because your personal situation dictates more to influence the outcome than the actual difference in the costs of the different financing alternatives.

[andrew]

Julian Thompson said:

Surely, as a guy who is making enough money to buy a £200k car outright and with the skill to create and be involved with investments that return 30% you know enough to weigh up the opportunity cost of laying out a given amount of your capital?

If you’re buying a modern non limited edition off the shelf car for £200k to use and enjoy it’s going to cost you an absolute tonne of cash, regardless of how you finance it. It’s just a question of whether you want to take monthly pain or pain on the day of purchase and subsequent sale.

I think, amongst others, there was a phrase about boats. “The two best days of boat ownership are the day you buy it and the day you sell it!” Maybe super cars are the same!

There is no better person than yourself to make this decision because your personal situation dictates more to influence the outcome than the actual difference in the costs of the different financing alternatives.

ffs sake, stop talking sense man : this is pistonheads !