Car PCP and deposits on them

[sidicks]

rehab71 said:

You're wrong.

No I'm not.

rehab71 said:

If a car is £20,000 new and has GMFV of £10,000 and is worth £12,000 when the GMFV is due the equity is exactly the same regardless of the deposit.

Yes, but under your approach you'll have paid more money to be in that position.

Or equivalently, by the virtue of paying less interest , you would be able to afford a higher deposit.

As I keep saying, this should be really simple to understand.

rehab71 said:

Yes, the total amount payable is effected by the deposit but the GMFV is fixed regardless of the deposit.

But the point is (quite obviously) if you have paid more throughout the term of the contract you have less to fund the next deposit.

Why can't you see this?

And if you can see this, why can't your admit that your advice is rubbish!!

[sidicks]

Let's see if a simple example will help you understand this:

£20,000 car
£8,000 GMFV
7.44% interest (0.6% per month)

Option 1:
£5,000 deposit
Monthly premium = £264.78
Total paid = £14,532.09

Option 2:
£1,000 deposit
Monthly premium = £388.65
Total paid = £14,991.57

So in this case, option 1 has an extra (£14,991.57 - £14,532.09) = £459.48 towards the next deposit...

[silentbrown]

Rehab71's amusing bks have some derailed the thread, and nobody mentioned THIS:

Dizeee said:

I intend to use the car as equity for another car at the 3 year point

Equity? What equity? You don't own the car after 3 years - all you've got is the possibility of buying the car for the GFV and selling it for a little more.

The problem with PCP is that the deposit payments become a hamster wheel : the figures are designed to leave you with very little "equity" at the end, so the *only* way you can afford to change your car is by getting another PCP deal. And so forth...

[Mattt]

sidicks said:

Let's see if a simple example will help you understand this:

£20,000 car
£8,000 GMFV
7.44% interest (0.6% per month)

Option 1:
£5,000 deposit
Monthly premium = £264.78
Total paid = £14,532.09

Option 2:
£1,000 deposit
Monthly premium = £388.65
Total paid = £14,991.57

So in this case, option 1 has an extra (£14,991.57 - £14,532.09) = £459.48 towards the next deposit...

But if there was no equity left in the MGFV, Punter 1 has to be saving each month to build back up his £5k deposit if he wants a similar deal. Not a problem if you're sensible, but as we know -many are not.

[Mastiff]

silentbrown said:

Equity? What equity? You don't own the car after 3 years - all you've got is the possibility of buying the car for the GFV and selling it for a little more.

The problem with PCP is that the deposit payments become a hamster wheel : the figures are designed to leave you with very little "equity" at the end, so the *only* way you can afford to change your car is by getting another PCP deal. And so forth...

Not strictly true, this depends largely on which manufacturers we are talking about.

[grahamm]

You just have to remember the deposit reduces the monthly payment, not the balloon payment, so if you are relying on payments staying similar on your next car you need to save up seperately over the term, otherwise your options will be limited and you may have to increase your payments or change to a cheaper car. Personally I have overstated my predicted mileage to reduce the balloon payment, although I accept I will lose out if the market moves and I would prefer to hand the car back at the end.

[Mastiff]

grahamm said:

You just have to remember the deposit reduces the monthly payment, not the balloon payment, so if you are relying on payments staying similar on your next car you need to save up seperately over the term, otherwise your options will be limited and you may have to increase your payments or change to a cheaper car. Personally I have overstated my predicted mileage to reduce the balloon payment, although I accept I will lose out if the market moves and I would prefer to hand the car back at the end.

Never a bad move to try and build in additional equity at the end - but there really should be no need to mess about with the projected mileage figure to do it. The dealer should be able to (within reason) set the GFV (baloon) to whatever you would like.

On some models that we have at the moment there is a better rate on PCP as opposed to HP (6.9% APR and 7.9% APR respectively) so we advise people to use the PCP Scheme and just have a token GFV at the end - say £1,000.00 or so.

[sidicks]

Mattt said:

But if there was no equity left in the MGFV, Punter 1 has to be saving each month to build back up his £5k deposit if he wants a similar deal.

And he's still £500 better off than your alternative!

Matt said:

Not a problem if you're sensible, but as we know -many are not.

And in that case the appropriate advice would be to pay the larger deposit upfront, benefit from the lower monthly premium (and the lower interest) and arrange for the difference in premiums ( £388.65 - £264.78 = £123.87 per month) to be paid into a separate 'car deposit' account.

[sidicks]

Mastiff said:

grahamm said:

You just have to remember the deposit reduces the monthly payment, not the balloon payment, so if you are relying on payments staying similar on your next car you need to save up seperately over the term, otherwise your options will be limited and you may have to increase your payments or change to a cheaper car. Personally I have overstated my predicted mileage to reduce the balloon payment, although I accept I will lose out if the market moves and I would prefer to hand the car back at the end.

Never a bad move to try and build in additional equity at the end - but there really should be no need to mess about with the projected mileage figure to do it. The dealer should be able to (within reason) set the GFV (baloon) to whatever you would like.

On some models that we have at the moment there is a better rate on PCP as opposed to HP (6.9% APR and 7.9% APR respectively) so we advise people to use the PCP Scheme and just have a token GFV at the end - say £1,000.00 or so.

PCPs can work out more expensive (in cash terms) than loans, even if the interest rate on the PCP is lower, due to the profile of the repayments.

However, if the balloon payment is minimised, as per your suggestion, this makes a lot of sense!

[sidicks]

grahamm said:

You just have to remember the deposit reduces the monthly payment, not the balloon payment, so if you are relying on payments staying similar on your next car you need to save up seperately over the term, otherwise your options will be limited and you may have to increase your payments or change to a cheaper car. Personally I have overstated my predicted mileage to reduce the balloon payment, although I accept I will lose out if the market moves and I would prefer to hand the car back at the end.

As above, many PCPs allow you to reduce the balloon payment, which makes more sense if you are planning on maintaining the deposit to use on a further PCP.

[TheHound]

I know I had a bit of disagreement with sidicks on a previous thread a few weeks ago, however he is 100% right here and the OP should pay attention to his posts and ignore any that are disputing what he is saying.

[pigeonskirt]

Rehab is offering good advice and you should all stop being so cynical. Ultimately, most people buy on PCP as they wish to swap their car on a 3 year cycle. If you put a large deposit (i.e £4000) in at day 1, you do commit yourself to putting in around about £4000 every time you renew. Unless you want to pay a much higher payment next time around of course. Obviously you will pay more interest as your loan amount is higher, but Rehab never suggested otherwise.

[Mastiff]

We do a great deal of business on PCP Schemes, specially since the introduction of the new rules.

People like them because of the flexibilty I think. You can now "overpay" on them, as little or as much as you like throughout the agreement without penalty - thereby reducing monthly repayments and the total amount payable as you go along.

You can settle up at any point, at which time the finance company will deduct any interest still payable and just add one months interest as an admin fee. This is important now as under the new rules Finance Companies are not allowed to "front load" the interest as they used to i:e - you no longer repay all interest before starting to repay the capital.

The figures here suggest that the best profile seems to be taking out 3 year agreements but changing somewhere between month 28 and month 32. I think that this is because of part exchange values being higher when the vehicle is still under warranty.

The schemes also appear to work very well for people covering higher annual mileages.

They are not for everyone certainly but there are a number of upsides. You know exactly what the worst case scenario is for running that vehicle - the only real variable is how much, if any, equity you will have in the vehicle at the end of the term.

It frees up personal funds without effecting the individuals credit line, as the loan is secured on the asset as oppposed to the individual.

A lot of people no longer see the need to put large sums of money into an asset that is (usually) only gong to go one way. They can do other thiings with that money.

It was once explained to me rather well by a chap who said "You see that flat over there? It's £250,000.00. You KNOW for a fact it's going to be worth £180,000.00 in three years - do you want to buy it or rent it"?

Pretty much how PCP works.

[Claudia Skies]

Whilst I'm interested to read Mastiff's point above, the best way to reduce your motoring costs is to reduce your depreciation. And the best way to do that is avoid buying a new car every 3 years!

However, I recognise it's what some people like to do.

[Dr Jekyll]

Mastiff said:

A lot of people no longer see the need to put large sums of money into an asset that is (usually) only gong to go one way. They can do other thiings with that money.

It was once explained to me rather well by a chap who said "You see that flat over there? It's £250,000.00. You KNOW for a fact it's going to be worth £180,000.00 in three years - do you want to buy it or rent it"?

An argument I've never understood, you pay for the depreciation either way.

Do you really believe that the bulk of PCP buyers put their capital into something that gives a higher after tax return than the interest they are paying?

Edited by Dr Jekyll on Saturday 28th February 17:30

[85Carrera]

silentbrown said:

Rehab71's amusing bks have some derailed the thread, and nobody mentioned THIS:

Dizeee said:

I intend to use the car as equity for another car at the 3 year point

Equity? What equity? You don't own the car after 3 years - all you've got is the possibility of buying the car for the GFV and selling it for a little more.

The problem with PCP is that the deposit payments become a hamster wheel : the figures are designed to leave you with very little "equity" at the end, so the *only* way you can afford to change your car is by getting another PCP deal. And so forth...

Quite, you're effectively renting it unless you pay the balloon payment at the end of the term. So after 3 years you either do that and own the car or enter into another PCP/rental agreement.

I've never seen the point of these until I saw someone mention on another thread the other day that if your payments were less than the depreciation it stacks up. This makes sense if this is what happens but I guess this isn't the case or the dealer/finance company wouldn't be making any money! Or am I missing something?

[sidicks]

85Carrera said:

Quite, you're effectively renting it unless you pay the balloon payment at the end of the term. So after 3 years you either do that and own the car or enter into another PCP/rental agreement.

I've never seen the point of these until I saw someone mention on another thread the other day that if your payments were less than the depreciation it stacks up. This makes sense if this is what happens but I guess this isn't the case or the dealer/finance company wouldn't be making any money! Or am I missing something?

No, you're not missing anything!

The depreciation still has to be paid and you either pay it yourself or you pay the Finance company to pay it, plus interest!!

The potential aleviating factor is that the Finance company can buy cars in bulk, achieving significant discounts and hence mitigating the depreciation to some extent.

[sidicks]

pigeonskirt said:

Rehab is offering good advice and you should all stop being so cynical. Ultimately, most people buy on PCP as they wish to swap their car on a 3 year cycle. If you put a large deposit (i.e £4000) in at day 1, you do commit yourself to putting in around about £4000 every time you renew. Unless you want to pay a much higher payment next time around of course. Obviously you will pay more interest as your loan amount is higher, but Rehab never suggested otherwise.

No you don't, as explained above.

[oop north]

Dr Jekyll said:

Mastiff said:

A lot of people no longer see the need to put large sums of money into an asset that is (usually) only gong to go one way. They can do other thiings with that money.

It was once explained to me rather well by a chap who said "You see that flat over there? It's £250,000.00. You KNOW for a fact it's going to be worth £180,000.00 in three years - do you want to buy it or rent it"?

An argument I've never understood, you pay for the depreciation either way.

Do you really believe that the bulk of PCP buyers put their capital into something that gives a higher after tax return than the interest they are paying?

Edited by Dr Jekyll on Saturday 28th February 17:30

Hear, hear! That's a really silly example - cars generally depreciate, but homes generally do not (and you also don't know in advance what is going to happen to house prices) - if you know there is going to be a massive property price crash you would not buy a property. But if acquiring the use of a car that is going to depreciate, and everyone knows that (we all know in advance that car values will generally fall over time) then you are going to have to pay for the depreciation. In fact I would say it is not just silly but actually a dangerous example because it makes a totally invalid comparison between housing and cars that confuses people

It is a bit sad that so many people understand so little about finances - and the finance industry absolutely capitalises on that. The entire PCP industry is designed to get you buying a new car every three years - because you (generally) have no equity in the car. At the end of the term, you can either borrow a load of money to buy the car, or borrow a load of money to buy a brand spanking new one. not surprising that, with that choice, many people stay on the treadmill

Now, I am not saying I won't ever get on the treadmill (I might well do that) and the upside of not tying so much money up in a car is that you (assuming you don't just spend it elsewhere and/or have not splurged on a far more expensive car cos the PCP makes that possible) have a rainy day fund. So, if you are out of work for a while, then you have some cash to support yourself.

But if you are in a PCP having paid a low deposit (rather than say HP or with a personal loan and/or having paid a big deposit) and you lose your job then getting rid of your car may actually cost you money (to clear negative equity). But if you had a personal loan you would be able to sell the car and get a cheaper one. So tying money up in your can actually be a good thing - the more you have tied up in it the more you can cash it in at some point if you need to.

So, there is a case for viewing PCP deals as being high risk, and to manage them safely you need to either have a very secure job or a cushion of cash / rainy day fund

[pigeonskirt]

sidicks said:

No you don't, as explained above.

Sidicks, are you in the motor trade?