PCP versus Cash

[Andyoz]

I know PCP has been discussed alot and I'm not one that uses it (always been a cash buyer)

Anecdotal evidence indicates car sales have been in a bit of a slump since the summer. People connected to the industry have indicated it to me and I can see with my own eyes in terms of listing hanging around longer than normal. Winter weather hasn't been that bad this year so can't blame that.

Has easy access for dealers to PCP credit lines allowed some specialist dealers to get too big compared to a decade ago. They are now holding alot of stock and the banks would be looking over their shoulder a bit more compared to boom times with high product turnover a few years back.

Anyone 'in the know' care to explain how PCP backed car sales appear on a dealers financials as apposed to simple cash sales. Are the PCP 'gains' to the dealer forward or backward loaded?

Would dealers be looking more favourably on a haggled price cash sale now if there is actually a delay in PCP 'profit' showing up on their books? I ran a business through the last recession and just interested in the dynamics at work here as car sales are having their own mini recession ATM.

[Porsche911R]

I think there are too many cars full stop.

a lot of people are stuck in 4 year deals also.

markets flooded with 4 year old cars day after day.

with 85 %buying on PCP there are no buyers for all the hand backs !!!!

had to happen at some point. Also PCP rob people who once had deposits, do a PCP say 3 times over 12 years you are really ********
now people down grade cars every PCP as they have less money as deposits get eroded away.

I know people who have gone from £50k cars to owning sweet FA and now rent a £15k car. no winners in PCP's deals bar dealers but they have robbed the money off their client base now over the last 12 years.

will we get a PCP ppi scandle to end it all, maybe....

Edited by Porsche911R on Monday 6th January 14:43

[Andyoz]

Porsche911R said:

I think there are too many cars full stop.

a lot of people are stuck in 4 year deals also.

markets flooded with 4 year old cars day after day.

with 85 %buying on PCP there are no buyers for all the hand backs !!!!

had to happen at some point. Also PCP rob people who once had deposits, do a PCP say 3 times over 12 years you are really ********
now people down grade cars every PCP as they have less money as deposits get eroded away.

I know people who have gone from £50k cars to owning sweet FA and now rent a £15k car. no winners in PCP's deals bar dealers but they have robbed the money off their client base now over the last 12 years.

will we get a PCP ppi scandle to end it all, maybe....

Edited by Porsche911R on Monday 6th January 14:43

I always believe markets have 10 or so year cycles and PCP is hitting that now.

Stock seems to be piling up and you do wonder about some independent dealers solvency. Banks always want to see cash flow when companies are in a bit of crisis even if it it isn't the most profitable cash flow. To me that might indicate dealers would be more open to a serious haggle for a cash buyer. They will be hoping things improve "in the Spring" but I'm not so sure this time...

[anonymous-user]

If you read the car salesman thread it seems things are now picking up 'anecdotally'.

Is interesting that 90% of car sales in the UK are apparently PCP funded (or thereabouts) yet absolutely everyone on PistonHeads has always been a cash buyer.

Personally I think Dec/Jan is a great time to buy. Stop trying to 2nd guess the market and do the deal...

[Andyoz]

Schmed said:

If you read the car salesman thread it seems things are now picking up 'anecdotally'.

Is that car salesmen contributing?

[DJMC]

So long as dealers hand over the correct PCP paperwork I think there's little chance of a mis-selling scandal. However, I'm sure they're not pointing out the pitfalls and prefer to concentrate on the lovely shiny new car the buyer could be driving away today.

[Andyoz]

DJMC said:

So long as dealers hand over the correct PCP paperwork I think there's little chance of a mis-selling scandal. However, I'm sure they're not pointing out the pitfalls and prefer to concentrate on the lovely shiny new car the buyer could be driving away today.

Apparently, half the buyers don't actually know how much they have 'borrowed' when asked. They just know the monthly payments.

[alltalk]

I'm also confused sometimes (I do work for a large accountancy firm so understand how it works), take an M5 for example, cash price from broker saves about £11k. If you do a PCP deal the finance+dealer contribution is £17k and APR of 3.9% so for some makes models its not always bad, provided you know what you have signed up for.

[Cheib]

Andyoz said:

I know PCP has been discussed alot and I'm not one that uses it (always been a cash buyer)

Anecdotal evidence indicates car sales have been in a bit of a slump since the summer. People connected to the industry have indicated it to me and I can see with my own eyes in terms of listing hanging around longer than normal. Winter weather hasn't been that bad this year so can't blame that.

Has easy access for dealers to PCP credit lines allowed some specialist dealers to get too big compared to a decade ago. They are now holding alot of stock and the banks would be looking over their shoulder a bit more compared to boom times with high product turnover a few years back.

Anyone 'in the know' care to explain how PCP backed car sales appear on a dealers financials as apposed to simple cash sales. Are the PCP 'gains' to the dealer forward or backward loaded?

Would dealers be looking more favourably on a haggled price cash sale now if there is actually a delay in PCP 'profit' showing up on their books? I ran a business through the last recession and just interested in the dynamics at work here as car sales are having their own mini recession ATM.

Used to work in the financial market managing a portfolio of loans to various different industries so can shed some light on this....well my knowledge is a bit out of date but I doubt it’s changed much.

Simple answer is that none of the risk around PCP loans has anything to do with car dealers....for them they sell the car and get some commission and then perhaps there might be some kind of claw back if it doesn’t run to term but in Porsche’s case I believe the loan only has to run for a month.

If you buy a car on finance from an OPC the loan will be from VW Financial Services....VWFS is the financial subsidiary of VW AG....VW AG is the car company itself. VWFS has all the residual risk from any PCP contract or GFV etc....i.e. if the car is worth less than the GFV and a borrower “hands the keys back” then that is VWFS problem.

To answer what VWFS does with that risk you need to know where it gets the money from that it lends to the individual car buyers. Like any financial services company it borrows it. That is typical in two forms....Term Borrowing for a fixed maturity which will typically from the international bond markets and through Securitisations. The former is simply a loan where they will borrow money for a fixed period (Typically 2,3 or 5 years) and then repay that money at the end of the term.. This financing will typically be used for old school HP financing. Simply they will lend money to the car buyer at a slight premium to where they borrow it themselves and make a small spread Securitisations are where they will effectively sell off that residual risk....they will pool thousands of PCP loans so that they have something like £500mil in loans. That pool of loans will then be tranched (sliced up) into various different levels of risk....the people that take the most risk get paid the best returns. Let’s say the average interest rate of that pool of loans is say 6% the spread of interest for the various tranches will be between 0.5 % and say 12%....the people getting 0.5% will have no residual risk....the people getting paid 12% a lot. VWFS may have to retain some of that 12% tranche so investors are comfortable with it. Those tranches of risk get bought by asset management companies, insurance companies, banks etc.

That’s a very simplistic summary !

[Andyoz]

Great summary. I half expected as much was going on behind the scene.

Securitization - are the correct credit checks being done on borrowers - I'm sure it's as safe as houses!

What happens if the credit lines suddenly dry up. Unlike housing (which is a primary human need), governments won't step in to try and shore up the car loans - they will just let the dominos fall.

[Cheib]

Andyoz said:

Great summary. I half expected as much was going on behind the scene.

Securitization - are the correct credit checks being done on borrowers - I'm sure it's as safe as houses!

What happens if the credit lines suddenly dry up. Unlike housing (which is a primary human need), governments won't step in to try and shore up the car loans - they will just let the dominos fall.

The same credit checks that are done for any consumer borrowing.

OPC’s have software that allows them to monitor ‘equity’ in any PCP contract vs trade values of cars. So I have been told PCP deals are designed to create ‘equity’ after a coupe of years so that the borrower can use it as a deposit Pm a new car mad PCP contract.

I think the first thing that will happen is that people will run their PCP contracts and find at the end of three two or three year contract term trade values are such that there’s no equity left. So I actually think it’s the consumer that’s going to get butt fked. They’ll suddenly realise they’ve been renting a car for three years, have nothing to show for it and don’t have a deposit to allow them to get a shiny new car of the calibration to which they have become accustomed,

The way the market is that might happen in the next two years, if that does happen that is a utter disaster for car manufacturers as their sales will disappear overnight, That my friends is the time to be a cash buyer !

PCP is utter madness I think. Some of the personal lease deals do look interesting though...I remember you could get an M5 for £500 a month plus something like a £ 5 k deposit a few years ago so £17k to run an M5 for two years....cheap and there’s zero uncertainty.

[tedblog]

Or in simple terms, if PCP's didnt exsist i dont think the car manufactureres would either, its given them a new lease of life to sell new cars.
You can pcp a car for £99 with a £1500 deposit in some cases.
Run of the mill cars like , Ford, Vauxhall etc etc are £20k plus , thats a lot on hp.
I think the only way PCP's will get looked into is the failure to say what condition the car has to come back in?

[tedblog]

Cheib said:

The same credit checks that are done for any consumer borrowing.


I think the first thing that will happen is that people will run their PCP contracts and find at the end of three two or three year contract term trade values are such that there’s no equity left. So I actually think it’s the consumer that’s going to get butt fked. They’ll suddenly realise they’ve been renting a car for three years, have nothing to show for it and don’t have a deposit to allow them to get a shiny new car of the calibration to which they have become accustomed,

Surely you havent rented as youve paid off the residual which you would lose if you had bought the car? If trade values drop and you own the car you basically have a car which has dropped in value too no difference although you own a car which is dropping like a stone?
You have to take advantage of the pcp kickbacks on offer to make it work.

[Andyoz]

If PCP car owners suddenly lose their jobs and decide to direct their money towards the basics like housing, food etc what happens if they want to hand the car back and 'get out'?

[RSVP911]

Cheib said:

Andyoz said:

I know PCP has been discussed alot and I'm not one that uses it (always been a cash buyer)

Anecdotal evidence indicates car sales have been in a bit of a slump since the summer. People connected to the industry have indicated it to me and I can see with my own eyes in terms of listing hanging around longer than normal. Winter weather hasn't been that bad this year so can't blame that.

Has easy access for dealers to PCP credit lines allowed some specialist dealers to get too big compared to a decade ago. They are now holding alot of stock and the banks would be looking over their shoulder a bit more compared to boom times with high product turnover a few years back.

Anyone 'in the know' care to explain how PCP backed car sales appear on a dealers financials as apposed to simple cash sales. Are the PCP 'gains' to the dealer forward or backward loaded?

Would dealers be looking more favourably on a haggled price cash sale now if there is actually a delay in PCP 'profit' showing up on their books? I ran a business through the last recession and just interested in the dynamics at work here as car sales are having their own mini recession ATM.

Used to work in the financial market managing a portfolio of loans to various different industries so can shed some light on this....well my knowledge is a bit out of date but I doubt it’s changed much.

Simple answer is that none of the risk around PCP loans has anything to do with car dealers....for them they sell the car and get some commission and then perhaps there might be some kind of claw back if it doesn’t run to term but in Porsche’s case I believe the loan only has to run for a month.

If you buy a car on finance from an OPC the loan will be from VW Financial Services....VWFS is the financial subsidiary of VW AG....VW AG is the car company itself. VWFS has all the residual risk from any PCP contract or GFV etc....i.e. if the car is worth less than the GFV and a borrower “hands the keys back” then that is VWFS problem.

To answer what VWFS does with that risk you need to know where it gets the money from that it lends to the individual car buyers. Like any financial services company it borrows it. That is typical in two forms....Term Borrowing for a fixed maturity which will typically from the international bond markets and through Securitisations. The former is simply a loan where they will borrow money for a fixed period (Typically 2,3 or 5 years) and then repay that money at the end of the term.. This financing will typically be used for old school HP financing. Simply they will lend money to the car buyer at a slight premium to where they borrow it themselves and make a small spread Securitisations are where they will effectively sell off that residual risk....they will pool thousands of PCP loans so that they have something like £500mil in loans. That pool of loans will then be tranched (sliced up) into various different levels of risk....the people that take the most risk get paid the best returns. Let’s say the average interest rate of that pool of loans is say 6% the spread of interest for the various tranches will be between 0.5 % and say 12%....the people getting 0.5% will have no residual risk....the people getting paid 12% a lot. VWFS may have to retain some of that 12% tranche so investors are comfortable with it. Those tranches of risk get bought by asset management companies, insurance companies, banks etc.

That’s a very simplistic summary !

Very interesting post - lots to think about there - I guess the hedge is the equity that’s built into the car at end of life - this acts as a buffer for the finance house before they get hurt - as you state in your later post - very interesting

[Andyoz]

If their is a shudder in credit markets and car manufacturers call in their most exposed loans (maybe not the right term) and take back the cars to sell on - won't that just accelerate car depreciation and put more PCP car owners 'equity' under pressure forcing more loans to be called in.

I just don't believe the government for a minute when they say this market model is solid. It was introduced as a reaction to the economic crisis and these quick fix policies always have a sting in the tail.

[tedblog]

Andyoz said:

If PCP car owners suddenly lose their jobs and decide to direct their money towards the basics like housing, food etc what happens if they want to hand the car back and 'get out'?

As long as you have paid back 50% you can hand back with no penalties

[tedblog]

Andyoz said:

If their is a shudder in credit markets and car manufacturers call in their most exposed loans (maybe not the right term) and take back the cars to sell on - won't that just accelerate car depreciation and put more PCP car owners 'equity' under pressure forcing more loans to be called in.

I just don't believe the government for a minute when they say this market model is solid. It was introduced as a reaction to the economic crisis and these quick fix policies always have a sting in the tail.

Why would it put pcp car owners equity as risk? You are given a price at the end of the term, if the bottom falls out of the car market you just hand the car back , no loss to you?

[Dr Jekyll]

Schmed said:

Is interesting that 90% of car sales in the UK are apparently PCP funded (or thereabouts) yet absolutely everyone on PistonHeads has always been a cash buyer.

Presumably that's 90% of new car sales.

[Andyoz]

tedblog said:

Andyoz said:

If their is a shudder in credit markets and car manufacturers call in their most exposed loans (maybe not the right term) and take back the cars to sell on - won't that just accelerate car depreciation and put more PCP car owners 'equity' under pressure forcing more loans to be called in.

I just don't believe the government for a minute when they say this market model is solid. It was introduced as a reaction to the economic crisis and these quick fix policies always have a sting in the tail.

Why would it put pcp car owners equity as risk? You are given a price at the end of the term, if the bottom falls out of the car market you just hand the car back , no loss to you?

They lose a good chunk of pretend money if that valuation is crazy low at end of the term.

I imagine their are clauses to protect the funders if the car market goes into free fall.

The majority of buyers don't read the T&C's anyway so the funders can write whatever they like.