Help with PCP vs Loan.. (money saving experts thread?)

[daemon]

Snowboy said:

StescoG66 said:

I like to change cars every 3-4 years, however I couldn't bring myself to do PCP for one simple reason - It looks to me as if one is paying interest on depreciation. Which doesn't compute in my wee head.
Am I wrong in that judgement?

Would you rather pay interest on the whole value of the car or on half the value?

PCP is a viable finance option.
But it's often advertised in a quite underhand way.

The salesman has said things like 'you pay a deposit, then monthly payments, and at the end you give the car back and any extra value in the car is deposit for a new car.'
It sounds great.

But they fail to mention the first deposit is £10k, and the 'extra value' at the end is £500.

The last time I looked at PCP vs bank loan it worked out roughly like this on a £20k car (£2k deposit)
PCP = £500 a month for two years, give car back.
Loan = £500 a month for three years, own car with +-£10k.

The loan was an extra 12 months and £6k.
But it was better for me.

Firstly, that was a seriously duff deal on PCP so i can understand why you didnt take it. My wife has a £35,000 Z4 for £309 a month with a £3K deposit.

Secondly - and i know you were only using an example - your £500 a month * 36 = £18,000 + your £2K, so you've no interest charges in there?

Skews the figures a bit, plus your PCP deal was terrible.

[Snowboy]

daemon said:

Firstly, that was a seriously duff deal on PCP so i can understand why you didnt take it. My wife has a £35,000 Z4 for £309 a month with a £3K deposit.

Secondly - and i know you were only using an example - your £500 a month * 36 = £18,000 + your £2K, so you've no interest charges in there?

Skews the figures a bit, plus your PCP deal was terrible.

I did over simplify with regards to interest.
Iirc the PCP Apr was just under double the bank loan Apr.

But, generally speaking the maths stands up.
On PCP you will pay (roughly) 60-75% of the cost of the car - and have no car.
On a loan you will pay 115% of the cost of the car, and have a car.

My BIG problem with PCP is the way I keep seeing salesmen try to convince the buyer (me) that at the end of the deal the returned car can be a deposit for a new car.
Oh, and the attempts to hide the fees and extra charges.

The sales tactic seems to be about offering low monthly payments, rather than looking at the overall package.

[daemon]

Snowboy said:

daemon said:

Firstly, that was a seriously duff deal on PCP so i can understand why you didnt take it. My wife has a £35,000 Z4 for £309 a month with a £3K deposit.

Secondly - and i know you were only using an example - your £500 a month * 36 = £18,000 + your £2K, so you've no interest charges in there?

Skews the figures a bit, plus your PCP deal was terrible.

I did over simplify with regards to interest.
Iirc the PCP Apr was just under double the bank loan Apr.

But, generally speaking the maths stands up.
On PCP you will pay (roughly) 60-75% of the cost of the car - and have no car.
On a loan you will pay 115% of the cost of the car, and have a car.

My BIG problem with PCP is the way I keep seeing salesmen try to convince the buyer (me) that at the end of the deal the returned car can be a deposit for a new car.
Oh, and the attempts to hide the fees and extra charges.

The sales tactic seems to be about offering low monthly payments, rather than looking at the overall package.

Referring back to the wifies deal - £309 * 48 + £3000 = £17832, which is 50% of the price of the car, and you'd expect probably 60% depreciation over 4 years so fairly decent.

There are many documented deals like that.

Thats the sort of deal you need to be aiming for before a PCP deal even starts to stack up. Clearly the deal you were being offered was far short of that - but it doesnt mean you can extrapolate that out over ALL PCP deals.

Just had the worlds quickest look there at a £20K BMW - a 1 series 116i Sport. On the PCP deal their APR is 4.9% and theres a £1000 dealer deposit contribution and £600 manufacturer deposit contribution. The best deal moneysupermarket were offering there on £20K over 5 years was 5.7%

Sounds like they were seriously stiffing you with a woeful PCP deal.

Out of curiosity, what was the car?

Edited by daemon on Friday 30th May 14:02

[daemon]

Snowboy said:

Oh, and the attempts to hide the fees and extra charges.

the PCP had a bunch of extra charges not mentioned - set up costs, final payment fee, return fee. Probably an extra £1k all told.

BMWs fees are:-

Credit Arrangement Fee :- £0
Credit Completion Fee :- £0
Option to Purchase Fee :- £10

[gizlaroc]

The APR includes all fees, that is what APR means, it has to include any fees, in the UK anyway.

http://aprexplained.com/apr-faqs/

[Snowboy]

There have been a few cars.
One was a six month old 135i; which was a terrible deal.
I think all second hand PCP's tend to be very poor deals because they lose the brand support.

But I've also looked at new Mercs, Land Rovers and others.

My point is;
PCP is a good financial choice if you're commuted to changing your car every few years and just want to pay the depreciation and not the full capital. (+ interest).
But it's a terrible way to buy a car to keep, because a loan is cheaper.
And it's a terrible thing to do if your looking for a cheap way to get a car.

If you're looking for something cheap; don't buy a new car.

[daemon]

Snowboy said:

There have been a few cars.
One was a six month old 135i; which was a terrible deal.
I think all second hand PCP's tend to be very poor deals because they lose the brand support.

But I've also looked at new Mercs, Land Rovers and others.

My point is;
PCP is a good financial choice if you're commuted to changing your car every few years and just want to pay the depreciation and not the full capital. (+ interest).
But it's a terrible way to buy a car to keep, because a loan is cheaper.
And it's a terrible thing to do if your looking for a cheap way to get a car.

If you're looking for something cheap; don't buy a new car.

Yes, i think you're bang on there.

My wife has always PCP'd her cars - waits for the right deal, specs them as she wants and then drives them 3 years. Has always had tasty cars too. Suits her well - shes in a great job, lots of disposable income but at the same time knows when a deal is "right". Hates the hassle / unexpected spend of MOT's, wear and tear, the odd breakdown, etc.

I got her a lovely 330Ci Coupe, black, black leather, 19's for £2000 when i was motor trading. Had it a month - hated it - too many rattles, etc - even though her colleagues in work saw it as a step up from her previous brand new Prodrive Modded Subaru Impreza. So she went for a new z4 - black, black leather, 19's.

Wouldnt have made ANY sense to try to take a loan out for it as she has no intentions of keeping it medium / long term.

[HJMS123]

daemon said:

You're applying a quite narrow example, then extrapolating it across ALL PCP deals.

PCP works best in terms of cost effectness with cars with a strong(er) residual value and when there is a manufacturer "finance contribution".

Typically that means german brands with the likes of BMW and Merc throwing in several thousand to some deals that you wouldnt otherwise get for a cash / straight finance deal.

Clearly, and for example, it would make little sense to do a PCP deal @ say £200 a month over three years, when you can buy the car outright @ £200 a month over 4 years.

However, if you were to look at say a £30K car, it can work out cheaper to PCP it, than to buy it outright and sell it three years later AND clearly, without a large deposit, you're unlikely to be able to HP it.

For example, wifie has a z4 with a list price of £36K. It worked out at £4K discount and £2K finance contribution. Shes paid a £3K deposit, and £310 a month over 4 years. Thats £17,880 to drive it for four years.

Had she bought the car for cash at £32K, a four year old car might have a £12K trade in price, so it would have cost her £20K in depreciation.

All back of the fag packet stuff, so please, no smart areses with "ah but you forgot to take into account..".

First person to explain PCP simply .. well done!

[P-Jay]

I worked in finance for 10 years, mostly motor, but 'asset' mostly.

I wouldn't buy a car with a PCP deal. Fundamentally it comes down to a gamble - do you think the vehicle will be worth more, or less than the 'balloon' element at the end - if it's worth less then the customer has won, they've bought say £11k of depreciation for £10k (minus the cost of the interest of course) if it's worth more then the financial house has won - the customer has paid £10k for £9k of depreciation so the finance house has made money on the interest and another grand at disposal, but the figures are calculated by very smart people who know the industry inside and out and have access to the whole picture including the true purchase price etc.

Plus factor in the fact it's a rental and not a loan per-se which allows them more leeway on disclosing APRs etc and it's a recipe for getting rumped.

IMO the most cost effective way to buy is to chose a 1-2 year old car so someone else can eat the 30% day-one loss on it, and buy via straight forward HP, if you want to reduce the payments include a balloon payment - they're not guaranteed of course - but as it's a HP deal as long as the balloon isn't stupid if you do find yourself with negative equity at the end - you can hand it back anyway via a VT.

[Shurv]

On a PCP ,you pay interest on the whole balance, you don't make payments on the whole thing because a % of it is deferred to the end. PCP's are great if someone is subsidising the interest rate, or offering some other inducement ( free servicing, deposit allowance, low rates etc). Think of it in 2 ways, you are paying for what you use, or the depreciation, over the term of the loan. It's not for everyone, but for many it is a very efficient way to drive a car. The best way is low deposit, choose a term where the payment suits your budget, and part x it at the end for a new one. With the low deposit on the original deal, the payments on the next one won't be massively more. If you put a big deposit in, you'll have to do it again for the next one to get similar payments. If you want to keep the car at the end, you can, by paying the end amount. Leasing can work, BUT, it tends to be more restrictive and can have painful costs at the end when you hand it back.

[daemon]

P-Jay said:

I worked in finance for 10 years, mostly motor, but 'asset' mostly.

For someone who worked in finance for 10 years, you've got several fundamentals wrong.

P-Jay said:

I wouldn't buy a car with a PCP deal. Fundamentally it comes down to a gamble - do you think the vehicle will be worth more, or less than the 'balloon' element at the end - if it's worth less then the customer has won, they've bought say £11k of depreciation for £10k (minus the cost of the interest of course) if it's worth more then the financial house has won - the customer has paid £10k for £9k of depreciation so the finance house has made money on the interest and another grand at disposal, but the figures are calculated by very smart people who know the industry inside and out and have access to the whole picture including the true purchase price etc.

Firstly - you dont *have* to hand it back. If its worth more than the residual, then thats yours should decide to sell it privately, sell it to a trader, or trade it in.

A few years ago BMW got it badly wrong. Apparently the crash of 2007 cost them several hundred million as people just handed their cars back rather than trade them in. My wife handed back her BMW z4 3.0Si - BMW finance had valued it at something like £19K, but come the end of term, she was getting offers of £15K. Saved herself a £4,000 hit.

Given we're seeing a massive housing bubble again, it could easily crash again in the future, hitting the car market again.

P-Jay said:

Plus factor in the fact it's a rental and not a loan per-se which allows them more leeway on disclosing APRs etc and it's a recipe for getting rumped.

No. Any charges must be included in the APR calculations. Also, if you read my previous posts - or have a look at BMWs website - all these "charges" you talk about amount to a heady £10. Oh and their APR is 4.9% - better than a bank loan.

P-Jay said:

IMO the most cost effective way to buy is to chose a 1-2 year old car so someone else can eat the 30% day-one loss on it, and buy via straight forward HP, if you want to reduce the payments include a balloon payment - they're not guaranteed of course - but as it's a HP deal as long as the balloon isn't stupid if you do find yourself with negative equity at the end - you can hand it back anyway via a VT.

Hmmm.

I wouldnt assume its better to cheaper to buy at a year old. Its certainly not necessarily cheaper to PCP at a year old - often the PCP deals on new cars mean you can get a better deal on a new one. Has happened us several times with BMW.

Also, buying an ex demo can mean buying a car on a previous plate, superceded spec, previous year, previous model year and often with options you dont want anyway, so you need to be v careful - particularly when there are some cracking deals on new cars if you're in the right place at the right time.

If you really want to "buy" a car and keep it for years, then yes, clearly you wouldnt use a PCP deal, conversely if you plan on only keeping a car for two or three years, why "buy" it in the first place?

[daemon]

Shurv said:

On a PCP ,you pay interest on the whole balance, you don't make payments on the whole thing because a % of it is deferred to the end. PCP's are great if someone is subsidising the interest rate, or offering some other inducement ( free servicing, deposit allowance, low rates etc). Think of it in 2 ways, you are paying for what you use, or the depreciation, over the term of the loan. It's not for everyone, but for many it is a very efficient way to drive a car. The best way is low deposit, choose a term where the payment suits your budget, and part x it at the end for a new one. With the low deposit on the original deal, the payments on the next one won't be massively more. If you put a big deposit in, you'll have to do it again for the next one to get similar payments. If you want to keep the car at the end, you can, by paying the end amount. Leasing can work, BUT, it tends to be more restrictive and can have painful costs at the end when you hand it back.

Totally agree.

And it depends on the car, and it depends on the time of year to get the "right" deal. BMW were doing effectively a "double discount" on z4s when my wife got hers - she got a "complementary specification upgrade" from SE to M Sport, which given she was going to buy M Sport anyway, was the equivalent of a £2500 discount, and BMW were doing a "finance contribution" of £1500 if you used a PCP deal, and she got 9% off from the dealer too. So it meant a new car worked out cheaper on PCP than a year old previous spec engine and SE trim ex demo car on a PCP deal.

Conversely though, i went to get a Golf diesel, got a 9 month old 1.6TDI S with 13K miles from a main dealer for £0 deposit, £217 a month, whereas a new one was coming in at £300 ish a month.