Back to Finance Library Home Page
Outright Purchase is simply getting vehicles by purchase direct from the
supplier without using finance.
The purchaser is then free to run the vehicle over any replacement cycle (or 'term') and
sell the vehicle at any time, though typically a specific number or months or miles
will be used a guideline on when to replace a vehicle.
Additionally, it may be possible to arrange with the vehicle supplier for an repurchase
or sales agency agreement to dispose of the car.
Under a repurchase agreement the vehicle is returned to the supplier at a fixed price,
thus guaranteeing the disposal value. In a sales agency agreement the supplier agrees
to dispose of the vehicle on behalf of the purchaser for a fixed payment or a commission, thus
reducing the purchaser's administration and related costs of disposal.
Outright purchase avoids direct finance charges, but ties up cash reserves/savings ('capital') as the buyer will have paid the full purchase price of the vehicle around the time of
taking delivery. This results in a loss of use of capital to the buyer and therefore
a notional cost in terms of the use to which the cash could otherwise have been put ('opportunity cost'). Ignoring costs that apply across all finance methods
(such as fuel and insurance), the major direct costs involved in outright purchase
are likely to be depreciation, Vehicle Excise Duty,
and maintenance.
Advantages of Outright Purchase
Because the purchaser takes ownership of the vehicle the purchaser can profit
from prudent management of the vehicle, such as achieving a better resale price than
market value through proper vehicle care, maintenance and management.
Vehicles can be sold at any time without a
specific financial penalty (leasing companies usually charge an early termination
fee for disposing of leased/hired vehicles before the full term), though the depreciation
cost will be proportionately higher when a vehicle is sold before the end of its normal
replacement cycle.
Disadvantages of Outright Purchase
The purchaser is exposed to fluctuations in residual values and maintenance costs, in particular if used vehicle prices drop.
For passenger cars the VAT on the purchase price of the vehicle
cannot be recovered by individuals.
|