Are Buy to Let Cars the newest best savings vehicle?
You know what it’s like. You’ve a spare £13,500 burning a hole in your back pocket, savings rates are still pretty dire, so to turn a buck you look to alternative ways of making your money work. And with rates averaging 11% per annum over three years, perhaps the latest idea of buy-to-let cars could be just what you are looking for.
The premise is simple, a scheme has been running for two years, and is currently being advertised. You hand over your cash to Buy2LetCars and they buy a car, for example, a Hyundai i30Active. The company then secures a lease deal through a financing company and leases the car to someone who doesn’t have £13,500 to buy a car. The car ‘owner’ receives £250 a month over three years, which totals £9,000.
So far this deal is not looking great, given the return is currently minus £4,500. However, what you are forgetting is that you still ‘own’ the car, and after three years you can apparently sell the Hyundai for £8,955. Add that to the pot and you end up £4,455 better off, which works out as a 33% return over the three year lease period. Sounds great doesn’t it? Sounds almost too good to be true…
While ambitious in its aims, the reason buy to let works with property is that property is (usually) an appreciating asset, so that interest-only loan repayments are fine, as the capital value should at least stay the same and be sufficient to pay off any borrowing. In the example with the car, the ‘return’ is dependent on the final value of the car, which is always going to have depreciated from the original value. The amount of your return depends on by how much the car’s value has depreciated. And almost £9k for a used Hyundai? Research by the Guardian suggests that £5,000 to £7,500 is more likely.
But even assuming a final value for the car at a mid-range £6,000, that would give a total return over three years of 11.1%, which is still better than many savings rates available today. But a savings account guarantees the capital, which is protected under the FSCS, so is the risk worth the reward?
That is ultimately a personal decision, but investors, of which there currently number a massive 300, should probably avail themselves of the following additional facts:
One of the directors of Buy2LetCars previously ran a company providing car finance to those rejected elsewhere. That company ran into financial difficulties and was wound up. The cars bought by Buy2LetCars’ investors are leased out by a sister company who specialises in, you guessed it, providing car finance to those rejected elsewhere.
The company says its typical lease contract brings in £300 per month. However, by way of example £249 per month for the Hyundai is a hefty wedge more than Hyundai itself charges for finance at £179. The car lessees must have terrible credit ratings. And will undoubtedly look after the car immaculately during the three years.
The Guardian also discovered that lessees do not have to cough up the final balloon payment on the car, and that even if the car isn’t sold, the company will find the money to pay out to investors from somewhere. Which is reassuring. Director Scott Martin said “We can generate the final £8,955 by month 37 due to our other income streams. In the future the company will also be banking the money earned each month from cars that have been leased out again after the initial three-year lease.” One of these income streams is pocketing the extra rental income earned- remember they claimed their average lease payment is £300 per month? Investors only get £250.
The cars are, apparently, fitted with immobilisers and trackers so that, if a payment is missed, Buy2LetCars can retrieve the vehicle quickly. Unfortunately there are no such devices fitted to the directors or the company bank account.
Patrick Connolly, a certified financial planner at Chase de Vere, said: “An outlay of £13,500 will be quite significant for many people; investors have no access to their money in the three-year period; and there is no protection from the Financial Services Compensation Scheme if Buy2LetCars is unable to pay investors what they are due.
“While the returns quoted are considerably greater than can be achieved through savings accounts, so are the risks. We wouldn’t recommend this investment.”
So, if you want to go for it, let us all know how you get on. We’ll stick to holding our bargepole…