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

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

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ILoveMondeo

Original Poster:

9,574 posts

143 months

Wednesday 28th May 2014
quotequote all
Struggling a bit here..

I understand the in's and outs of PCP and I'm really struggling to see why I should use it... yet I keep hearing it's a great product. Want to run it by you lot just to make sure I'm not missing something..

I've changed the numbers slightly, (removed some zero's as it scares the st out of me with all the big numbers) but here they are..

Purchase price £630
Already paid £20 cash deposit.

£610 left.

I have £360 cash.

I can borrow £250 at 4.3% over 2 years = £1.15 cost of credit
Opposed to PCP with £8 deposit (to take it to a £10 total) 7.9% over 2 years = 6.70-ish cost of credit

Monthly payments are about the same with each. I own fk all at the end of the PCP, but I tie up pretty much all my available cash with the loan option. The PCP interest is bonkers expensive.

I'm failing to see the point of the PCP really, especially as any money I hang on to will just sit in the mortgage offset, "earning" roughly 5% once tax etc is taken into account.

Total outgoing with loan/mortgage/bills/car payments/etc will be approx 45% of my monthly net earnings so I'm not overly concerned about "the boiler blowing up" etc. any "reasonable" emergency can be taken care of.

Seems there may be a tiny amount of wiggle room in buying negotiations for the car on PCP, but I've gently approached that with the dealer and I think the best we got to was about "£15" of extras, which didn't come close to the massive cost of the PCP.

So, Why take PCP?

The only other thing I can think of is that it's probably easier to get approved for credit with a secured loan on the car.






jdwoodbury

1,052 posts

123 months

Wednesday 28th May 2014
quotequote all
Probably needs to move to the finance section...

PCP can be useful if your intent is to get into a new/different car every 3-4yrs. The advantage is you offset part of the cost (balloon) and pay a lower amount per month, the idea to have equity in the car at the end of the deal to contribute to the next deposit.

A few things to be mindful of:

- If the balloon is not guaranteed it is up to you to find the extra money if you find yourself in negative equity
- PCP on 2nd hand cars is not always good value due to the poor residuals, best speaking to specialist brokers (performancecarfinance or classicandsports finance)
- PCP is often not offered on cars that are 10yrs old (at the end of the deal)
- Total cost of the car to you will be higher with a PCP (if you buy the balloon)

rfoster

1,418 posts

171 months

Thursday 29th May 2014
quotequote all
I can *probably* get you a better rate on PCP than you've been quoted. But, you will pay more interest on a PCP agreement over a standard hire purchase or personal loan, because you are deferring a large lump of the capital repayment until the end of the agreement.

As mentioned, PCP works well for people who want to change cars every 2-3 years and don't want the hassle of selling a car at the end of the term. However, if you can afford it, I'd recommend a longer term hire purchase to keep the monthly payments similar to those on a PCP (and usually at a lower rate too.) You can always settle early under the regulations set out by the consumer credit act.

ILoveMondeo

Original Poster:

9,574 posts

143 months

Thursday 29th May 2014
quotequote all
Cool, thank you.

daemon

17,440 posts

114 months

Thursday 29th May 2014
quotequote all
ILoveMondeo said:
So, Why take PCP?

The only other thing I can think of is that it's probably easier to get approved for credit with a secured loan on the car.
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..".


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Snowboy

8,028 posts

68 months

Thursday 29th May 2014
quotequote all
With the loan, at the end you own the car.
With the PCP, at the end you don't.

Very generally.
Assuming a 3 year PCP, and 50% depreciation.
With PCP you only need to finance half the cost of the car.
With a loan you finance the whole lot.

With an expensive car a high apr on a half amount is less per month that a low apr on twice the amount.

(Bad maths below)
Financing £5000 @ 7%
Is less per month than
£10000 at 4%.

So, if you want a low monthly payment for a few years then PCP works.
But if you want to buy a car it doesn't.

Also, the smaller the value borrowed the smaller the difference.
20% difference in payments could be £200 a month or could be £40 per month.



Edited by Snowboy on Thursday 29th May 15:24

daemon

17,440 posts

114 months

Thursday 29th May 2014
quotequote all
Snowboy said:
With the loan, at the end you own the car.
With the PCP, at the end you don't.

Very generally.
Assuming a 3 year PCP, and 50% depreciation.
With PCP you only need to finance half the cost of the car.
With a loan you finance the whole lot.

With an expensive car a high apr on a half amount is less per month that a low apr on twice the amount.

(Bad maths below)
Financing £5000 @ 7%
Is less per month than
£10000 at 4%.

So, if you want a low monthly payment for a few years then PCP works.
But if you want to buy a car it doesn't.

Also, the smaller the value borrowed the smaller the difference.
20% difference in payments could be £200 a month or could be £40 per month.



Edited by Snowboy on Thursday 29th May 15:24
Well summarised! Hence why PCP deals rarely make sense on relatively low cost cars.

StescoG66

797 posts

60 months

Thursday 29th May 2014
quotequote all
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?

daemon

17,440 posts

114 months

Thursday 29th May 2014
quotequote all
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?
No. You're bang on - what you look for is the exceptions where manufactures offer a "contribution" or more rarely a PCP with 0% finance.

Also you capital is then safely tucked up elsewhere earning you interest.

Not saying its the cheapest way to buy a car but it can work for some people and at worst a lot of the time its "there or there abouts" compared to a cash purchase, if you do it right.

Lucas Ayde

1,464 posts

85 months

Thursday 29th May 2014
quotequote all
rfoster said:
As mentioned, PCP works well for people who want to change cars every 2-3 years and don't want the hassle of selling a car at the end of the term. However, if you can afford it, I'd recommend a longer term hire purchase to keep the monthly payments similar to those on a PCP (and usually at a lower rate too.) You can always settle early under the regulations set out by the consumer credit act.
If you're looking to change cars every 2-3 years, surely a lease deal is going to be better?

What I don't understand is "Where does PCP fit in, in a general financing sense?": If you don't have the cash in the bank to outright buy an expensive car which you want then taking out a loan to buy the car would seem to be a better option if you are intending to keep the car over the longer term .. and leasing would seem to be a better solution for fixed, shorter term periods.


Lucas Ayde

1,464 posts

85 months

Thursday 29th May 2014
quotequote all
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?
Using any form of finance to buy a depreciating asset invariably means paying interest on depreciation.

Fox-

12,701 posts

163 months

Thursday 29th May 2014
quotequote all
Snowboy said:
With the loan, at the end you own the car.
No, you own the car immediately - the loan is not secured on the vehicle.

Dr Jekyll

12,012 posts

178 months

Thursday 29th May 2014
quotequote all
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?
You're paying interest on the purchase price less deposit, the same as with a loan. In fact with a PCP the faster it depreciates and the lower the GFV, the less interest you pay (assuming you change cars at the end of the agreement).

Fox-

12,701 posts

163 months

Thursday 29th May 2014
quotequote all
Dr Jekyll said:
In fact with a PCP the faster it depreciates and the lower the GFV, the less interest you pay
How?

Two £20k cars, Car A and Car B. Both on a PCP with £1k down.

Car A depreciates like a brick and has a GFV of £5k after 3 years.
Car B depreciates slowly and has a GFV of £10k after 3 years.

You are paying interest on £19k over 3 years for both of these, surely? The interest is on the amount borrowed, in both cases, £19k is borrowed to buy the car, irrespective of the predicted residuals.

gizlaroc

9,743 posts

141 months

Thursday 29th May 2014
quotequote all
No he is right, however, I would rather pay a bit more interest than a lot more depreciation.

Dr Jekyll

12,012 posts

178 months

Thursday 29th May 2014
quotequote all
Fox- said:
How?

Two £20k cars, Car A and Car B. Both on a PCP with £1k down.

Car A depreciates like a brick and has a GFV of £5k after 3 years.
Car B depreciates slowly and has a GFV of £10k after 3 years.

You are paying interest on £19k over 3 years for both of these, surely? The interest is on the amount borrowed, in both cases, £19k is borrowed to buy the car, irrespective of the predicted residuals.
On car A you are paying 3 years interest on the £5K, but effectively only borrowing the other £14K for slightly over 18 months because you are paying this off in your monthly payments.

On car B you are paying 3 years interest in £10K and 18 months interest on £9K.

Fox-

12,701 posts

163 months

Thursday 29th May 2014
quotequote all
Dr Jekyll said:
On car A you are paying 3 years interest on the £5K, but effectively only borrowing the other £14K for slightly over 18 months because you are paying this off in your monthly payments.

On car B you are paying 3 years interest in £10K and 18 months interest on £9K.
Ah, got it smile

rfoster

1,418 posts

171 months

Friday 30th May 2014
quotequote all
Lucas Ayde said:
If you're looking to change cars every 2-3 years, surely a lease deal is going to be better?

What I don't understand is "Where does PCP fit in, in a general financing sense?": If you don't have the cash in the bank to outright buy an expensive car which you want then taking out a loan to buy the car would seem to be a better option if you are intending to keep the car over the longer term .. and leasing would seem to be a better solution for fixed, shorter term periods.
Not necessarily - a personal lease will have monthly figures at a very similar prices to a PCP agreement (not taking into account any manufacturer special offers) by the time you've added VAT to the lease. No vat payable on the PCP option. The PCP is also easier to terminate early should you want - you can offset the value of the vehicle against the regulated settlement figure and this is generally lower than a termination fee on a lease (usually circa 50% of the remaining rentals to hand the vehicle back to the finance company, differs from company to company.)

PCP works well for individuals who want the most car for their monthly budget - you can take a 4 year PCP with final balloon payments and keep the monthly payments to a minimum, and under the consumer credit act you can settle at any time and obtain a regulated settlement figures (which is, very roughly, capital remaining plus abut 2 months interest.)

Of course you can't do a lease agreement on a used car, PCP's are available on cars up to 5 years old at the beginning of the term.

Dog Star

7,543 posts

85 months

Friday 30th May 2014
quotequote all
rfoster said:
As mentioned, PCP works well for people who want to change cars every 2-3 years and don't want the hassle of selling a car at the end of the term.
The second half of your sentence above has become more important than ever these days, I think. I've grown to detest the hassle of trying to sell cars and bikes: the "innit bruv", endless scammers, "best price mate" etc etc and I never ever seem to get anything like book value. I'm a total convert to PCPs now; go to a good broker, get something in stock and it's brilliant.

Snowboy

8,028 posts

68 months

Friday 30th May 2014
quotequote all
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.

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

PCP would have been better if I knew I only wanted the car for two years then wanted another new car; and I was willing to pay the price if constant new car ownership.

But, if I wanted to keep the car it was a bad choice.