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
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.
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?
2012 VW Beetle 2.0 TDi Sport. But I've paid the deposit now so I don't think withdrawal is possible? I suppose there is the cooling off period...
The T&Cs from VW are as clear as mud. They don't explain the finance calculation method nor the consequences of withdrawal on "special offers". I'm wondering if all of that is standard across the industry. This guide seems good:
http://www.which.co.uk/consumer-rights/regulation/...
I'm noting that the T&Cs don't include anything about penalties for early repayment. I'll come back when I've read up more but I think there are two things at play here: 1 the ability to repay the lender early and 2 the ability to hand back the car. The first one seems easy at any point (once I figure out the effect on interest payable) and the second may be the VT (voluntary termination) that keeps cropping up on various forums.
The T&Cs from VW are as clear as mud. They don't explain the finance calculation method nor the consequences of withdrawal on "special offers". I'm wondering if all of that is standard across the industry. This guide seems good:
http://www.which.co.uk/consumer-rights/regulation/...
I'm noting that the T&Cs don't include anything about penalties for early repayment. I'll come back when I've read up more but I think there are two things at play here: 1 the ability to repay the lender early and 2 the ability to hand back the car. The first one seems easy at any point (once I figure out the effect on interest payable) and the second may be the VT (voluntary termination) that keeps cropping up on various forums.
Right, I've reviewed the Consumer Credit (Early Settlement) Regulations 2004
http://legislation.data.gov.uk/cy/uksi/2004/1483/m...
There is a formula explaining how it is calculated that is beyond my memory of A-level maths but the worked example beneath looks like if you want to repay early then you owe the original amount plus the interest accrued to that point (so NOT the full interest to the end of the loan period) less the amounts already repaid, including the interest they represented. Then there is a bit of additional interest due to cover the delay from you telling the company you want to end early to actually sending them the money.
It's fair really - a lender lends you some money, its starts accruing interest on day 1, you pay it back clearing some capital and interest then, if you want to settle up, you pay them what's left of the capital plus the interest that capital accrued. Front loading is therefore illegal.
http://legislation.data.gov.uk/cy/uksi/2004/1483/m...
There is a formula explaining how it is calculated that is beyond my memory of A-level maths but the worked example beneath looks like if you want to repay early then you owe the original amount plus the interest accrued to that point (so NOT the full interest to the end of the loan period) less the amounts already repaid, including the interest they represented. Then there is a bit of additional interest due to cover the delay from you telling the company you want to end early to actually sending them the money.
It's fair really - a lender lends you some money, its starts accruing interest on day 1, you pay it back clearing some capital and interest then, if you want to settle up, you pay them what's left of the capital plus the interest that capital accrued. Front loading is therefore illegal.
So I can refinance on to better terms at any time, paying only the cost of the money during the time I borrowed it.
I'm going to ask the dealer tomorrow if I decide to pay up early and go back to being a cash purchase, do I keep the warranties? Nothing to say I couldn't get PCP elsewhere instead of that cash.
Now I just need to understand why borrowing that money is cheaper than spending it.
I'm going to ask the dealer tomorrow if I decide to pay up early and go back to being a cash purchase, do I keep the warranties? Nothing to say I couldn't get PCP elsewhere instead of that cash.
Now I just need to understand why borrowing that money is cheaper than spending it.
Edited by marcg on Monday 1st May 21:49
Yes, that's what I read in the legals.
I think I've cracked why PCP is cheaper than cash. It's not if you run it to full term. £10500 at 1.5% on the decreasing amount is negligible. So the cost to buy a car for cash would be £10600 or so. If you buy it PCP it would be £211x44 +balloon of £4400 = £13684.
BUT
PCP is like a loan that you are refinancing every month. Whereas a traditional personal loan for £11k over 48 months will cost you 6% per annum (say) = 11000 x 1.06 x 1.06 x 1.06 x 1.06 = £13887, PCP will cost you 10.9 APR = 0.86% per month for the full £11k for only the first month = £11094.60. The second month will be 0.86% on (£11094.60 MINUS £211 monthly payment) + 0.86% = £10977.20 and so on with each monthly payment reducing the capital by an increasing amount as you get closer to the end of the loan. The last payment of £211 is £173 of capital and £38 of interest for the last month as compared to the first month which is £121 capital and £90 interest.
The effect of this is that you don't really pay off much capital in the beginning. If voluntary termination at 24 months is a true thing, you can walk away from more debt than the car is worth. By my calculations, you owe about £7500 on a car which has depreciated quicker to £6500. And 2 years free servicing warranty etc, worth £650 to me. So, by spending £211 x 24 = £5064, you have financed £4000 + 650 of depreciation/servicing/warranty. Add some creative interest to the money still sat in the bank and you've got nearly a zero sum game. But it all relies on being able to walk away from the finance package without settling the £7500 outstanding.
So I need to be sure VT at 24 months is real.
I think I've cracked why PCP is cheaper than cash. It's not if you run it to full term. £10500 at 1.5% on the decreasing amount is negligible. So the cost to buy a car for cash would be £10600 or so. If you buy it PCP it would be £211x44 +balloon of £4400 = £13684.
BUT
PCP is like a loan that you are refinancing every month. Whereas a traditional personal loan for £11k over 48 months will cost you 6% per annum (say) = 11000 x 1.06 x 1.06 x 1.06 x 1.06 = £13887, PCP will cost you 10.9 APR = 0.86% per month for the full £11k for only the first month = £11094.60. The second month will be 0.86% on (£11094.60 MINUS £211 monthly payment) + 0.86% = £10977.20 and so on with each monthly payment reducing the capital by an increasing amount as you get closer to the end of the loan. The last payment of £211 is £173 of capital and £38 of interest for the last month as compared to the first month which is £121 capital and £90 interest.
The effect of this is that you don't really pay off much capital in the beginning. If voluntary termination at 24 months is a true thing, you can walk away from more debt than the car is worth. By my calculations, you owe about £7500 on a car which has depreciated quicker to £6500. And 2 years free servicing warranty etc, worth £650 to me. So, by spending £211 x 24 = £5064, you have financed £4000 + 650 of depreciation/servicing/warranty. Add some creative interest to the money still sat in the bank and you've got nearly a zero sum game. But it all relies on being able to walk away from the finance package without settling the £7500 outstanding.
So I need to be sure VT at 24 months is real.
Edited by marcg on Monday 1st May 23:30
I've done the maths. The total cost of the finance is £211 x 44 +4400 = £13684.
VT is possible at 50% of that = £6842
At completion of payment in month 24, £7458 is due. So VT is not possible. VT is only possible from month 28 where £6865 is due.
Let's assume the dealer's maths is off and he meant month 28 and run the numbers cash vs PCP again.
Cash:
£11k down. Sell in month 28 at £6500. Cost £4500 plus £650 servicing and warranty. = £5150.
PCP
£500 down. Return in month 28. Cost £211 x 28 plus deposit = £6408.
Upward variation in the value of the car has no effect on the PCP unless it exceeds the outstanding amount. But it reduces the cost of the cash.
Downward variation in the value of the car increases the cost of the cash.
But for the cash to cost more than the PCP, the car would need to be worth <£5300.
IF it were possible at month 24 then the above remains true albeit that if the estimate of £6500 was right it would be nicer to have most of the £11k in the bank for more of the time.
So I need to pin down why the dealer thinks I can walk away at month 24.
VT is possible at 50% of that = £6842
At completion of payment in month 24, £7458 is due. So VT is not possible. VT is only possible from month 28 where £6865 is due.
Let's assume the dealer's maths is off and he meant month 28 and run the numbers cash vs PCP again.
Cash:
£11k down. Sell in month 28 at £6500. Cost £4500 plus £650 servicing and warranty. = £5150.
PCP
£500 down. Return in month 28. Cost £211 x 28 plus deposit = £6408.
Upward variation in the value of the car has no effect on the PCP unless it exceeds the outstanding amount. But it reduces the cost of the cash.
Downward variation in the value of the car increases the cost of the cash.
But for the cash to cost more than the PCP, the car would need to be worth <£5300.
IF it were possible at month 24 then the above remains true albeit that if the estimate of £6500 was right it would be nicer to have most of the £11k in the bank for more of the time.
So I need to pin down why the dealer thinks I can walk away at month 24.
Or.
Take out the VW PCP. Cancel within cooling off period but keep the £650's worth of goodies. Pay on a credit card. Move the debt on to 48 month 0% cards for usual 3% transaction fee and repay for a total cost of £11k +3% = £330. Plus interest from cooling off period - £70? Monthly repayments of £11400/48 = £237.50
Sticking with my usual illustrations, sell in month 24 for £6500. Total cost to own £11400-6500 = £4900.
So somehow find out what happens to the goodies if I cancel. Somehow.
At the end of the day, its all about those goodies. If I have to pay for them, it increases the cost of the cash purchase towards the cost of the PCP.
Take out the VW PCP. Cancel within cooling off period but keep the £650's worth of goodies. Pay on a credit card. Move the debt on to 48 month 0% cards for usual 3% transaction fee and repay for a total cost of £11k +3% = £330. Plus interest from cooling off period - £70? Monthly repayments of £11400/48 = £237.50
Sticking with my usual illustrations, sell in month 24 for £6500. Total cost to own £11400-6500 = £4900.
So somehow find out what happens to the goodies if I cancel. Somehow.
At the end of the day, its all about those goodies. If I have to pay for them, it increases the cost of the cash purchase towards the cost of the PCP.
Edited by marcg on Tuesday 2nd May 00:18
Obviously this has all been done before:
https://www.pistonheads.com/gassing/topic.asp?t=15...
Another question though - if I withdraw within 14 days, the credit agreement is scrapped but am I paying the dealer or the finance company the £11k. And can I pay either using a credit card? I assume the dealer would be fine but using a credit card to pay a finance company feels like using a credit card to pay an overdraft which never worked when I was a student.
I need the debt to be on the credit card so I can move it to the 0% cards.
I'm feeling confident enough about all this that I will risk losing the goodies.
https://www.pistonheads.com/gassing/topic.asp?t=15...
Another question though - if I withdraw within 14 days, the credit agreement is scrapped but am I paying the dealer or the finance company the £11k. And can I pay either using a credit card? I assume the dealer would be fine but using a credit card to pay a finance company feels like using a credit card to pay an overdraft which never worked when I was a student.
I need the debt to be on the credit card so I can move it to the 0% cards.
I'm feeling confident enough about all this that I will risk losing the goodies.
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