Finance Question

[H4rsePower]

So, we’re buying a new car for the Mrs. Normally, I am pretty good with figures but PCP deals just wreck my mind.

I think I know the answer and I have read other topics on similar matters but..

We went to see a used car. A C Class Coupe, 2019 worth £24,999.

The dealer mentioned a PCP. 10% deposit. Over 4 years with 9.9% Apr. Monthly payments £339. I think the GFV was around £13,000. So, total interest charges were £7000 ish.

I thought £339 a month sounds fair, could just get the deal done and walk away, sell the car at the end and hopefully get the deposit back.

Then I thought about a bank loan of £22500. (25k minus 10% deposit ) Which I could get at 6.9%. Spread it over 5 years for monthlies of about £440. Total interest charged of about £4000.

So, tell me if I’m wrong but at the end of the PCP I’d have paid £3000 more interest plus maybe walk away with £2000 or so equity or cash if I sell it?

As opposed to the bank loan where I keep the car and own its whole value, hopefully sell it for around £13,000.

So, the bank loan route would see me around £13,000 better off at the end in saved interest and equity vs the PCP?

Is this correct or have I totally misunderstood everything??!

Thanks in advance for anyone’s input!

[anonymous-user]

PCP = £2500 + (£339 * 48) = £18,772
Loan = £2500 + (£440 * 60) = £28900

Assuming the car is worth £13000 after five years that would mean the Loan cost you £28900 - £13000 = £15,900

You would be better off by £2,872 although you would have also owned the car for 1 year longer.

H4rsePower said:

So, total interest charges were £7000 ish.

£7,000 in interest alone to rent a second hand A class for 4 years! Personally I would just buy something with that £7000 instead outright.

Edited by anonymous-user on Thursday 8th June 11:04

[Fusion777]

Bank loan with larger deposit if possible would be my choice in your situation.

[Fusion777]

Joey Deacon said:

£7,000 in interest alone to rent a second hand A class for 4 years!

People need to see it like this, rather than just thinking of that monthly figure.

[Mark-C]

Fusion777 said:

Bank loan with larger deposit if possible would be my choice in your situation.

My daughter has spent ages working through all sorts of numbers and this was exactly her conclusion ...

[H4rsePower]

That’s weird. I typed a reply and nothing appeared.

Thanks for the advice. I thought I must have made an error somewhere!? Not sure how I was so far off though.

Yeah. Funnily enough, that’s how I bought my own car.

So, I’m thinking either a completely different car. Or £10k deposit then £15k loan over 48 months.

[anonymous-user]

Fusion777 said:

Joey Deacon said:

£7,000 in interest alone to rent a second hand A class for 4 years!

People need to see it like this, rather than just thinking of that monthly figure.

But shiny, Mercedes badge and "only £339 a month" make all logic go out of the window. Better to Frolic in the surf of emotions rather than the arid desert of logic.

Until recently we had a company car scheme at work, suddenly you have all these 30 something year olds who have had brand new cars every 3 years and have never owned a second hand car. None of them have any money to actually buy a cheap second had car so what did they all do? That's right lease a brand new one instead.

Blows my mind the way some people manage their finance. You have no money so you lease a brand new car instead.

[Fusion777]

Joey Deacon said:

Blows my mind the way some people manage their finance. You have no money so you lease a brand new car instead.

It is a strange phenomenon. It's almost like the inverse of the past, where if someone a brand new car, you knew there had to be at least some money behind it, even to afford the payments of the regular loan.

I'm sure we all know people on the 2/3/4 year PCP/lease cycle with little in savings/wealth behind them. Wonder if we're seeing the beginning of the demise of this though with rate rises?

[Sheepshanks]

H4rsePower said:

So, tell me if I’m wrong but at the end of the PCP I’d have paid £3000 more interest plus maybe walk away with £2000 or so equity or cash if I sell it?

On the equity, who knows, but it you are right that the GFV was £13K it seems a bit of a stretch that an 8yr old C Class Coupe is going to be worth much more than that.
.

More general point - PCP is designed to sell new cars, often with subsidised interest rates and deposit contributions. It doesn't usually work very well (ie it's more expensive) for used cars.

[dave123456]

Joey Deacon said:

But shiny, Mercedes badge and "only £339 a month" make all logic go out of the window. Better to Frolic in the surf of emotions rather than the arid desert of logic.

Until recently we had a company car scheme at work, suddenly you have all these 30 something year olds who have had brand new cars every 3 years and have never owned a second hand car. None of them have any money to actually buy a cheap second had car so what did they all do? That's right lease a brand new one instead.

Blows my mind the way some people manage their finance. You have no money so you lease a brand new car instead.

Not to be confused with those that failed to compute a £gross car allowance was considerably less after tax… yeah I’m paying £450 a month but my £500 car allowance covers it… ok.

[H4rsePower]

I am almost shocked at how easily I was sucked in and nearly signed on the line without thinking it through. The shiny merc badge and “it’s only 330 a month” which is less than 5% of our joint incomes after tax. So, why not.

But yeah, £7000 is a lot !

[Sheepshanks]

dave123456 said:

Joey Deacon said:

But shiny, Mercedes badge and "only £339 a month" make all logic go out of the window. Better to Frolic in the surf of emotions rather than the arid desert of logic.

Until recently we had a company car scheme at work, suddenly you have all these 30 something year olds who have had brand new cars every 3 years and have never owned a second hand car. None of them have any money to actually buy a cheap second had car so what did they all do? That's right lease a brand new one instead.

Blows my mind the way some people manage their finance. You have no money so you lease a brand new car instead.

Not to be confused with those that failed to compute a £gross car allowance was considerably less after tax… yeah I’m paying £450 a month but my £500 car allowance covers it… ok.

...and those who seem bemused when you ask about the deposit. It could be many £K, or they've PX'd their old car so maybe didn't even think about it, but they've put it out of their minds completely as they're totally focused on the monthly.

I know someone (family member) who got to the end of a PCP, handed the car back and was left with nothing. They couldn't understand how they'd started off with a car, which they PX'd, and it had just "disappeared"!

[Pit Pony]

dave123456 said:

Not to be confused with those that failed to compute a £gross car allowance was considerably less after tax… yeah I’m paying £450 a month but my £500 car allowance covers it… ok.

My car allowance is £400 a month. Net that would be worth about £200 after tax and national insurance, so as there are no rules about what I do with it.
I don't pay any tax on it, because it is then salary sacrificed into my pension.
Paid cash for my car. £6500. If I take what it's worth now, £4500, and divide the £2000 depreciation by 20 months I've had it, it comes to £100 a month.

[Fusion777]

Sheepshanks said:

I know someone (family member) who got to the end of a PCP, handed the car back and was left with nothing. They couldn't understand how they'd started off with a car, which they PX'd, and it had just "disappeared"!

Have heard someone talking about one of the supposed benefits being that at the end of the term, you can "just walk away". Well yes, and you will be walking...

[Chamon_Lee]

Fusion777 said:

Joey Deacon said:

£7,000 in interest alone to rent a second hand A class for 4 years!

People need to see it like this, rather than just thinking of that monthly figure.

This
People too often forget to look at figures as a whole

[anonymous-user]

H4rsePower said:

I am almost shocked at how easily I was sucked in and nearly signed on the line without thinking it through. The shiny merc badge and “it’s only 330 a month” which is less than 5% of our joint incomes after tax. So, why not.

But yeah, £7000 is a lot !

Do you have a mortgage? As a rough rule of thumb, every pound you borrow on a mortgage costs you two pounds by the time you have repaid it.

So that £25K Mercedes is actually costing you £50K compared to using the money to pay off your mortgage. That's a head fk isn't it.

If you then work out how many hours you have to work after tax to pay for things (add in the interest) you will probably never buy anything again!

[J1990]

Joey Deacon said:

H4rsePower said:

I am almost shocked at how easily I was sucked in and nearly signed on the line without thinking it through. The shiny merc badge and “it’s only 330 a month” which is less than 5% of our joint incomes after tax. So, why not.

But yeah, £7000 is a lot !

Do you have a mortgage? As a rough rule of thumb, every pound you borrow on a mortgage costs you two pounds by the time you have repaid it.

So that £25K Mercedes is actually costing you £50K compared to using the money to pay off your mortgage. That's a head fk isn't it.

If you then work out how many hours you have to work after tax to pay for things (add in the interest) you will probably never buy anything again!

Except that it really doesn't work like that, when talking about mortgages you're talking long term borrowing and so inflation and time-value of money is more prevelant than ever and, at least in the good old days, that interest was vastly outstripped by appreciation of the asset.

The issue when it comes to cars is that what people need is often much, much lower spec and price than what they want. Some people strike a balance between the two and others just look at the monthly figures and ignore the overall cost of ownership.
The latest Mercedes A class deals are hilarious, last PCP I saw was £7k deposit + £550/month for a standard A Class on 5k miles/year. Imagine burning £26k over 4 years just to rent a basic car for 5k miles/year.

[Pit Pony]

5k miles? That's fk all. You'd be cheaper getting a taxi. (probably)

£26k to do 20k miles
Plus fuel, insurance and servicing.
Shall we call it another £9k
£35k
£1.75 per mile.
How much is a taxi?

Edited by Pit Pony on Thursday 8th June 20:14

[Geffg]

Sheepshanks said:

...and those who seem bemused when you ask about the deposit. It could be many £K, or they've PX'd their old car so maybe didn't even think about it, but they've put it out of their minds completely as they're totally focused on the monthly.

I know someone (family member) who got to the end of a PCP, handed the car back and was left with nothing. They couldn't understand how they'd started off with a car, which they PX'd, and it had just "disappeared"!

I’ve got mine on pcp and hence when I did I made sure to only put £500 deposit down as I knew at the end I could literally walk away and in my mind only cost me the deposit. The monthlies are just an ongoing outgoing as I’ve never owned a car in 32yrs due to always swapping every 2/3yrs. Looking at deals if I can’t afford the monthly with only that deposit I look at something else.
Not going to work or suit everyone but I find this works ok for me. I know I’m only renting the car but in the past I’ve never gotten to the end of finance so I’ve never had the pleasure of actually owning the car anyway.

[7 5 7]

So glad I have never been suckered into this merry go round with financing a car, never ever been remotely tempted at all, once you've done the sums like above it's quite eye opening.