PCP car loan

cat23

i'm buying a new car (2nd hand mini convertible) and want to use cash £2750 part exchange value to pay for it. The dealer saying that i would be better off keeping my cash in a savings account of 3.5 or thereabouts and having a PCP. i thinking of keeping the car for around 2 years and then exchanging it for something like a basic KA for a similar price.
Would i be better investing the cash? I just dont understand the PCP scheme and want to get it right in my head before i speak to them again.
(The cash is coming from a larger amount that i've been left)

Hope someone can help

Rafter

I cannot believe that the dealer is offering a lower interest rate than 3.5% after tax on the loan - in which case they probably earn commission on the size of the pcp loan.

Generally it is never more efficient to borrow and hold savings at the same time, the exception being 0% credit cards or 0% buy now pay later deals.

R.

bms1972

cat23 wrote: »

i'm buying a new car (2nd hand mini convertible) and want to use cash £2750 part exchange value to pay for it. The dealer saying that i would be better off keeping my cash in a savings account of 3.5 or thereabouts and having a PCP. i thinking of keeping the car for around 2 years and then exchanging it for something like a basic KA for a similar price.
Would i be better investing the cash? I just dont understand the PCP scheme and want to get it right in my head before i speak to them again.
(The cash is coming from a larger amount that i've been left)

Hope someone can help

You say you don't understand the PCP, so I hope I'm not repeating what you already know :-)

The key is that the car is given a "minimum guaranteed future value" (MGFV) or similar jargon. On a car priced now at £15k this MGFV might be £6k or 7k. You don't pay this money back during the repayment period - in your case 2 years. This keeps payments attractively low, but means you do not own the car at the end of the 2 years. At that point you have the following choices:

- toss the keys back to the dealer and walk away - you owe nothing more, but you have no car. This is (usually) the worst option.
- pay the MGFV and keep the car. Hopefully it will be worth more than the MGFV.
- if the car is worth more than the MGFV you can trade it for a new one, that extra value in the vehicle is the deposit on the next one.

So, if you mean you want to swap the Mini for a basic Ford Ka (without handing over any money) it's not possible. The Mini is not yours until you've paid the large lump sum off.

PCPs can work very well if you strike the right deal. I've got a 3yr one that expires in September and I'm very happy that I made the right decision. But you need to be clear on your finances, and clear on the fact that the car is not yours until that hefty lump sum is paid. You also need to know where you are going to find that lump sum from in 2 years time :-)

By the way, Minis have traditionally been good cars for PCPs using the 'trade it and get another' option at the end as they have extremely high percentage retained values. This makes for temptingly low monthly payments. It also makes for a large MGFV.

I agree with what Rafter says on the deposit. The dealer wants his extra commission and I would be surprised if he can offer an APR lower than the savings rate you will get.

Cheers

Rich

cat23

Thanks Rich for the info. its all much clearer in my head now.

bms1972

cat23 wrote: »

Thanks Rich for the info. its all much clearer in my head now.

No problem, good luck with your decision :-)