PCP help/maths homework
Discussion
Hi all,
I'm looking with help explaining the best way to buy a £11k secondhand car.
So I've just entered the dark magic that is PCP. Well, not quite but I've just paid a £500 deposit on a £11k car and have until Tuesday to decide whether to buy it cash or use VW PCP. My immediate thought when offered PCP was "why would I borrow when I don't need to? Surely that's interest I don't need to pay?" But then I was given some illustrations and it somehow makes sense.
First, assumptions - car purchased today at £11k and worth £6.5k in two years. I know there's a lot of variation in resale value but all of my recent car sales have gone really badly and I'm pessimistic about resale so I'm happy to accept that I will only get a trade-in value in a couple of years. Recent car sales (well over last 10 years): £8k 320d sold for £1500 after two years, £3500 RX8 sold for £1000 after 18 months, £5500 mini about to be sold for £2000 after three years. None of these cars had problems and were all bought trade and couldn't sell privately even at trade-in value. I might be rubbish at selling cars or it might be my taste in cars is too niche. Whatever, I'm going to assume it's not going to change.
Next, I like warranties, especially manufacturers' ones. I usually take out a 1 year warranty from an aftermarket company but have never claimed yet. But still, I like the comfort. Today's deal comes with 2 years warranty, 2 years, breakdown cover, 2 years MOT warranty (works arising covered), 2 free services, 2 years key guard and 2 years stone chip/scratch cover. The special offer had to be applied for today as the last day of the offer. I'm under no obligation to go ahead with it though.
Please presume that I'm happy with the purchase price and future resale.
Here's the illustrations:
1. Cash purchase:
Cost of lost interest on £11k over 2 years (not compound)@1.5% £165/pa, £330 total.
Cost of second year warranty (first year included anyway) ~£400
Cost of two services ~£250
I'm not valuing the breakdown cover as I have it with my bank account, nor of the stone chip cover as I've never paid to refurbish a car before so why would I start now.
Funds back from sale after 2 years £6500
So total cost over 2 years 11000+330+400+250-6500=£5480
2. PCP with £500 deposit
Deposit £500 + 2yrs 1.5% interest lost on this = £650
Repayments of £211 (10.9% APR) x24 months (44 month term) = £5064
Less the interest on my £11k staying sat in the bank £330
Total £5384
3. PCP with £3300 deposit
Deposit £3300 + 2yrs 1.5% interest lost on this = £3400
Repayments of £132.41 x24 = £3177.84
Less the interest on my £11k staying sat in the bank £330
Total £6247.84
So you can see that the added benefits (warranties etc) thrown in make the option2 finance cheaper than cash. If I leave out the 2nd year warranty, it's not a lot more. So that's confused me. Black magic, I tell ye.
Next thing that is even less clear to me is why financing a smaller amount (i.e. bigger deposit) makes it more expensive???
Explanations on a postcard gratefully received. Explanations on this thread even more gratefully received.
Next thing is, I believe I can take out the VW PCP and then clear it off after a month and move on to a independent PCP on a lower APR but keep all the VW benefits (warranties etc). Anyone with experience of this?
I can't get my head around all this. I'm worried I'm about to miss something important - anyone?
I'm looking with help explaining the best way to buy a £11k secondhand car.
So I've just entered the dark magic that is PCP. Well, not quite but I've just paid a £500 deposit on a £11k car and have until Tuesday to decide whether to buy it cash or use VW PCP. My immediate thought when offered PCP was "why would I borrow when I don't need to? Surely that's interest I don't need to pay?" But then I was given some illustrations and it somehow makes sense.
First, assumptions - car purchased today at £11k and worth £6.5k in two years. I know there's a lot of variation in resale value but all of my recent car sales have gone really badly and I'm pessimistic about resale so I'm happy to accept that I will only get a trade-in value in a couple of years. Recent car sales (well over last 10 years): £8k 320d sold for £1500 after two years, £3500 RX8 sold for £1000 after 18 months, £5500 mini about to be sold for £2000 after three years. None of these cars had problems and were all bought trade and couldn't sell privately even at trade-in value. I might be rubbish at selling cars or it might be my taste in cars is too niche. Whatever, I'm going to assume it's not going to change.
Next, I like warranties, especially manufacturers' ones. I usually take out a 1 year warranty from an aftermarket company but have never claimed yet. But still, I like the comfort. Today's deal comes with 2 years warranty, 2 years, breakdown cover, 2 years MOT warranty (works arising covered), 2 free services, 2 years key guard and 2 years stone chip/scratch cover. The special offer had to be applied for today as the last day of the offer. I'm under no obligation to go ahead with it though.
Please presume that I'm happy with the purchase price and future resale.
Here's the illustrations:
1. Cash purchase:
Cost of lost interest on £11k over 2 years (not compound)@1.5% £165/pa, £330 total.
Cost of second year warranty (first year included anyway) ~£400
Cost of two services ~£250
I'm not valuing the breakdown cover as I have it with my bank account, nor of the stone chip cover as I've never paid to refurbish a car before so why would I start now.
Funds back from sale after 2 years £6500
So total cost over 2 years 11000+330+400+250-6500=£5480
2. PCP with £500 deposit
Deposit £500 + 2yrs 1.5% interest lost on this = £650
Repayments of £211 (10.9% APR) x24 months (44 month term) = £5064
Less the interest on my £11k staying sat in the bank £330
Total £5384
3. PCP with £3300 deposit
Deposit £3300 + 2yrs 1.5% interest lost on this = £3400
Repayments of £132.41 x24 = £3177.84
Less the interest on my £11k staying sat in the bank £330
Total £6247.84
So you can see that the added benefits (warranties etc) thrown in make the option2 finance cheaper than cash. If I leave out the 2nd year warranty, it's not a lot more. So that's confused me. Black magic, I tell ye.
Next thing that is even less clear to me is why financing a smaller amount (i.e. bigger deposit) makes it more expensive???
Explanations on a postcard gratefully received. Explanations on this thread even more gratefully received.
Next thing is, I believe I can take out the VW PCP and then clear it off after a month and move on to a independent PCP on a lower APR but keep all the VW benefits (warranties etc). Anyone with experience of this?
I can't get my head around all this. I'm worried I'm about to miss something important - anyone?
Edited by marcg on Monday 1st May 00:15
Not an expert by any means, but the bit you are missing is the balloon payment at the end of the agreement.
Presumably, it is larger for the option with the lower deposit?
Also, you don't say what the term of the deal with the larger deposit is - is it 44 months like the other one?
I'm also a little confused by you working out everything over 24 months when you say that the term is 44 months - are you only planning to keep the car for two years and chop it in early? That doesn't sound like it would be a cheap way to do things.
Presumably, it is larger for the option with the lower deposit?
Also, you don't say what the term of the deal with the larger deposit is - is it 44 months like the other one?
I'm also a little confused by you working out everything over 24 months when you say that the term is 44 months - are you only planning to keep the car for two years and chop it in early? That doesn't sound like it would be a cheap way to do things.
Unless you really want the insurance products, get them taken out for a better representation of the true cost differences.
Scratch, key cover etc are all costing you hundreds of pounds however they try to dress it up, and are always cheaper elsewhere.
They're huge commission generators as is getting the car taken on finance for the salesman.
Another avenue to look at is often things like servicing will be included on the basis of taking the dealers finance. I've read a number of times about people taking this finance to get the freebies, then paying the finance off at no penalty immediately after delivery.
Scratch, key cover etc are all costing you hundreds of pounds however they try to dress it up, and are always cheaper elsewhere.
They're huge commission generators as is getting the car taken on finance for the salesman.
Another avenue to look at is often things like servicing will be included on the basis of taking the dealers finance. I've read a number of times about people taking this finance to get the freebies, then paying the finance off at no penalty immediately after delivery.
markstev0 said:
Hi, just a heads up, VT of a pcp is usually when you have paid 50% of the total agreement including the balloon not 50% through the agreement. I would be very surprised if at month 24 you could VT without making up the difference to get you to the 50% paid
Well 24 months is more than 50% of 44 months so...?Dr Jekyll said:
The reason it's confusing is because the higher monthly payments after a £500 deposit compared with £3300 are calculated to cover the £2800 + interest after 44 months. If you can really walk away after 24 months then yes a lower deposit is better.
I don't understand this - £2800 of money at 10.9% should cost me more over 2 years, not less? If I borrow less, shouldn't I be quids-in?TooMany2cvs said:
1.5% APR interest on the savings you're accessing to pay for the monthlies? Where...? Don't forget that you'll be paying income tax on that interest.
Strange how attractive the finance looks from the illustrations given by the people selling you the finance...
That's exactly what I'm worrying about. I sounds too good to be true - I keep my money in the bank and it costs me less. Even if you ignore the 1.5% interest (let's say I stick it in a 2 year bond or whatever), the cost is not really different. Strange how attractive the finance looks from the illustrations given by the people selling you the finance...
chr15b said:
Unless you really want the insurance products, get them taken out for a better representation of the true cost differences.
Scratch, key cover etc are all costing you hundreds of pounds however they try to dress it up, and are always cheaper elsewhere.
They're huge commission generators as is getting the car taken on finance for the salesman.
Another avenue to look at is often things like servicing will be included on the basis of taking the dealers finance. I've read a number of times about people taking this finance to get the freebies, then paying the finance off at no penalty immediately after delivery.
The only cover I value is the warranties - the rest is bonus which is why I wasn't pricing them into my cash comparison. Scratch, key cover etc are all costing you hundreds of pounds however they try to dress it up, and are always cheaper elsewhere.
They're huge commission generators as is getting the car taken on finance for the salesman.
Another avenue to look at is often things like servicing will be included on the basis of taking the dealers finance. I've read a number of times about people taking this finance to get the freebies, then paying the finance off at no penalty immediately after delivery.
I'm going to look into other finance offers and then ask on Tuesday "If I cancel the PCP within 14 days, do I keep the warranties?" If not, then I will stick with the VW PCP, if yes then I can switch to a better rate.
That's all presuming PCP is the best form of finance for me.
marcg said:
markstev0 said:
Hi, just a heads up, VT of a pcp is usually when you have paid 50% of the total agreement including the balloon not 50% through the agreement. I would be very surprised if at month 24 you could VT without making up the difference to get you to the 50% paid
Well 24 months is more than 50% of 44 months so...?So if you've got a 44mo agrement for £200/mo - £8800 in payments - plus £8800 balloon, then the 50% is only reached after month 44's payment, because the total finance package is £17,600...
I've just had a thought which may explain the benefit of PCP:
At 44 months the balloon payment is due. £4400 in this case. That capital isn't being paid off within the term so is effectively an interest-only loan. By leaving early at 24 months, that interest-only capital amount is increased to... whatever the value of the car is at that point. £6500 in my example.
The key thing is the car depreciates. Whether I buy it cash or PCP, it will cost me at least £11-6.5=£4500. In the cash example, add to that the essential cost of servicing £250 and my desired warranties £400 and the car costs me at least £5150. Let's ignore the loss of interest on my money in the bank.
If I finance the car I'm servicing the interest on £6500 for 2 years AND doing capital-and-interest on the remaining £4500. So cost over cash is the interest on the £11k over 2 years. £11k x 10.9% x 2 = £2400 so total cost £6700... This isn't working out right?
At 44 months the balloon payment is due. £4400 in this case. That capital isn't being paid off within the term so is effectively an interest-only loan. By leaving early at 24 months, that interest-only capital amount is increased to... whatever the value of the car is at that point. £6500 in my example.
The key thing is the car depreciates. Whether I buy it cash or PCP, it will cost me at least £11-6.5=£4500. In the cash example, add to that the essential cost of servicing £250 and my desired warranties £400 and the car costs me at least £5150. Let's ignore the loss of interest on my money in the bank.
If I finance the car I'm servicing the interest on £6500 for 2 years AND doing capital-and-interest on the remaining £4500. So cost over cash is the interest on the £11k over 2 years. £11k x 10.9% x 2 = £2400 so total cost £6700... This isn't working out right?
TooMany2cvs said:
It's 50% of the TOTAL finance package.
So if you've got a 44mo agrement for £200/mo - £8800 in payments - plus £8800 balloon, then the 50% is only reached after month 44's payment, because the total finance package is £17,600...
I'm not sure that's right... If I pay £211 for 44 months, that is £9284 plus the £500... Oh? I have so misunderstood this.... So if you've got a 44mo agrement for £200/mo - £8800 in payments - plus £8800 balloon, then the 50% is only reached after month 44's payment, because the total finance package is £17,600...
But the dealer has put in writing to me that I can terminate at month 24?
marcg said:
TooMany2cvs said:
It's 50% of the TOTAL finance package.
So if you've got a 44mo agrement for £200/mo - £8800 in payments - plus £8800 balloon, then the 50% is only reached after month 44's payment, because the total finance package is £17,600...
I'm not sure that's right... If I pay £211 for 44 months, that is £9284 plus the £500... Oh? I have so misunderstood this.... So if you've got a 44mo agrement for £200/mo - £8800 in payments - plus £8800 balloon, then the 50% is only reached after month 44's payment, because the total finance package is £17,600...
In total, you are paying deposit + (monthly x months) + balloon.
BUT
You are paying the deposit up front, so all you are financing is (monthly x months) + balloon.
Think of what you'd be financing if the deposit was 100% of the price... A cash purchase. You'd be financing £0.
marcg said:
But the dealer has put in writing to me that I can terminate at month 24?
You may well be able to. The statutory right to voluntary termination is 50% of total finance. Your contract may well include earlier termination rights, but they aren't legally required.marcg said:
I've just had a thought which may explain the benefit of PCP:
At 44 months the balloon payment is due. £4400 in this case. That capital isn't being paid off within the term so is effectively an interest-only loan. By leaving early at 24 months, that interest-only capital amount is increased to... whatever the value of the car is at that point. £6500 in my example.
The key thing is the car depreciates. Whether I buy it cash or PCP, it will cost me at least £11-6.5=£4500. In the cash example, add to that the essential cost of servicing £250 and my desired warranties £400 and the car costs me at least £5150. Let's ignore the loss of interest on my money in the bank.
If I finance the car I'm servicing the interest on £6500 for 2 years AND doing capital-and-interest on the remaining £4500. So cost over cash is the interest on the £11k over 2 years. £11k x 10.9% x 2 = £2400 so total cost £6700... This isn't working out right?
Well no, because you aren't borrowing £11K for 2 years, you are borrowing £11K for a month, and £6500 for 2 years. Consider it as £8750 (6500 + 4500/2) for 2 years and that's just a slight underestimate because of interest, near enough for ballpark figures.At 44 months the balloon payment is due. £4400 in this case. That capital isn't being paid off within the term so is effectively an interest-only loan. By leaving early at 24 months, that interest-only capital amount is increased to... whatever the value of the car is at that point. £6500 in my example.
The key thing is the car depreciates. Whether I buy it cash or PCP, it will cost me at least £11-6.5=£4500. In the cash example, add to that the essential cost of servicing £250 and my desired warranties £400 and the car costs me at least £5150. Let's ignore the loss of interest on my money in the bank.
If I finance the car I'm servicing the interest on £6500 for 2 years AND doing capital-and-interest on the remaining £4500. So cost over cash is the interest on the £11k over 2 years. £11k x 10.9% x 2 = £2400 so total cost £6700... This isn't working out right?
Gassing Station | Car Buying | Top of Page | What's New | My Stuff