Uggghhh another PCP question - PCP vs. cash
Discussion
I'm looking at a new car which comes to approx. £50k. I'm being told left/right/centre that it's better to go down the PCP route due to the fact I'm buying a depreciating asset. If I go down the PCP route, I remain more liquid, and can hand back the car if it drops in value considerably. However when I do the maths, it seems like unless it drops to over 40% of original value in 3 years, I'm still better off just paying for the car outright, even with the depreciation in mind.
Looking at the PCP dealer finance options I'd pay £31k over 3 years, and then if I pay the GTV at the end naturally that puts me well over the value had I paid it outright (56k). However if I buy outright, and worse case I sell for £20k in 3 years (60% depreciation), that costs me £30k over the 3 years
To me, it makes sense just to buy it with cash, even without a crystal ball I can't see it depreciating 60% in 3 years, that feels like a worse case scenario. Is there something I'm missing out PCP vs. depreciation?
Disclaimer: I know this question will infuriate some, it may seem an obvious answer, however I just want to make sure my man maths are right and I'm not completely missing the point here.
Looking at the PCP dealer finance options I'd pay £31k over 3 years, and then if I pay the GTV at the end naturally that puts me well over the value had I paid it outright (56k). However if I buy outright, and worse case I sell for £20k in 3 years (60% depreciation), that costs me £30k over the 3 years
To me, it makes sense just to buy it with cash, even without a crystal ball I can't see it depreciating 60% in 3 years, that feels like a worse case scenario. Is there something I'm missing out PCP vs. depreciation?
Disclaimer: I know this question will infuriate some, it may seem an obvious answer, however I just want to make sure my man maths are right and I'm not completely missing the point here.
Edited by juggsy on Monday 14th August 14:31
juggsy said:
Looking at the PCP dealer finance options I'd pay £31k over 3 years, and then if I pay the GTV at the end naturally that puts me well over the value had I paid it outright (56k).
Is it "well over" just because of amount of interest you'll be paying?It might be tricky on the car you're looking at but usually the dealer will turn themselves inside out get you take the PCP - either by giving a deposit contribution (as well as other discounts) and/or a cheaper interest rate.
Sheepshanks said:
Is it "well over" just because of amount of interest you'll be paying?
It might be tricky on the car you're looking at but usually the dealer will turn themselves inside out get you take the PCP - either by giving a deposit contribution (as well as other discounts) and/or a cheaper interest rate.
Exactly - cash at least means no interest, just the depreciation your funding. There are no deposit contributions at the moment and interest rate is fixed centrally, which to me makes the PCP route far less desirable with little incentive, aside from being an alternative and more expensive (in the long term) funding option.It might be tricky on the car you're looking at but usually the dealer will turn themselves inside out get you take the PCP - either by giving a deposit contribution (as well as other discounts) and/or a cheaper interest rate.
An extra £20K overall (more like £40K if you can afford the monthlies anyway and just take the deposit from savings) is a fair chunk to have tied up in an asset, especially a depreciating one.
Think about how you could invest that, even in the short term, and then the gap widens between paying cash and using PCP.
Think about how you could invest that, even in the short term, and then the gap widens between paying cash and using PCP.
If you have the cash, I'd cut back on the options and/or buy nearly new.
DriveTheDeal is £41k for a base (non-PP) saloon or £45k for an estate without options.
C350e AMG Line Premium Plus is £32k new from DtD (not the same car, but a useful benchmark for value for money as the discount is much larger).
A nearly new C43 AMG PP is £39k.
http://www.autotrader.co.uk/classified/advert/2017...
Going for all the options and/or brand new might add a couple of £k to the second-hand value in three years, but the vast majority of the extra will be lost to depreciation: if the car is worth £23k as a base model and £25k as a Premium Plus with options, your £50k car has lost £25k vs .£18k - so the options are 39% of your cost of ownership.
As for the funding - I would assume the same value at the end of the deal, whether you get PCP or cash. The PCP adds a floor to the value so you could come out ahead, but it's set up so that you're expected to carry over a few £k into the next deal. However, if the interest rate is high enough (over your low-risk return on the capital you've retained) then that effectively depresses the floor for the retained value so that it could be unrealistically low.
DriveTheDeal is £41k for a base (non-PP) saloon or £45k for an estate without options.
C350e AMG Line Premium Plus is £32k new from DtD (not the same car, but a useful benchmark for value for money as the discount is much larger).
A nearly new C43 AMG PP is £39k.
http://www.autotrader.co.uk/classified/advert/2017...
Going for all the options and/or brand new might add a couple of £k to the second-hand value in three years, but the vast majority of the extra will be lost to depreciation: if the car is worth £23k as a base model and £25k as a Premium Plus with options, your £50k car has lost £25k vs .£18k - so the options are 39% of your cost of ownership.
As for the funding - I would assume the same value at the end of the deal, whether you get PCP or cash. The PCP adds a floor to the value so you could come out ahead, but it's set up so that you're expected to carry over a few £k into the next deal. However, if the interest rate is high enough (over your low-risk return on the capital you've retained) then that effectively depresses the floor for the retained value so that it could be unrealistically low.
Thanks CYMR0, all very valid points CYMR0, however my question is less about how I can get the car cheaper, but how best to finance it.
I'm planning on having the car for a good few years, so whilst I wouldn't spec to increase the value, I don't want to settle for base spec and would want to spec some optional elements. Also as I'm looking for a cab there aren't many on the used market there aren't a lot of options, and with the carwow discount it actually makes more sense to order new as there's very little in it.
Yes I could settle for less spec, different engine, a different body type etc., however that's not really what I'm looking for. I have the car and spec in mind, it's just the best way to finance it (and make sure I'm not missing something in the process!)
Agreed on the end of the deal though, this is where if you decide to keep, by and large you seem to pay way more than if you had paid outright. Seems like it's set up for those who want to change at the end of the deal, but as you say you could come out ahead but more likely to be in negative equity.
I'm planning on having the car for a good few years, so whilst I wouldn't spec to increase the value, I don't want to settle for base spec and would want to spec some optional elements. Also as I'm looking for a cab there aren't many on the used market there aren't a lot of options, and with the carwow discount it actually makes more sense to order new as there's very little in it.
Yes I could settle for less spec, different engine, a different body type etc., however that's not really what I'm looking for. I have the car and spec in mind, it's just the best way to finance it (and make sure I'm not missing something in the process!)
Agreed on the end of the deal though, this is where if you decide to keep, by and large you seem to pay way more than if you had paid outright. Seems like it's set up for those who want to change at the end of the deal, but as you say you could come out ahead but more likely to be in negative equity.
Edited by juggsy on Monday 14th August 20:05
Defconluke said:
An extra £20K overall (more like £40K if you can afford the monthlies anyway and just take the deposit from savings) is a fair chunk to have tied up in an asset, especially a depreciating one.
Think about how you could invest that, even in the short term, and then the gap widens between paying cash and using PCP.
This is one area I'm crap at, so any ideas/inspiration on investment opportunities much appreciated!Think about how you could invest that, even in the short term, and then the gap widens between paying cash and using PCP.
There is no right answer, really, which is why my last answer focused on getting the car and making sure you understood the cost of your options.
There may be an answer that's right for you.
GFV of a basic version is £21,775 so let's round that up to £23k for the Premium Plus. I'll assume an £8k deposit, giving you monthly payments (with no extras) and a price of £44,773, leaving you £35,773 to finance. That means your monthly payment is £485 or thereabouts.
By the end of year 3, allowing for a 3% return on your investment, you have £22k left of your original outlay if you fund the payments from savings, and can hand the car back. You're not in negative equity, but you have to find cash to keep it. You've started out with £45k and have £22k of assets remaining. Your net cost is therefore £23k.
If you pay cash, and invest the £485 per month of income, you have made an additional £1,551 @ 3% p.a. You also have a car worth £23k that you own outright. You've spent £45k and have a £23k asset + £1,500 of additional interest from released income. Your net cost is therefore £20,500.
There may be an answer that's right for you.
GFV of a basic version is £21,775 so let's round that up to £23k for the Premium Plus. I'll assume an £8k deposit, giving you monthly payments (with no extras) and a price of £44,773, leaving you £35,773 to finance. That means your monthly payment is £485 or thereabouts.
By the end of year 3, allowing for a 3% return on your investment, you have £22k left of your original outlay if you fund the payments from savings, and can hand the car back. You're not in negative equity, but you have to find cash to keep it. You've started out with £45k and have £22k of assets remaining. Your net cost is therefore £23k.
If you pay cash, and invest the £485 per month of income, you have made an additional £1,551 @ 3% p.a. You also have a car worth £23k that you own outright. You've spent £45k and have a £23k asset + £1,500 of additional interest from released income. Your net cost is therefore £20,500.
Edited by CYMR0 on Monday 14th August 20:53
If there's a difference between the price you'd pay on PCP and cash, then the extra you are paying is insurance against the arse dropping out of the used market for that car for the term of the PCP
Of course you have to add interest gained on the cash too if you went down the PCP route for your calculation.
If the car is worth more than the GMFV then look at the last action (paying off the final amount) as getting a known history second hand car you want as a bargain.
Of course you have to add interest gained on the cash too if you went down the PCP route for your calculation.
If the car is worth more than the GMFV then look at the last action (paying off the final amount) as getting a known history second hand car you want as a bargain.
andygo said:
One point that people seem to forget about is that buying the car for cash means you have the flexibility to sell the car whenever you want without worrying about the finance deal.
Surely it’s better to get a bank loan which you can pay back at any time if you need to borrow?
As talkthetorque mentioned above, believe the key reason is should the value drop like a stone, you can simply hand the car back rather than having paid over the odds, as a lot of the cost is lumped at the end of the payment. However unlike a lease/contract hire, you can actually pay back the finance in a lot of cases.Surely it’s better to get a bank loan which you can pay back at any time if you need to borrow?
Interestingly looks like the retail banks are getting in on the action, and at 3.4% pretty good value, although you have to bank with them already: https://www.halifax.co.uk/car-finance/compare/
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