PCP and lease hire

[Dynamic Turtle]

Can anyone explain why large deposits on PCP and lease hire plans are viewed so negatively? It seems like common sense to me (like financing a fast-depreciating asset with a high APR, lol) but the consensus seems to be that a 10% deposit + much higher monthly payments is the way to go. Why shouldn’t I put down 30 or 40 per cent and have lower monthlies (and pay less in the way of financing costs too)?

Cheers,
DT

[duckers26]

I would say because you'll never see it again. I have signed for a new PCP and have put the lowest deposit down as each time I have finished one of these it has ended up in negative equity due to the finance company being over optimistic with residuals.

[Steve vRS]

duckers26 said:

I would say because you'll never see it again. I have signed for a new PCP and have put the lowest deposit down as each time I have finished one of these it has ended up in negative equity due to the finance company being over optimistic with residuals.

I thought the final value was a guaranteed agreed sum?

Steve

[Alucidnation]

With all the cheap lease deals that are available, i suppose a large deposit will not save much on finance payments?

[Dave Hedgehog]

not everyone has a large deposit

i would look at the total cost of deposit and all the payments to see how much difference there was between the 2 deals

[Shmee]

If you plan to hand it back at the end, put in a smaller deposit. If you plan to sell it during the period you'll want a bigger deposit to carry more equity to the new car etc.

[Dynamic Turtle]

Here's an example:

Car £20k, £2k deposit, total cost of lease finance = £2,339 (@8.7% APR for 24months)
Car £20k, £10k deposit, total cost of finance = £1,632

A difference of £707, which is quite a lot for a two-year plan IMHO. I just don't understand why I should people are willing (if able) to put down a very small deposit and incur (in this example) and extra £700 in interest.

DT

[markcjd]

Dynamic Turtle said:

Here's an example:

Car £20k, £2k deposit, total cost of lease finance = £2,339 (@8.7% APR for 24months)
Car £20k, £10k deposit, total cost of finance = £1,632

A difference of £707, which is quite a lot for a two-year plan IMHO. I just don't understand why I should people are willing (if able) to put down a very small deposit and incur (in this example) and extra £700 in interest.

DT

This only provides part of the picture.

The RV is the projection of the value at the end of lease by the finance company. Your deposit does not (generally) affect the RV. So,

Car £20k, £2k deposit, RV £10k (2 yr, 24k, ave model) at end of lease car is worth £8k in a hard market and so client opts to exercise hand back option. Cost of use of vehicle = £2k deposit + 24 payments

Car £20k, £10k deposit, RV £10k (2 yr, 24k, ave model) at end of lease car is worth £8k in a hard market and so client opts to exercise hand back option. Cost of use of vehicle = £10k deposit + 24 payments

Whilst payments will be less for the £10k deposit, they will not be £8k less.

[CYMR0]

markcjd said:

This only provides part of the picture.

The RV is the projection of the value at the end of lease by the finance company. Your deposit does not (generally) affect the RV. So,

Car £20k, £2k deposit, RV £10k (2 yr, 24k, ave model) at end of lease car is worth £8k in a hard market and so client opts to exercise hand back option. Cost of use of vehicle = £2k deposit + 24 payments

Car £20k, £10k deposit, RV £10k (2 yr, 24k, ave model) at end of lease car is worth £8k in a hard market and so client opts to exercise hand back option. Cost of use of vehicle = £10k deposit + 24 payments

Whilst payments will be less for the £10k deposit, they will not be £8k less.

Er.. that's not quite true. Assuming 6% APR, with a £2k deposit, payments will be £406.

With a £10k deposit, they will be £52 (i.e., interest only). That's £8,496 less in monthly payment over 2 years.

Cost of use is £11,744 in the first example and £11,248 in the second.

However, the simple reason why I would caution against big deposits on a PCP is that if you need a big deposit to reduce the monthly payment to a level where it's affordable, you're not going to be able to replace the car like for like unless you get a better deal, or have more income, next time around. So effectively you can't afford the car.

If on the other hand you can afford to keep funding deposits out of savings (whether you just have lots of savings, or because this reduces the payments to a level where you can replenish the big deposit) then big deposits are the way to go as effectively you're pre-paying the use.

[markcjd]

CYMR0 said:

Er.. that's not quite true. Assuming 6% APR, with a £2k deposit, payments will be £406.

With a £10k deposit, they will be £52 (i.e., interest only). That's £8,496 less in monthly payment over 2 years.

Cost of use is £11,744 in the first example and £11,248 in the second.

However, the simple reason why I would caution against big deposits on a PCP is that if you need a big deposit to reduce the monthly payment to a level where it's affordable, you're not going to be able to replace the car like for like unless you get a better deal, or have more income, next time around. So effectively you can't afford the car.

If on the other hand you can afford to keep funding deposits out of savings (whether you just have lots of savings, or because this reduces the payments to a level where you can replenish the big deposit) then big deposits are the way to go as effectively you're pre-paying the use.

Should have finished the thought, the difference as you say is on the next lease. Vauxhall almost destroyed themselves in the late 90's by throwing people into PCP's on Frontera without explaining this concept. First frontera was funded through large PX equity on PCP, second Frontera was never purchased as all equity had vanished.

[Dynamic Turtle]

CYMR0 said:

However, the simple reason why I would caution against big deposits on a PCP is that if you need a big deposit to reduce the monthly payment to a level where it's affordable, you're not going to be able to replace the car like for like unless you get a better deal, or have more income, next time around. So effectively you can't afford the car.

Of course I can't "afford" the car I'm looking at, hence PCP!!!

[Dynamic Turtle]

Thanks for the advice so far guys - really appreciate the tips. It does appear (having read other PH threads too) that a small deposit really is the way to run these things and the equity "penny" has finally dropped.

However....

I'm just wondering if the whole lease/PCP thing is just far too complicated compared to simply taking out a lower APR £10k loan (most rates I've seen are 1-2% lower than PCP APRs) and adding it a £10k deposit to buy the car outright. Sod the GFV option - if I thought the car was going to drop by 2/3rds in two years I wouldn't buy it and if I thought we were going back into 2008, I wouldn't buy it either. Saves the headache with mileage issues, hand-back arguments over stone chips and gives you the flexibility to tune/remap and put aftermarket plastic trinkets on the car.

But i definitely see the benefits of PCP for a certain type of buyer (i.e. my turbo-nutter brother) who would put down a 10% deposit to finance the acquisition of his dream vehicle costing 1.5x his annual salary. It's an interesting scheme that explains to me why there are so many new cars on the road (never understood how anyone could afford to buy them!). Sound like a muppet now, but I had no idea that PCP type deals existed and that such a huge number of people use them.

[Face for Radio]

Dynamic Turtle said:

Thanks for the advice so far guys - really appreciate the tips. It does appear (having read other PH threads too) that a small deposit really is the way to run these things and the equity "penny" has finally dropped.

However....

I'm just wondering if the whole lease/PCP thing is just far too complicated compared to simply taking out a lower APR £10k loan (most rates I've seen are 1-2% lower than PCP APRs) and adding it a £10k deposit to buy the car outright. Sod the GFV option - if I thought the car was going to drop by 2/3rds in two years I wouldn't buy it and if I thought we were going back into 2008, I wouldn't buy it either. Saves the headache with mileage issues, hand-back arguments over stone chips and gives you the flexibility to tune/remap and put aftermarket plastic trinkets on the car.

But i definitely see the benefits of PCP for a certain type of buyer (i.e. my turbo-nutter brother) who would put down a 10% deposit to finance the acquisition of his dream vehicle costing 1.5x his annual salary. It's an interesting scheme that explains to me why there are so many new cars on the road (never understood how anyone could afford to buy them!). Sound like a muppet now, but I had no idea that PCP type deals existed and that such a huge number of people use them.

A few years ago I found out that a great many people I knew who had flash 'premium' cars were all on a Ponzi Car Purchase, and one of the reasons they kept going back to the same manufacturer for new cars was that they just rolled from one deal into the next.

[CYMR0]

Dynamic Turtle said:

CYMR0 said:

However, the simple reason why I would caution against big deposits on a PCP is that if you need a big deposit to reduce the monthly payment to a level where it's affordable, you're not going to be able to replace the car like for like unless you get a better deal, or have more income, next time around. So effectively you can't afford the car.

Of course I can't "afford" the car I'm looking at, hence PCP!!!

Confession: I drive a £12k car on a PCP, albeit at 5.9% APR (taken at a time when most personal loans were nearer 9%). By affordability I don't mean 'you can only afford it if you can pay from capital, not income' but where if you have to increase the deposit to make the monthly payments affordable at all, you're going to have real difficulty sustaining that standard of living.