One Decision Away From A Financial Nightmare
The story I want to go through in this blog is one that, thankfully, I look back on with nothing but relief and happiness – this was easily one decision away from a crippling financial mistake and I want to tell this story so that people in my position or in a similar position don’t make the same mistake as me.
Let’s rewind back to 2019, I had just turned 22 and was in a really good position financially and in a fairly stable job within a trading firm; things were looking really good. It was the height of summer and a lot was going on both socially and within business.
For those who are either too young to have witnessed it or too old to have experienced it, I want to give you a bit of an insight.
Between the age of 20-24 people begin to change – and most, with their new found financial freedom, look to impress others with materialistic assets. It’s just seen as the thing to do around this age. Now this could be a flash watch, a nice car or designer clothes. This is the age when looking ‘the part’ makes you feel ‘the part’.
There is an excellent quote – “We buy things we don’t need, with money we don’t have, to impress people we don’t like”
This quote really summed up what I was seeing during this time in my life – social media only enhanced this feeling, making everything more visible and seem more attainable than ever before. If you use Social Media, how many times have you found yourself comparing your life, job and possessions to someone else’s? I will put my hand up and say that I have. In fact, I’ve restricted my use of social media and cut it down to the people closest and most connected to me, but that’s a story for another day.
So why is this happening?
The consumer marketplace is set up so that products or services can become attainable even if you don’t have the funding to do so. This all falls under the dangerous umbrella of personal finance.
So what is finance? Finance gives you the ability to spread a set payment across the course of multiple months – depending on the value of the product (usually over the course of 12 – 36 months). So, for example, if you wanted the latest iPhone 11 that costs around £750, you could walk into the Apple store, fill out a few credit checks with the underwriting company and walk out with the product, paying around £60-£80 a month maybe with a £100-£200 deposit, happy days! This all sounds well and good… However, the majority of the time these underwriting finance companies will charge an interest fee on top, so that an £750 iPhone may now cost you £900 over the course of 2 years. A £150 fee for ease of access. Does £150 over 2 years sound like a great trade off to get the product early? Yes, you’re right, in some cases it can be extremely helpful especially if you are strapped for cash and desperately need that set product to get through everyday life. However, there are some cases where finance, in combination with Social Media materialism, can lead people to stack financed products/services to the point where it becomes overwhelming and exceeds their monthly income.
In this blog I want to focus in particular on the car finance industry. The product I was looking to get was a 2018 plate Audi S5.
Now originally I didn’t plan on getting such a powerful high-end car. I actually started at a slightly cheaper price point and looked down the ‘hot hatch’ route – I didn’t have a clear direction of what I wanted when I first started looking on the market for cars. Having done some shopping around and test driven a few cars, I was quite quickly sucked into the more powerful, more luxurious and, of course, more expensive cars. The nature of car showrooms are designed to do just that. In fact, before I continue, I think it’s important to stress this. My first drop of advice is to be very careful when looking for a product or car without a clear direction of how much you want to spend and what you really want to get out out of it. It can very quickly get out of control!
Lesson 1 – Set yourself a budget and stick to it. Walk into a store, dealership or online shop with a set figure in mind and don’t ever deviate from it.
So far it’s not a massive problem, I hadn’t technically put any money down or committed to any contract. However, after a short stint in the dealership and having shown the right credentials to progress, I was quickly ushered on a test drive. Test drives are designed to do two things. Firstly, they give you a good understanding about the car; how it drives, how it feels and how comfortable it is. Secondly, they are designed to get you hooked onto the product so that it is very difficult to say no.
I remember vividly getting out of that test drive feeling like I had a new sense of confidence. I had just achieved a goal that I had envisioned for months. I couldn’t wait to get it!
Sticker price: circa £32,000, which when broken down, equals roughly £8000 down and £450 a month for 3 years. The purchase was a ‘PCP deal’ meaning that after the 3 year finance had run its course, I wouldn’t have owned the car. I would have to pay a balloon payment of around £13,000.
So after 3 years of paying £450 a month I wouldn’t even own the car! I would have two options: refinance the remaining £13,000 or chop it in for another car and restart the finance cycle. And this payment is not even including car insurance, which for such a powerful car, was not cheap in the slightest. A well known insurance company quoted me £2500 a year for fully comprehensive cover, which again, could be financed. £2500 / 12 = roughly £210 a month.
So far this car would be costing me £660 a month for 3 years. That’s not even including road tax and fuel.
I had sold myself on this car. I put a £1000 retainer deposit down whilst I proceeded to sort car insurance
What made me back out?
Fortunately, there was a couple of days time delay between putting the £1000 down and receiving some negotiated insurance quotes for the car. In this time I managed to really process the payment; how much this would actually cost me to own.
Lesson 2: Really take time to break down and process the finances in front of you. When you really break down larger finances, the majority of the time they are even worse than initially meets the eye.
One key problem with cars is, whichever way you look at it ,they are going to lose you money. One, because not many people can afford to buy cars outright and so result in going down the hefty finance route where they get slapped with 6%+ APR and two, because cars, like any consumer product, devalue over time. My 2018 plate Audi S5 would be worth nowhere near what I paid for it in 3 years’ time. I would be lucky to even get half of what I paid for it.
Combine these two together and you’re looking at a financial recipe for disaster. I pulled my deposit and continued to keep my current car which realistically had nothing wrong with it in the first place.
I was lucky in my story. I was so close to getting this car that it was very difficult to back out of the purchase. However, I do know some close friends who have followed through with PCP finance deals and they have loved their purchases but they loved it for only the first few months. After that, the novelty wore off and their dream car really became like any other car on the road. Most now say they really wish they hadn’t bought them in the first place.
Large financed products restrict your ability to save, to travel and to go out because, for the majority of people, a large chuck of their income is being swallowed by that one purchase.
Of course, in my example I used the automotive industry. However, my anecdote can be applied to any industry/product – these types of financing deals can be seen anywhere.
I highly recommend you think about what you’re getting yourself into AT LEAST for two months before committing to anything. When I say ‘think’, I mean really think. Break down what you have going out each month, how much you want to save and places you might want to visit or things you might want to do before even contemplating committing to these types of purchases.
If after two months have passed you still really want that new product and you have worked through the finances in true detail, then by all means proceed to purchase. However, I truly believe 90% of people would back out by this point and, in some cases, would have completely forgotten about the purchase in the first place.
Lesson 3: “Cash is king” – keep money around you and only really buy these products when you can truly afford them.
Author: Max Baker