London: The soaring cost of petrol, low savings rates and high house prices are some of the factors behind the growing number of people forking out for new cars despite the economic downturn, according to industry experts.

“Some motorists are looking to the new car market to take advantage of the latest technologies that offer enhanced fuel efficiency and lower running costs,” a spokesperson for the Society of Motor Manufacturers and Traders said. “Very little movement in the housing market may have also shifted focus to new car replacement.”

Chas Hallett, editor-in-chief of What Car?, suggests poor savings rates are also having an impact. “A lot of people are looking at what they are getting on their savings and deciding it is worth doing something else with the money.”

And the vehicles being bought suggest it is not millionaires driving the surge: the best-selling models in the past year were the Ford Fiesta, the Ford Focus, the Vauxhall Astra, the Vauxhall Corsa and the Nissan Qashqai.

New vs second hand

Buying new might be popular, but with cars losing a typical 20 per cent of their value the moment they leave the dealership, is it ever really a wise move?

A recent study from motoring magazine Auto Express concludes it can be if you buy using dealer finance. It compared some of the deals currently available on the forecourt for new and used cars and found, for example, that buyers using a finance package to purchase a new Ford Focus can save more than £1,700 (Dh9,688) compared with a used one. A Volkswagen Scirocco worked out £3,200 cheaper than a second-hand one, and a Nissan Juke £1,000 cheaper.

In 2012 the number of people buying new cars via dealership finance packages rose by 26 per cent from 2011, according to the Finance Leasing Association, meaning more than 70 per cent of new cars were bought this way.

“Every manufacturer is offering [finance] deals and they are remarkably good,” says Jon Morgan, acting consumer editor at Auto Express and Car Buyer. “When a monthly payment is only a couple of hundred pounds, it makes buying a new car affordable for so many more people.”

Hallett says there is always the emotional appeal of buying new, but this is now coupled with long warranties and attractive cashback and finance deals. “The real value is still in buying a nearly new car,” he says. “But the attractive finance deals are often not available on those.”

Financing options

The main options for financing a new car are taking out a personal loan, buying on hire purchase, or via personal contract purchase (PCP).

Personal loan rates are coming down. For those that qualify it is possible to get a rates of less than 8 per cent on loans of up to £25,000.

Hire purchase is the simplest form of finance outside of a personal loan. With HP, you pay a deposit upfront (often 10 per cent) and then pay the rest off in monthly instalments over an agreed period, usually over 18-60 months. After the last payment you own the car.

PCP is increasingly popular with both motorists and dealers. Again, you pay a deposit and monthly amounts over a fixed term, but payments are typically lower and the term shorter. Some deals are on an interest-free basis, making PCP even more attractive. At the end there is a chunk left to pay this is called the guaranteed minimum future value (GMFV) as there is a guarantee that, within certain conditions, the car will be worth at least as much as the outstanding amount.

You then have three options: to pay this off and keep the car, give the car back without making any more payments, or part-exchange the car for a new one.

The third way

Many buyers are motivated by lower motoring costs rather than the eventual value of the car. But if you plan to sell the car after a few years the residual value is important. You can check this at whatcar.com/car-depreciation-calculator.

“We recently looked at the amount different cars lose 24 hours after you buy them. In one case it was 50 per cent overnight,” Morgan says. This had made leasing an increasingly popular option, with the number of people doing so in 2012 up 15 per cent on the year before. “In many cases it will work out better to lease and not then take the hit on any depreciation in value,” he says.

Leasing can work out as cheaply as PCP on a monthly basis, but you have to look carefully at how much you will end up paying for extras. Often you can only get, for example, a white version of your desired car as standard and will have to pay £500 for black or silver.

As an example of costs, leasing the Nissan Qashqai via Nationwide Vehicle Contracts, has an initial payment of £662 (plus £180 processing fee). Over 36 months, the monthly payments are £221 — as long as the annual mileage is no more than 10,000. After this it is 13p a mile. The total cost is £8,798.