Car PCP and Overpaying

denial2010

Hi all,

I have a quick question regarding overpaying on a Car PCP loan. I pick my new car up on Tuesday which I've got out on this agreement. The car is 13k and interest is 7.7% APR. I've put down a 2.5k deposit and the rest is on this agreement. It works out at £183/m over the next 3 and a half years with a balloon payment of approx £5k at the end. Now I fully intend to buy the car outright and have already set up a standing order to savings of £150/m on top of the £183/m so the balloon payment will available when the term is up (plus about 1k extra) and I haven't got to get furthur finance.

Now I'm just considering my options. Is this the best way of doing it? I've spoken to VW Finance and they said I can overpay whenever I like. If I do they will either reduce the term or the monthly amount. Now am I right in thinking if I ask them to reduce the term it just brings the 5k balloon payment forward? Obviously if this is the case, I won't have the 5k available as it's gone into overpaying? So should I just simply ask them to reduce the monthly payments and overpay the rest? Then in theory the entire loan should be paid when the term is up? I'm just wondering what would be cheaper in terms of saving on interest payments? Maybe it would be cheaper to leave it in savings as its earning interest, plus I guess I've got the added advantage if the car is worth less than the GRV I can just give it back and use it as a deposit on another car? Or I could get an early settlement quote? Gah so many questions I know! Any advice would be much appreciated!

bris

Why bother taking out a loan with a balloon payment in the first place, just adjust the loan to reflect the whole cost of the car and forget about the balloon payment. Balloon payments were brought about to make cars more affordable by reducing monthly payments, you don't need it so why bother.

t508

as above. the balloon is just deferred capital to make the monthly affordable. go back to them and ask for some alternatives i.e reduce the baloon so the motnhly is higher. As the rest is a fixed rate loan there is no interest benefit to overpaying unless you actually settle early. dont over pay but put the money into isa etc till needed/or you can settle in full. The baloon is part of the loan so early settlement has to include paying the baloon as well.

HP over a longer term without baloon then put aside your overpayment into an isa and settle it when youve built up enough gives you best of both worlds.

denial2010

t508 wrote: »

as above. the balloon is just deferred capital to make the monthly affordable. go back to them and ask for some alternatives i.e reduce the baloon so the motnhly is higher. As the rest is a fixed rate loan there is no interest benefit to overpaying unless you actually settle early. dont over pay but put the money into isa etc till needed/or you can settle in full. The baloon is part of the loan so early settlement has to include paying the baloon as well.

HP over a longer term without baloon then put aside your overpayment into an isa and settle it when youve built up enough gives you best of both worlds.

Brilliant! Thank you! Is there an easy way to work out what the settlement quote will be? Say for example in the 36th month? or perhaps before? Then I can work out the best way without breaking the bank!

Captain__

You may have stumbled upon an idea of use to me, so comments welcome..

When you take a PCP, you have a guaranteed future value (GFV)to the vehicle and known monthly payments. Over the term, you only pay down the difference between the purchase price and the GFV, plus compound interest on the complete outstanding amount of finance.

Realistically, if you can afford to outright purchase the car, and want to keep it, I believe it makes no sense getting a loan.

A loan at 7% on £10k over 4 years will cost around £2,400 on top of the price of the car.

But what if you were able to remove most of that loan by overpaying, but still have the advantage of GFV. I have got a few quotes for PCP, and generally they will not let me put down more than 1/3 of the value in deposit.

Take the following example.

I buy a £10k car on PCP with a GFV of £3k. If I carry out the finance to the letter, I will pay around £3,100 in interest for that car(another dis advantage of PCP that removes more money from you than a loan). But if I were to take that same car, repay down to a poultry amount above the £3k, I would only be paying interest on the £3k over the finance period, and still get the GFV....

So in a long way, I am trying to ask, do they still honour the GFV when making overpayments and reduce your monthly payment (which I suspect they would), or do they reduce the term length in which I would expect them to recalculate the GFV to a higher figure as the vehicle would be younger at the expiry of the agreement.

Hell, could I overpay almost all the loan element, and then when I return the car at the end, ask for £3k back. Thus paying almost no interest on the loan but still getting the advantage of GFV? (I doubt it).

Many thanks for reading.
Captain__