PCP - am I missing something???

Snuggles

Having recently made the decision to buy a brand new car, every dealership I've been to has told me how PCP is the best way to go if you want to have a new car every three years. I haven't gone down this route, however I am intrigued by these plans, as I just can't understand how it can possibly work.

Just say you buy a car on PCP, pay a £2,000 deposit, then pay X amount per month for 36 months. At the end of the 36 months the GFV is £5,000.

At this point you can either pay the balloon payment and keep the car, hand it back, or trade it in for a new one. It's the latter option I don't understand. If you still owe £5,000 on the car, how can you trade it in? Surely you are effectively just handing it back, and then having to find more cash to pay a deposit on a new one?

Can someone explain, as I just can't see how it would work!

Hintza

Snuggles wrote: »

If you still owe £5,000 on the car, how can you trade it in?

The theory goes that the car will be worth (say) £8,000 at the end of the PCP so £5k goes to pay off the remaining finance and the £3k is used as a deposit.

The thing to be aware of is this is the theory. There have been occasions when the actual value of the car was lower than the final payment, which is not your problem but you would not have a deposit for the next car.

Leasing is another option but the deals there aren't great just now but still worth running the numbers especially if it is an unpopular car you are buying.

forgotmyname

They give you a £10,000 car with a recommended retail of about £16,000

You pay £2000 up front and £200 a month for 36 months, Total £9200.

Then they get to sell the car on for £6000+

You have paid £9200 to rent a car for 3 years.

You dont owe them £5000 your only renting it. Unless you buy it at the end of course.

Doesnt suit everyone, I wouldnt want to spend nearly £10,000 and own nothing at the end.

missile

There are many ways to finance a car. Get a number of quotes and work which suits your requirements. Do not trust the salesman who may get a substantial bonus for selling you PCP.

Beware the small print, e.g. on PCP you have an agreed mileage and could be liable for horrendous charges if you exceed that. It can be expensive to re-negotiate if you decide to sell car before the agreed time.

motorguy

forgotmyname wrote: »

They give you a £10,000 car with a recommended retail of about £16,000

In the example you're using, if the GFV is set to £10,000 then you would expect to be able to get £12,000 - £13,000 for the car on a trade in, leaving you with £2,000-£3,000 as a deposit for next time.

forgotmyname wrote: »

Then they get to sell the car on for £6000+

'They' as in the dealer dont get the car back, it goes back to the finance company, it will then be resold at auction.

forgotmyname wrote: »

You have paid £9200 to rent a car for 3 years.

You dont owe them £5000 your only renting it. Unless you buy it at the end of course.

You pay £2000 up front and £200 a month for 36 months, Total £9200.

Doesnt suit everyone, I wouldnt want to spend nearly £10,000 and own nothing at the end.

Dont forget that includes your depreciation, and since you'd be buying a new car you're getting 3 years manufacturers warranty, probably AA / RAC cover and possibly free servicing.

That works for a lot of people - a simply monthly payment and it covers all their costs bar maybe tyres.

Also, it works both ways - my wifes BMW had a residual value of around £18,000 and the car was 'only' worth about £16,000 so she 'saved' on that extra depreciation.

Finally, a lot of manufacturers will use cash incentives if you use the PCP deal - for example BMW will put £1,500 into the deal on most of their cars so you're offsetting the interest charges.

If you buy a new car and change every three years then it can make a lot of sense as effectively your depreciation costs are factored in up front.

motorguy

missile wrote: »

There are many ways to finance a car. Get a number of quotes and work which suits your requirements. Do not trust the salesman who may get a substantial bonus for selling you PCP.

Salesmens get bonused on finance agreements full stop. They wont generally get more if its a PCP deal.

missile wrote: »

Beware the small print, e.g. on PCP you have an agreed mileage and could be liable for horrendous charges if you exceed that. It can be expensive to re-negotiate if you decide to sell car before the agreed time.

The mileage rates tend to be 6p to 12p per mile for cars ranging from small to medium sized respectively.

Also, you wont pay the extra mileage charges unless you hand the car back. If you buy it, or simply trade it in and go again, then no mileage charges are payable.

Also, you dont renegotiate *ANYTHING* if you sell before the end of the contract - you simply get a settlement figure and work with that as per a regular HP agreement. You're thinking of leasing.

motorguy

Snuggles wrote: »

ou are effectively just handing it back, and then having to find more cash to pay a deposit on a new one?

Can someone explain, as I just can't see how it would work!

You owe £5,000 on the finance agreement but your car may be worth £8,000 come trade in time, hence you've £3,000 towards your next agreement.

If it turns out the car is worth just £3,000 you hand it back and its up to the finance company to cover their loss.

verityboo

pgilc1 wrote: »

You owe £5,000 on the finance agreement but your car may be worth £8,000 come trade in time, hence you've £3,000 towards your next agreement.

If it turns out the car is worth just £3,000 you hand it back and its up to the finance company to cover their loss.

Yes, our neighbour had a Range Rover Sport on a PCP which was worth thousands less than the GFV so he handed it back. Cost far with the PCP than if he had paid cash

The PCP deals are normally subsidised by the manufacturer so as well as the normal car discount, you often get a deposit contribution and things like free servicing thown in. They are not for everyone but worth considering if you are keeping the car 3 years, will not be doing starships miles and the car has reasonably low depreciation

gkerr4

interesting points above.

I think Warren buffet said if it appreciates, own it, if it depreciates, rent it.

PCP makes a lot of sense in this respect - you only really want to pay the depreciation on a new car - especially if you are keen on changing it every few years anyway - the sort of response about paying out £10k an not owning anything is meaningless as the car you would have "bought" would have been worthless anyway.

One other thing to consider - if you are buying a car with reasonably strong residuals (VW golfs, some BMW's, Audi A3/A4 es example) then you can ask them not to 'guarantee' the final value. You will pay a fair bit lower finance - probably a couple % - and take the risk yourself that the vehicle will have equity over the balloon payment.

forgotmyname

Better still if it depreciates, Buy it after its done the bulk of its depreciation.

Whats a 2004 mondeo estate worth today with full mot and long tax? £1000 /£1500?

Well i paid just over £2000 for it in 2009 so the loss is neglible compared to a new cars depreciation.

I bet a lot of cars lose more than £2000 driving it out the showroom.

motorguy

forgotmyname wrote: »

Better still if it depreciates, Buy it after its done the bulk of its depreciation.

Whats a 2004 mondeo estate worth today with full mot and long tax? £1000 /£1500?

Well i paid just over £2000 for it in 2009 so the loss is neglible compared to a new cars depreciation.

I bet a lot of cars lose more than £2000 driving it out the showroom.

Oh indeed. No doubt. I'm with you even to the extent that i make my living selling cars in the £2,000 - £5,000 price bracket.

BUT, some people want and like new cars. I coaxed my wife away from a new car and into a beautiful black 330Ci BMW with black leather and 19 inch alloy wheels. It cost me in the trade what a typical deposit might be on a PCP deal. I loved it. She drove it a month. Hated it. No confidence in the car. Didnt like the rattles that the trim sometimes made, didnt like not having brand new quality rubber at each corner, didnt like the risk of poorer reliability, so she bought a brand new factory order BMW z4 instead. The reasoning? Shes a really great job on a fantastic salary and she likes having a really nice, new car. She can well afford the payments and has used PCP's to own some really decent cars over the years.

So i guess for some people they're happy with monthly payments they can budget for and a new car in the spec they want.

Each to their own really.