Explaining PCP's

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Discussion

zedstar

Original Poster:

1,735 posts

175 months

Thursday 21st April 2016
quotequote all
I don't about anybody else but personally I feel like the 'car guy' in my family and friends and one thing i'm always having to explain is a PCP. Which im normally comparing to a lease. I'm amazed but actually not surprised about how many people out there don't know about the mechanics of a PCP. Not that many seem to know that the outstanding 'GFV' is attracting interest all the way through, so you're not just paying interest on the portion you're paying back but the entire outstanding amount.

Another real confusion point is that people tend to think they can't change the car until their term ends, I say 'Yes, ofcourse you can, as long as you pay the O/S loan,', they say 'No, can't do anything until its 3 years, thats when my balloon is. So again, they don't really understand that it is a loan like any other.

A lot amount of people think you can only 'easily' get a new PCP by going to the same manufacturer and that going to a different complcates matters hugely.

The GFV, they think thats what the car will actually be worth in 3 years time, not that it is just a manufactured figure to allow a few quid to roll into the next deposit. Although I am aware of a few friends who had mercs where the value at the end was less than the GFV and it was best to just hand back. Another angle here is related to the point above, people assume that the manufacturer is the only one that can give you a value higher than the GFV. A few guys i've spoken to are all happy that they got more than the GFV for their mint cars within agreed mileages, great deal apparently cos they got more than it was 'worth'.

Anyway i'm not trying to criticise the average car buying punter, it took me a while to get my head around the above. But, I do think its concerning how many people have no idea what the finance agreement that they have already entered into means for them. And maybe thats ok, as if they're happy with the monthlies then good for them.

What I explained to the last 2 members of my family who asked me was that the car finance is a bit like a 6 year car loan, with a break clause at year 3. (I'm using 3 years for simplicity). At year 3 they can terminate everything, but if they want to carry on the loan they'll have to refinance. This seemed a clearer way of explaining the PCP thing.

So my thought of the thread is, are PCP's too complicated and not explained enough for the average consumer? I had one on my last car and with all the talk of monthly rentals, final values and the mileage charges it seems like anything but a loan you're taking out.

Granfondo

12,241 posts

205 months

Thursday 21st April 2016
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Or the realistic explanation

PCP gets some/most people into cars they can't afford to own! biggrin

This can be viewed good or bad depending on which side of the salesman's desk you are sitting!


Sheepshanks

32,529 posts

118 months

Thursday 21st April 2016
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I know two people, both of whom have jobs that involve money and contracts, so quite commercially minded, who were both convinced they would get their deposits back at the end of the PCP, like you would do if you hired something.

One of them was utterly dismayed to learn that the value of his p/x was gone, and at the end of the deal he'd likely have nothing. This proved to be the case - it was a Ford and it was under water at the end of the term.

sidicks

25,218 posts

220 months

Thursday 21st April 2016
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Sheepshanks said:
I know two people, both of whom have jobs that involve money and contracts, so quite commercially minded, who were both convinced they would get their deposits back at the end of the PCP, like you would do if you hired something.

One of them was utterly dismayed to learn that the value of his p/x was gone, and at the end of the deal he'd likely have nothing. This proved to be the case - it was a Ford and it was under water at the end of the term.
That's pretty rare, as the manufacturer's want some contingency built in to the GFV, to avoid people simply handing back the cars and them taking a loss.

Granfondo

12,241 posts

205 months

Thursday 21st April 2016
quotequote all
sidicks said:
Sheepshanks said:
I know two people, both of whom have jobs that involve money and contracts, so quite commercially minded, who were both convinced they would get their deposits back at the end of the PCP, like you would do if you hired something.

One of them was utterly dismayed to learn that the value of his p/x was gone, and at the end of the deal he'd likely have nothing. This proved to be the case - it was a Ford and it was under water at the end of the term.
That's pretty rare, as the manufacturer's want some contingency built in to the GFV, to avoid people simply handing back the cars and them taking a loss.
Rare?
Ask someone who pcp'd a Merc recently!

bmwmike

6,918 posts

107 months

Thursday 21st April 2016
quotequote all
Good to see a PCP discussion.

I understand the basics of a PCP I think, enough to know I don't want one anyway as I prefer to be buying the car if not buy it outright. Although I am not fully sure I know why I prefer to own a car and the risk that goes with it if out of warranty etc.

The part I personally find difficult to weigh up is whether (for example) on paper my last purchase would have been better off as a new car on PCP. I paid 18.5k for a 3.5yr old f10. Financed through a 15k loan at 3.6% and the rest cash.

Is now 4 years old and I think the outstanding loan is approximately what I'd get for the car, about 14k ish.

Had I bought new on pcp I'd have put the 3.5k cash in, had a new car, but a higher APR and much higher monthly payments. At the end of 3 years I'd be in the same approx position of spending about 18 ish k on a 3 year old motor.

Not being the sort to care about having a new car on my drive (last was 17yrs old) I think I made the right choice for my circs.

Be interested to know if I'm right or have missed a pcp trick.





JonV8V

7,175 posts

123 months

Thursday 21st April 2016
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bmwmike said:
Good to see a PCP discussion.

I understand the basics of a PCP I think, enough to know I don't want one anyway as I prefer to be buying the car if not buy it outright. Although I am not fully sure I know why I prefer to own a car and the risk that goes with it if out of warranty etc.

The part I personally find difficult to weigh up is whether (for example) on paper my last purchase would have been better off as a new car on PCP. I paid 18.5k for a 3.5yr old f10. Financed through a 15k loan at 3.6% and the rest cash.

Is now 4 years old and I think the outstanding loan is approximately what I'd get for the car, about 14k ish.

Had I bought new on pcp I'd have put the 3.5k cash in, had a new car, but a higher APR and much higher monthly payments. At the end of 3 years I'd be in the same approx position of spending about 18 ish k on a 3 year old motor.

Not being the sort to care about having a new car on my drive (last was 17yrs old) I think I made the right choice for my circs.

Be interested to know if I'm right or have missed a pcp trick.
The car you bought you'd own after 3 years, might not be worth a lot but it will be yours.

The PCP route you'd have a car you give back and have nothing to show for that 18k - there is a potential upside where its worth a few quid more than the guaranteed future value that you can pocket. Depends on what happens to the used car market between now and then.

PHlL

1,538 posts

138 months

Saturday 23rd April 2016
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You hit the nail on the head really about people thinking they're tied in.

PCP has the highest retention as people often think they locked in for a set period with the same manufacture.

We live in a world all about the monthlies. If you have a Golf which costs £30k, or £300 a month on PCP people like the sound of the latter. If VW advertised it more, you could get it for £250 on a PCH lots of people would jump to that, they just don't know about it.

bad company

18,483 posts

265 months

Sunday 24th April 2016
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PCP avoids a lot of the hassle at change time. No need to hear a dealer telling you that you chose the wrong colour or that there is little demand for this model sir.

My pcp finishes in May 2017 so will be ordering the replacement around February.

Edited by bad company on Sunday 24th April 10:45

HTP99

22,443 posts

139 months

Sunday 24th April 2016
quotequote all
I've had people that think the balloon is what they are getting at the end; hand the car back with a £3500 balloon and they think that they will be handing the car back and also receiving the £3500 to put down on a new car.

When we took over the garage that we are in now we spent a good few years sorting out PCP mis-selling issues from the previous occupants; another is someone that is new to PCP being sold it on the basis of low monthly payments by using their part ex that has a decent value, as the full deposit, however come re-newel they haven't got that chunky deposit from a part ex so therefore their monthlies jump up considerably, unless they can find £5k as a deposit for the new PCP; of course many haven't got that kind of money, or if they have, they don't want use it.

Many PCP's are mis-sold by salesmen who in all likely hood won't be there in three years time to mop up the mess.

New FCA regulations stipulate that we must present all forms of finance options, with knowledgeable explanations as to the pro's and cons of each one; whether that goes on or not for the majority is another matter.

Many younger people know exactly what PCP is and are fairly clued up on it, I guess to them it is similar to a phone contract; x amount per month for 2 or three years and then just upgrade.

Edited by HTP99 on Sunday 24th April 10:41

Sheepshanks

32,529 posts

118 months

Sunday 24th April 2016
quotequote all
HTP99 said:
Many PCP's are mis-sold by salesmen who in all likely hood won't be there in three years time to mop up the mess.
My daughter has a Honda Jazz which we took on PCP as it was 0%, no deposit and they gave us £500 back. The monthly is quite high but the GFV is low so there's quite a bit of equity in the car.

I'm being beaten senseless by a salesman from the dealership who has called twice a week for a month to try and get us to swap it to a HR-V and acts incredulous that we don't jump at it because the monthly is lower.

But the GFV on HR-V is massively higher - which means at 3yrs there's going to be no equity in the car so it won't make sense to keep it. And starting a new PCP will be expensive as we'll be starting from scratch.

I might be missing something, but it feels like a trap.

Mandat

3,879 posts

237 months

Sunday 24th April 2016
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JonV8V said:
The car you bought you'd own after 3 years, might not be worth a lot but it will be yours.

The PCP route you'd have a car you give back and have nothing to show for that 18k
Why is this line always trotted out? Of course you have something to show for it.

At the very least you will have had exclusive use of a brand new car for the 3 year period, with worry free motoring and manufacturer's warranty, etc.

Some people will place a greater value on this convenience than others, but there is still an intrinsic value in the PCP route.

ashleyman

6,962 posts

98 months

Sunday 24th April 2016
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I have no idea how a long term PCP will work. But I got my Golf R on a PCP in January because it was much cheaper than a lease over the same term.

I feel a little cheated as if I'd waited I could have got one of those cheap leases. If there's something left at the end I might be swayed to do another PCP but only if the deal was proper cheap.

PCP is great if you know all the facts and options and look at total cost of ownership and not just monthly payments. I do have to thank the person who mentioned that interest was calculated over the full term including the balloon. That's annoyed me but I am still happy with my deal.

JonV8V

7,175 posts

123 months

Sunday 24th April 2016
quotequote all
Mandat said:
JonV8V said:
The car you bought you'd own after 3 years, might not be worth a lot but it will be yours.

The PCP route you'd have a car you give back and have nothing to show for that 18k
Why is this line always trotted out? Of course you have something to show for it.

At the very least you will have had exclusive use of a brand new car for the 3 year period, with worry free motoring and manufacturer's warranty, etc.

Some people will place a greater value on this convenience than others, but there is still an intrinsic value in the PCP route.
a, you truncated half my post

b, the post was in response to somebody who said they didn't value having a new car

c, its true, at the end of a PCP, you give the car back and have nothing other than the memory.

The reason why its trotted out is because it is the most significant difference between buying a car with a loan v a PCP which was what the question was.

bad company

18,483 posts

265 months

Sunday 24th April 2016
quotequote all
Mandat said:
JonV8V said:
The car you bought you'd own after 3 years, might not be worth a lot but it will be yours.

The PCP route you'd have a car you give back and have nothing to show for that 18k
Why is this line always trotted out? Of course you have something to show for it.

At the very least you will have had exclusive use of a brand new car for the 3 year period, with worry free motoring and manufacturer's warranty, etc.

Some people will place a greater value on this convenience than others, but there is still an intrinsic value in the PCP route.
For me the attraction is that I can chose exactly what spec I want and not have to worry about what the resale/ trade in might be. I can afford to buy outright but prefer pcp.

Mandat

3,879 posts

237 months

Sunday 24th April 2016
quotequote all
JonV8V said:
Mandat said:
JonV8V said:
The car you bought you'd own after 3 years, might not be worth a lot but it will be yours.

The PCP route you'd have a car you give back and have nothing to show for that 18k
Why is this line always trotted out? Of course you have something to show for it.

At the very least you will have had exclusive use of a brand new car for the 3 year period, with worry free motoring and manufacturer's warranty, etc.

Some people will place a greater value on this convenience than others, but there is still an intrinsic value in the PCP route.
a, you truncated half my post

b, the post was in response to somebody who said they didn't value having a new car

c, its true, at the end of a PCP, you give the car back and have nothing other than the memory.

The reason why its trotted out is because it is the most significant difference between buying a car with a loan v a PCP which was what the question was.
In response:

a: to highlight the specific point that I was addressing.

b: noted.

c: it's the same situation when you sell the car that you originally bought outright.

Conclusion: it's generally misunderstood by many people because to truly compare the difference between buying outright (i.e. cash, loan, hp, etc) and PCP you need to calculate the total cost of both options. To do that you need to work out the loss that is made when the owned car is sold -v- the cost of payments made under the PCP term. In both cases, money has been spent/lost over the ownership term with no car at the end of it.

JonV8V

7,175 posts

123 months

Sunday 24th April 2016
quotequote all
Mandat said:
In response:

a: to highlight the specific point that I was addressing.

b: noted.

c: it's the same situation when you sell the car that you originally bought outright.

Conclusion: it's generally misunderstood by many people because to truly compare the difference between buying outright (i.e. cash, loan, hp, etc) and PCP you need to calculate the total cost of both options. To do that you need to work out the loss that is made when the owned car is sold -v- the cost of payments made under the PCP term. In both cases, money has been spent/lost over the ownership term with no car at the end of it.
That's exactly the point I was making. The monthly costs were the same, the difference was after one he had a car (which he could sell) and the other he didn't. If he sells his BMW for £7200 after the 3 years it would effectively mean the monthly cost was £200 lower.

Mandat

3,879 posts

237 months

Sunday 24th April 2016
quotequote all
JonV8V said:
Mandat said:
In response:

a: to highlight the specific point that I was addressing.

b: noted.

c: it's the same situation when you sell the car that you originally bought outright.

Conclusion: it's generally misunderstood by many people because to truly compare the difference between buying outright (i.e. cash, loan, hp, etc) and PCP you need to calculate the total cost of both options. To do that you need to work out the loss that is made when the owned car is sold -v- the cost of payments made under the PCP term. In both cases, money has been spent/lost over the ownership term with no car at the end of it.
That's exactly the point I was making. The monthly costs were the same, the difference was after one he had a car (which he could sell) and the other he didn't. If he sells his BMW for £7200 after the 3 years it would effectively mean the monthly cost was £200 lower.
Well I'm glad that yo agree with me. tongue out

The actual figures will stack up differently based on the particular car, its value, monthly payments, rate of depreciation, etc. and everyone should work out the costs relative to their particular circumstances to assess the value of the deal to them.

However, the point that I was addressing is that the mantra of "having nothing to show at the end of a PCP" is misleading and therefore incorrect.

skahigh

2,023 posts

130 months

Sunday 24th April 2016
quotequote all
JonV8V said:
Mandat said:
In response:

a: to highlight the specific point that I was addressing.

b: noted.

c: it's the same situation when you sell the car that you originally bought outright.

Conclusion: it's generally misunderstood by many people because to truly compare the difference between buying outright (i.e. cash, loan, hp, etc) and PCP you need to calculate the total cost of both options. To do that you need to work out the loss that is made when the owned car is sold -v- the cost of payments made under the PCP term. In both cases, money has been spent/lost over the ownership term with no car at the end of it.
That's exactly the point I was making. The monthly costs were the same, the difference was after one he had a car (which he could sell) and the other he didn't. If he sells his BMW for £7200 after the 3 years it would effectively mean the monthly cost was £200 lower.
You're making the mistake of comparing a 3 year old car against a new one, of course it would be cheaper overall due to the massive depreciation on a new car in the first three years.

A true comparison is between a pcp on new, hp on new and buying new with savings. In all three cases the true cost of ownership is the difference between the purchase price and the selling price over a set period, in all cases you have no car at the end. Usually the PCP will have cost a little more than HP due to the interest and the HP will have cost a little more than the savings purchase due to the interest.

There are variables in all of this which confuse people like varying interest rates between products for example but, comparing new vs used just makes no sense.

JonV8V

7,175 posts

123 months

Sunday 24th April 2016
quotequote all
skahigh said:
You're making the mistake of comparing a 3 year old car against a new one, of course it would be cheaper overall due to the massive depreciation on a new car in the first three years.

A true comparison is between a pcp on new, hp on new and buying new with savings. In all three cases the true cost of ownership is the difference between the purchase price and the selling price over a set period, in all cases you have no car at the end. Usually the PCP will have cost a little more than HP due to the interest and the HP will have cost a little more than the savings purchase due to the interest.

There are variables in all of this which confuse people like varying interest rates between products for example but, comparing new vs used just makes no sense.
That's not the question he asked though. He asked if he'd missed a trick as based on the monthlies he was paying the same for his used car v a new one.