Car buyers: how to steer through the labyrinth of choice

For Ben and Pamela Thomas, the decision over whether to buy an electric car was decided by a stray roof tile. 

When a storm dislodged the ceramic projectile that wrote off their trusty VW Polo, they began the search for a new model, and were keen to try their first electric vehicle. Yet more than a year later, they are still waiting. 

At first, they waited months for an electric Hyundai, only for the factory to cancel the order weeks before delivery. 

Then a broker they knew emailed, having found the same model — also brand new — in stock. 

The lease deal allowed them to “try” the battery car for two years, says Ben Thomas, while the low running costs and environmental benefits appealed to the retired hospital manager.

Finally, in two weeks, they will get the chance to use the electric charger they installed in their Surrey home last spring. 

Their purchase reflects the experiences — and frustrations — of millions of UK motorists who navigate the car-buying process. Decisions such as whether to buy electric or not, selecting a new or used model and which of the myriad finance products to use for the purchase have turned the process into a labyrinth of choices. Added to this, recent production delays have caused hold-ups for even the most determined buyer.

And just as new vehicles become more expensive — with costly electric cars gaining in popularity — persistent inflation is sapping consumers’ spending power, while rising labour and material costs and higher interest rates threaten to push up car loan charges. 

New or used? 

Last summer the manufacturing industry was struck by a combination of semiconductor shortages and Covid-related shutdowns in Chinese plants that supply intricate engine parts. Global carmaking slowed to a trickle. 

This led to months-long waiting times for even the most unexciting car models, and spilled over into unexpectedly high demand for second-hand cars. In the UK, as in many markets, the phenomenon propelled used car prices above the level of new models.

This turned the industry’s golden rule — that cars shed value the moment they drive off a forecourt — on its head, and ushered in a harvest season for the dealership industry.

Car traders, used to eking out profit margins with canny trading, simply had to take delivery of new models, wait a week or so, and then flip them for more money than they paid. 

Demand is still incredibly high. Britain’s used car market recorded its strongest spring in three years, with 1.8mn cars sold between January and March this year. There were a record 82.5mn visits to the AutoTrader site during March, 15 per cent higher than a year earlier. 

“If you consider us as a bellwether, it’s a good sign that people are interested in buying cars,” says Ian Plummer, the online marketplace’s chief commercial officer. 

“At one point, you know, we were discounting our cars between 5 and 10 per cent,” says Bill Berman, chief executive of Pendragon, one of the largest used car dealership groups in the UK. “We’re not having to discount vehicles at all.” 

Yet hints of normality are beginning to reappear. Used car prices, which were up by a third in April 2022 compared with a year earlier, are now almost flat compared with a year ago. The chip crisis is also beginning to wane, and carmakers expect the taps to turn back on later this year.

The waiting times for cars — which could be years at the peak of the shortages — have fallen back to more normal levels. 

“Typically manufacturers are talking about delivery times of around 3-4 months, which is kind of where we were pre-Covid,” says Paul Harrison, director at Leasing.com, a comparison site. 

However, used prices are likely to remain robust for years. The dearth of new cars caused by factory closures in spring 2020 will be felt as the hole in the market washes through the system. 

“We are short of 2.5mn cars that never got sold, and that will never exist as used vehicles,” says Dylan Setterfield at Cap HPI, an automotive data provider. “That has a big impact on the used market.”

Lease or buy? 

The use of cash or bank loans to buy cars is long gone. More than 90 per cent of new car sales are based on a depreciation-based model, while almost half of second-hand sales use them as well. 

Under this arrangement, a consumer finances the amount of value the car loses over a period (typically three years), rather than the old-fashioned “sticker price”.

The most popular finance deal, called a personal contract purchase (PCP), gives consumers the chance to buy the car at the end of the loan, or they can roll any equity in the vehicle into a new deal.

This also explains the outsized growth of the premium brands such as BMW and Audi in the UK, as drivers found their products, which have strong second-hand value, just as cheap to access using a PCP as a Ford or VW. 

It is also an increasingly vital help for consumers seeking a new model: the average list price of a new car has risen by 38 per cent in just three years. 

But borrowing money has become significantly more expensive. APR deals of 0 per cent, once almost ubiquitous, are near-extinct.

The industry is now in a “period of adjustment”, says Harrison at Leasing.com. “We are now understanding what the true cost of new cars is versus the incredibly low rate environment we had all become used to.”

Costs are rising. VW says around one in 10 of its retail customers have opted to extend their PCP for another year at the same rate on the same car, rather than refresh their model and lock in a higher price.

“Consumers are looking to eke out as much value as they can,” Harrison says. “Within leasing, that means that people are typically going more for volume brands rather than premium.” 

Yet the real picture on financing costs is complicated. Lease rates on non-electric cars have not soared, even as APRs climb from close to zero into the double digits. 

“Affordability is not as bad as it seems,” says Mike Todd, head of financial services at VW in the UK.

A spike in the third quarter of last year — coinciding with the market turmoil that surrounded the brief Liz Truss premiership — has subsided slightly.

There are three drivers behind this. First, banks are resisting passing through higher rates. “Often changes in Q4 won’t be felt until Q2. [The banks] are trying not to pass it on,” says Harrison.

Second, the shortage of used cars means residual values are strong. If cars lose less value, less depreciation needs to be refinanced, so payments do not climb as sharply even if borrowing costs have risen.

Another consequence is the strong resale value of cars. Almost every buyer taking out a PCP is trading in a vehicle that is worth much more than was expected in 2019. This means they have more equity in the vehicle, which they can roll into the next deal, acting as a larger deposit and reducing their monthly payments.

The upshot is that, even though advertised costs are higher, once people get into the details, they come down.

“In reality, today’s customer, because of residual values, has got more equity in their vehicle than they would have had three years ago when part-exchanging a 2017 car,” says Todd at VW.

Battery or fuel-burner?

The burning question for anyone seeking a new model is whether to embrace the forthcoming electric era or have another round in an engine-powered car — petrol, diesel or, increasingly, hybrid. 

New electric cars remain doggedly expensive on sticker prices, but the prevalence of finance deals can bring better value. 

EVs are cheaper to run, with a combination of lower (though not zero) refuelling costs and less expensive maintenance. Most new cars come with an eight-year battery warranty.

While the headline UK government incentive, the “plug in car grant”, has been scrapped, there is still a rich abundance of subsidies if you know where to look.

Top of this pile is for employees who can persuade their companies to open salary sacrifice schemes so a car can be paid for out of pre-taxed income, thus lowering an employee’s tax bill. The current system heavily incentivises electric vehicles.

“Overall, it’s still the case that salary sacrifice is cheaper when getting an EV compared to a petrol car,” says Fiona Howarth, chief executive of Octopus EV, an electric vehicle leasing group.

According to Octopus’s online calculator, an electric Renault Zoe is £409.30 a month, compared with £287.32 for its petrol cousin, the Clio. But the Clio racks up higher costs once maintenance, servicing and — importantly — fuel costs are lumped in. 

Octopus expects that, for a basic rate taxpayer, the electric could be almost £250 a year cheaper. Higher up the tax brackets, the gap widens. 

When purchased by a 40 per cent higher rate taxpayer, a Tesla Model Y has almost £2,000 a year saving over an Audi Q3, despite both cars being near-identical in their £449-a-month lease payments, the calculator says.

For someone paying the top rate of income tax at 45 per cent, Audi’s electric e-tron GT — an £85,000 sports car — saves £5,000 a year compared with the high-powered Audi RS4.

“Electrification will actually be acting as an accelerator of the [leasing] trend,” says Annie Pin, chief commercial officer of leasing company ALD. “Today an electric vehicle is quite expensive so actually people will have a tendency to lease it.”

Four times as many people in the UK buy used cars rather than new. The first wave of mass-market long-range EVs, sold around the turn of the decade as new emissions rules kicked in, are just starting to come into the second-hand market.

This has posed a problem for dealers, none more than Tesla, which runs its own showrooms.

Elon Musk’s electric car brand may have garnered global headlines by cutting prices of new vehicles, but it has mishandled its selling of second-hand models, often releasing them into the market too cheaply and so damaging the overall residual values of its brand new cars, according to multiple people in the industry. 

Used EV prices across the board have fallen steadily for eight months, as the supply of second-hand models floods a market that is still, broadly, wary of the new technology.

“It feels like there has never been a better time to buy a used EV,” says Lauren Pamma, director at the Green Finance Institute.

A three-year-old electric Jaguar I-Pace is cheaper than the brand’s engine-version F-Pace, a three-year-old battery Renault Zoe is cheaper than its petrol Clio cousin, while a Tesla Model 3 and a BMW 3 series — once separated by £22,000 — are now only £3,000 apart, she says. 

“There is a massive need to develop a [functioning] used market for electric vehicles,” says Toby Poston, head of policy at the British Van and Rental Leasing Association, the trade body for fleet buyers that account for around half the UK’s vehicle purchases.

Slowly, education and experience is helping to assuage buyers’ concerns over EVs. 

One of the earliest fears was that batteries would smoke out after only a handful of years. Yet a study by telematics company Geotab found that a fleet of 6,000 EVs, running millions of miles between them, suffered only 2 per cent degradation per year. This would mean an EV coming off a three-year lease still has 94 per cent of its battery in use, far higher than previously feared.

Evidence from the US shows that EVs with a “battery certificate” to quantify their health status fetched better prices than those without. Pamma reckons that battery certificates “are the single biggest thing that will persuade people to jump into a used EV”.

The EV shift also loosens the ties that customers have to traditional brands and even brings premium and mass market segments closer together. 

If every vehicle accelerates like a sports car, then consumers may be less willing to pay more simply for nicer interiors.

“Consumers are hopping from looking at an Audi to a car from Škoda to a car from Kia,” says Ginny Buckley, director at consumer advice website Electrifying.com. “Five years ago that was unthinkable. But electrification has really opened that up.”