Why cars are so expensive - and how to find a good deal

Erica McKoy: If you’ve noticed that the price of cars seems to be on the rise, you’re definitely not the only one. So why aren’t cars as cheap or as cheerful as they used to be? Welcome to this podcast from Which?

Hello, it’s Erica recording from the studio today, and I’ve got our car expert Michael Passingham here to talk about the price of cars. Hi, Michael.

Michael Passingham: Hello.

Erica McKoy: So, I’m a Londoner. I get around by train. I don’t have a five mile hike through country lanes to get to a post office or a train station. To be honest, when I’ve considered – I’ve kind of had this on and off relationship with the idea of learning how to drive – but every time I’ve considered it, I’ve thought to myself, "well, it’s just too pricey." I think a lot of people are also in that boat too. What is going on, and is it because of inflation or are there other things at play?

Michael Passingham: There’s so much at play with the cost of motoring overall. The cost of buying a car is coming up, both new and used; the cost of insuring a car has spiked hugely in recent years; the cost of fuel for your petrol and diesel cars; and also the cost of electricity and charging for electric cars as well. There’s kind of nowhere to hide when it comes to these costs. So, yeah, if you’re opting to steer clear of car life, it’s probably good to be on pause on that at the moment, I’d say.

Erica McKoy: As you said, there’s lots at play here. One of the big problems is – well, actually maybe should we talk about the price of cars going up? A classic VW Golf, that has almost – no, it’s more than doubled in price, which is the classic one that maybe lots of people would get when they first buy a car.

Michael Passingham: Yeah, so when I was looking through for writing the piece that’s in the April issue of the Which? magazine, I went through old issues of the Which? car guide that we’ve been producing for decades now. I went back as far as the year 2000 to go look at prices of what was there. It was a really fun trip down memory lane. I looked at the VW Golf – that’s a great example – and back in 2000 it was £11,700. If you adjusted that for inflation – you just strapped that car’s price to inflation – today it should be £22,500. But it’s actually £27,000. It’s inflation plus a bunch extra. In writing this piece, it was a case of finding out where has this extra come from? It is a multi–faceted issue, and it’s not just as simple as things aren’t as good as they used to be. There are societal shifts and technological changes that have meant this is kind of inevitable. But also, in doing so, I’ve also found that it doesn’t have to be this way and you still can save money if you know where to look.

Erica McKoy: One of the big problems you figured out was that cars being on finance seems to be having this impact that I don’t think anyone really expected it to have.

Michael Passingham: This was an interesting thing. When I spoke to one of our pricing analysts, Pat Hoy, who is quoted in this article, he talked about how car finance has been around for a long time, but 80% of cars are bought on finance. What this means is that you pay monthly for the car. Often it’s on what’s called Personal Contract Purchase, or PCP. You pay monthly and at the end of your deal – maybe four or five years – you then can either choose to buy the car outright for a pre–agreed sum, minus the money you’ve paid per month – so a few hundred pounds a month – plus then this final balloon payment it’s called. Or you can take that value and trade it in for a new car. You can end up in this cycle – how perhaps, if you don’t have a car, you might have had a phone contract in recent years where you have the option of upgrading partway through or at the end or buying the phone outright. It’s the same with cars.

What this does is it spreads the cost of all the little extras that you add to your car. If you add a whole pack of extras – like a winter pack or a technology pack – it could be a few thousand pounds. But if your monthly outgoings allow you to add maybe £50 or £100 per month to your car payment, that will nudge you towards adding those extras. What this ends up doing is that cars that end up used after those few years, they come back onto the used market with all of these extras and therefore their value is also higher. Not only people who can afford to pay finance are buying spec’d up cars, but then they end up back on the used market. You end up with these high–end used cars.

Erica McKoy: In the moment it doesn’t seem so bad because you’re paying maybe £200 a month or whatever, and if you can handle that, that’s not too bad. But it’s when it gets back onto the used market that it’s a problem for the next person that’s buying it, right?

Michael Passingham: It is, and it kind of pushes people – I think people come, especially if you don’t buy a car that often, if you’re the type of person who is just buying a used car maybe every ten or plus years, you might come back to the used market and be kind of shocked about what you find. I think it’s fair to say that the quality of used cars now is very good because the quality of cars in general has improved a lot. So, even if you’re looking at a five or ten year old car, it’s probably pretty safe; it’s probably pretty efficient if you’re choosing the right kind of thing. But it’s kind of unavoidable that used cars have ballooned in price in a similar way to new cars because the price of new and used are kind of in lockstep with each other. The market keeps those used and new average prices in lockstep because that’s just how it works.

Erica McKoy: Something you also talk about in the article is the bundling together of packages that kind of turn it into a bit of a problem. What does this mean for car dealers? Because I thought there was a really interesting line in there – tell me about it. What does it mean for car dealers, and then what does it mean for the consumer?

Michael Passingham: For me, someone who likes to tinker and tweak and get exactly what I want, I find these packages quite frustrating if I was in the market to buy a new car. One of the examples I drew upon was Mini. They’re far from the worst, but they’re just the simplest to explain. If you go for a petrol Mini Cooper, it’s about £25,000 for the basic model – reasonably well kitted out. However, there are certain features that aren’t on that model and if you want just one extra feature – like maybe you just wanted heated front seats, which is not crazy to ask for, they’re very nice to have – you can’t just buy them by themselves. It’s part of the Level 1 upgrade and that itself costs £2,000. If you wanted another feature – for example, tinted windows, privacy glass in the back – you’d have to get the Level 2 upgrade which is £4,000 and that includes a bunch of other features that perhaps you didn’t want.

While it’s possibly frustrating for me, the consumer, for the dealer it makes things a lot more simple because you don’t have to get your potential buyer humming and hawing about what to choose and what not to choose. Ultimately they just have to pick a pack and move on. Instead of saying, "I’ll go away and think about it," which our pricing analyst, who was also a former car dealer, he said, "look, that’s just a killer for car dealers." Someone goes away to think about it, that’s an opportunity for them to pull out. So, the simpler the choice is – as frustrating as it is – once you’ve got your heart set on that car, you’re probably going to buy it if there aren’t too many more decisions to make. It does work in the favour of dealers as well.

Erica McKoy: And then with this added features, bigger bundles, bigger packages, there’s that safety aspect. Obviously, I think most people want to know that their car is as safe as it can be and that is something that has changed over the years. There’s more mandatory rules to cars. Everyone wants to have a safer car, right?

Michael Passingham: Exactly. Although a lot of people have different priorities when it comes to safety. Safety legislation not only protects the occupants of the car – which I would imagine most people are most interested in – but it also impacts how the car responds to external factors like pedestrians: automatic braking to avoid collisions with pedestrians and cyclists and other vehicles. This stuff – unlike things like airbags or crumple zones – all of this stuff, these sensors, these cameras, this is technology. That takes material, it requires computer chips and various other sensors, and it requires development. Those systems are powered by software and that software needs people to work on it and keep it working well.

That adds cost, ultimately. That is something that I think some people do find frustrating as they’re paying for safety features that perhaps they themselves don’t want – for example, automatic speed sign recognition and lane–keep assist and those kinds of things that are mandatory, but actually they feel like, "well, I don’t need it, this isn’t for me, but I’ve got to have it anyway and I’m paying for it." Not only does it add to the cost of the bill of materials for the car itself, but it also makes that car more expensive to repair should an accident happen. If you collide with – have a small bump with the car in front – not only are you having to possibly replace your bumper, you’re also having to replace the sensors that are inside that bumper and that costs a lot extra. It also requires extra calibration once that bumper has been fitted – make sure it’s all plugged in properly, make sure it’s working properly. Not only that, the car you hit, you’ve probably got a bunch of sensors in their bumper as well. That also then not only drives up the cost of the repair but it also has this effect of driving up insurance costs, despite the fact that this technology is intended to make cars cheaper to insure because they’re supposed to have fewer accidents. So, it’s this kind of really – it’s very tricky to unpack what effect this is having. But ultimately, if nothing else, it’s driving up the initial purchase cost of cars for things that you have to have on that car – there’s no option to not have them.

Erica McKoy: Michael, you’re making me not want to buy a car anymore or learn how to drive. So, we’ve spoken about the finance, cars being on finance, the bundling of these packages, the safety aspect, but then there’s another thing that’s happened which is Covid and also – I don’t know if this was mentioned in your article, but Brexit as well. These big things that have happened in society that have sent shockwaves through loads of different industries. Have they had an impact on cars?

Michael Passingham: They have, yeah. In fact, Auto Trader, the car marketplace, has really good data on this. Just before Covid, in February 2020, the average selling price for new and used cars was £13,600. Fast forward just two years to January 2022, that had risen by £5,000 – almost £5,000 to £18,000. Covid was a huge economic shock and it had a number of different effects. There was pent up demand from people who didn’t buy cars in 2020 and 2021 because of lockdowns, other priorities – what you’d expect. But also, in that period, those car manufacturers who had computer chips on order cancelled those orders because they didn’t feel like demand was going to return to new cars for a long time. And then when that demand came back quicker than expected, they didn’t have any spare computer chips lying around that they’d already bought and committed to with a given price, so they had to then put in these orders of chips that ended up costing a bunch more, which created a massive backlog. It just ended up with a huge supply and demand offset where people wanted to buy cars and so the prices increased accordingly.

That is now having an impact also on cars – cars that were bought four or five years ago are now coming back onto the market in the used sector, and that economic shock is being felt now. It also means there are fewer cars coming back onto the market from that period because while the prices went up, obviously fewer were sold because there was so much supply chain constraint. It was kind of chaotic. And like you say, Brexit also has had its effect. It’s increased the complexity of moving the thousands and thousands of parts that move around when cars are manufactured in the UK in particular. But it’s also, I guess in some ways, created an opportunity for some manufacturers. For example, we are now seeing a lot of Chinese car manufacturers in the UK and while in Europe they are subject to more in the way of tariffs and taxes, in the UK it’s actually a much less hostile environment for those manufacturers. So those companies are coming to the UK first and also bringing with them some pretty good cars for pretty impressive prices. So, it’s not all doom and gloom, I would say.

Erica McKoy: Good. Do we have a list of the most reliable old cars or used cars that are go–tos that are just good cars?

Michael Passingham: That’s a good shout, actually. So on our website we have a bunch of really handy data – some of it’s for members only, others is also for everybody. But we have data on car reliability for cars up to 15 years old. If you’re looking for a used car that will have low running costs and will be reliable, you can go to our most reliable cars page and then look for cars that are 10 to 15 years old and see which ones get your five stars – that’s the cream of the crop. Some of those older cars are actually more reliable than many much newer cars. So you’re not only getting a bargain – maybe a car that’s perhaps a little simpler and a little more – less expensive to repair – but you’re also getting something extremely reliable.

Then speaking of repairs and maintenance cost, we also have data that we got from this year’s Which? car survey that tells you for several hundred cars the average repair costs when things go wrong and the average servicing cost if you bring your car in for an annual service or something like that. Again, you’ll find a nice crossover of cars that are cheap to service, cheap repair and also really reliable. I think one car that stood out to me when looking at this was the – sort of an older Suzuki Alto. It’s a cheap, cheerful car that also scores really well for reliability and is super cheap to repair and super cheap to maintain. So that’s definitely one worth looking at if you do decide to take the plunge.

Erica McKoy: Amazing. And then we’ve also published a most loved list. Did any of the typical first cars show up on that loved list?

Michael Passingham: Yeah, there are some popular first cars – some of these might be a bit rich for some first car tastes – but there were lots of cars that were on the cheaper side that people really love. This survey was asking people how satisfied they were with their car and whether they’d recommend it to friends and family and then we give them an overall score. Cars like the Honda Civic were right up there – that is actually become quite an expensive car, but you might be able to find a nice used model of that. The Honda Jazz is a Which? reader favourite, one of the most popular cars on our website year after year. Again, perhaps not a first car for a lot of people, perhaps it doesn’t have the super trendy features that perhaps people would want. But also up here are cars like the Renault Clio – that’s a classic first car. Although again, like this whole article is talking about, the prices have gone up quite a lot there for you as well. VW Golf, some Polos, they’re all up here. Minis in particular also performing quite well, even the older ones. So, there’s plenty to choose from and I would definitely recommend looking up our guide on the most and least loved cars in the UK because that will give you a good idea. You can then cross reference it with our testing data to see which ones people like and which ones we recommend as well and then you can go out there and find what you want.

Erica McKoy: Find your car. Drive around. When we’re looking to buy a car, when I’ve finally passed my driving test and I’m out on the road or looking to be out on the road, what’s the best way of saving money?

Michael Passingham: If you’re in the market for a new car, I think my first recommendation would be to not. But you can still get all the joys of a new car with a nearly new car, and that could include things like in–stock cars at dealerships. What that means is it’s a car that already exists, has been pre–registered, may have only driven a few miles, may have been a car used for test drives, or may have just been a display model. These cars can see massive discounts and if you’re prepared to travel to go see and buy them, you can save a huge amount of money on them. Often in some cases if you get lucky, it might be a car they really just looking to get off the lot because they need to make space for a newer car to come on. So it’s absolutely worth looking at those in–stock deals. You have to be flexible exactly on what you – you might not get the colour you’re after or exactly all the features that you wanted. But if you’re prepared to do a lot of research and wait for the exact right model to come along, it’s the best way to save a huge amount of money.

Erica McKoy: Oh, that’s good to know. Are there any other tips?

Michael Passingham: I think just to be aware of the fact that if you do buy a brand new car and it is spec’d exactly to what you want it to be, if you have bought it in cash you will see, especially on EVs in particular, you will see a lot of depreciation. If that’s something that you factor into the car ownership costs and you’re not buying on finance, you should look at depreciation information because when you come to then trade that car in later, you might find that it’s not worth as much as you would have thought. It’s worth keeping that in mind, if you’re someone who habitually buys cars in cash, you should definitely look into that kind of stuff before you buy.

Erica McKoy: Brilliant. So, what’s the future of cars, Michael? Let me get my crystal ball out.

Michael Passingham: I’d say the future is mixed, not to give you a non–answer. But there’s loads of factors that influence the price of cars. One perhaps that people don’t think of is if you’re looking – not looking to buy an electric car and you’re looking at a petrol or diesel. The UK’s laws around how many non–EVs you’re allowed to sell versus the number of petrol and diesel cars you sell. There’s a very strict ratio that is enforced called the zero–emissions vehicle mandate. What this means is manufacturers who sell too many petrol and diesel cars versus the number of EVs they sell, they get fined for every petrol and diesel car they sell above that level. This means that in a lot of cases manufacturers are disincentivised from making petrol and diesel cars more affordable. So they might not be offering the best deals they absolutely could should the market be completely free to do what it wants. It’ll be interesting to see how that policy evolves and whether the very vociferous car manufacturing and dealership lobbying groups are able to get that law shifted, if at all – we’ll have to see about that.

Another thing to keep in mind though, I guess some of the good news is around the huge increase in the number of brands in the UK. The UK has actually quite a vibrant car market and that means there is actually lots of competition. So while the actual flat price of a car has increased a lot, there’s loads of manufacturers vying for your business. So as a consumer you actually probably have a decent amount of power if you’re prepared to do the research and go for brands perhaps you’ve not heard of before. So, yeah, again, while the news doesn’t look amazing, it’s still in your power to save money if you can.

Erica McKoy: But going for something that’s slightly different, I don’t know – lots of people like to go with what they know and what they trust, don’t they?

Michael Passingham: Absolutely. And I do think a lot of the legacy brands – if that’s how you’d put it – they know that, so there are some brands that will kind of resolutely not undercut newer arrivals from China, for example, because it’s kind of the – I guess – reassuringly expensive thing. But I would encourage people who are – have some time to think about what car they’re going to buy next, just go on as many test drives as you can and see what cars from unknown brands or brands you’ve just not considered before – see what’s out there because cars have changed a lot in recent years and there’s a lot of good stuff from manufacturers that perhaps you wouldn’t have ever considered.

Erica McKoy: Brilliant. Thanks for joining me today.

Michael Passingham: Thank you.