PCP vs HP for 'car upgrade'

kevin63

I know PCP is designed for people who want a new car every few years but as you are only paying off a percentage of the car (as a lump sum is left until the end) is it not better to go with HP? As HP you are paying off the total amount from day 1 and so should have more equity in the car at any given point - as you have paid off more... no?

Also, is it better to have higher PCP payments as opposed to lower monthly payments? This way you will pay off the car quicker and should you come to P/X sooner than expected (Mid term) you will have more equity... no?

My friend has a car on finance at the moment and we were talking about it which has spiked my interested and i've started looking at a Golf.

Just want to be prepared before I head to the showroom.

jaydeeuk1

HP is really another name for a lease. In that, you're just paying for the depreciation and at the end you hand it back and then pay to have any dents or scratches put right that fall outside its terms for fair wear and tear. It will also be at dealer rates so expensive. Ideally, the cost to lease will be less than the cost of depreciation, but it is rarely for the model you want and adding options will increase cost massively as its price is split across the payments. For example, a vauxhall astra diesel deal might be £180 a month, yet you might find a deal for a VW Golf R a far more expensive car for £170 a month. However, monthly cost is usually far cheaper than a PCP, tax etc will be included and sometimes servicing too. It is also flexible depending on how much deposit you put down.

A PCP is similar to lease, expect you pay for the depreciation, plus a little extra which will be 'equity', where the idea is the manufacturer wants to keep you within their brand. After x months you can pay an optional Guaranteed final value payment, which will be a good 10% less than the actual value of the car. So you can either pay it off, and then use that equity as a deposit on another car or sell it privately and use the cash for something else, or hand it back, in which case you have effectively overpaid for the vehicle and a lease would have been far cheaper. A PCP may be easier to get credit for if you can put down a large deposit.

If the PCP is 0%, then imo I'd rather pay 0% deposit - might as well earn some interest on it!

Edit (PS if you after a Golf R, which really was £170 a month recently then you're in for a good 6 month wait for delivery)

http://www.centralukvehicleleasing.co.uk/vehicle/choose_your_lease/63191/volkswagen/golf/20_tsi_r_3dr.html

Edit 2 - ignore all the above

OddballJamie

Jaydee, HP is hire purchase which is in essence a loan secured on a car, you pay equal monthly payments just like a loan. Difference being you own it when the last payment is made.

What you've described sounds like a Lease Purchase.

Short movie from VW explaining it.
http://www.volkswagen.co.uk/buying-guide/finance-hire-purchase

InsideInsurance

There is also more gamble involved with these things.

On PCP you have a guaranteed valuation/ balloon payment to get to keep the car at the end of the deal. As you say, you could pay more monthly payments in exchange for a smaller balloon so saving some interest and hopefully have more equity in the car when you come to trade it in/ sell it.

Obviously the problem comes when the value of secondhand cars crashes and the car is now worth less than the balloon in which case you're better off surrendering the car and walking away but if you've been paying above the odds it means the car has cost you more than it should.

Secondly, you need to compare APRs to AERs. Now in most cases I would expect the APR on the debt to be higher than the AER earned on your savings but its not always the case in which case lowering your monthly payments and sticking the extra money saved into a higher interest rate ISA or equiv would be better for you

jaydeeuk1

OddballJamie wrote: »

Jaydee, HP is hire purchase which is in essence a loan secured on a car, you pay equal monthly payments just like a loan. Difference being you own it when the last payment is made.

What you've described sounds like a Lease Purchase.

My bad, thought HP was another name for contract hire.

InsideInsurance

OddballJamie wrote: »

Jaydee, HP is hire purchase which is in essence a loan secured on a car, you pay equal monthly payments just like a loan. Difference being you own it when the last payment is made.

Is HP always equal payments in personal cars?

I know in the commercial space it can still have a balloon payment at the end but the difference to PCP is that you are obliged to pay it rather than it being an option.

OddballJamie

InsideInsurance wrote: »

Is HP always equal payments in personal cars?

I know in the commercial space it can still have a balloon payment at the end but the difference to PCP is that you are obliged to pay it rather than it being an option.

AFAIK in normal hire purchase there's a small payment either end to cover fees but no balloon payment to speak of.

There is a version called Hire Purchase with Balloon Payment or Balloon Hire Purchase with a compulsory large final payment but it's not as common as standard HP or PCP. I was offered it once on a Fiesta S1600, 50% in payments interest free followed by a 50% balloon after two years.

Leasing and PCP seems to be the most popular nowadays with people swapping cars every 2/3 years.

kevin63

Sounds like PCP has the best protection then and your best to just haggle the lowest monthly cost you can get - understanding the fact that you might not have any equity for deposit at the end of the deal.

InsideInsurance

kevin63 wrote: »

Sounds like PCP has the best protection then and your best to just haggle the lowest monthly cost you can get - understanding the fact that you might not have any equity for deposit at the end of the deal.

Its more complex than that

If you definitely want to get rid of the car at the end then the lowest risk is PCP or Lease and its simply a case of doing the sums for the total cost of ownership over the 24-36 months factoring in deposits etc.

If you definitely want to keep the car then PCP or HP is the right option but given the debt is incurring interest then the smallest monthly payment may not be best as you're still paying say 20% APR on the debt which ultimately will have to be repaid so you may as well repay quicker to reduce the interest charges. Obv if your paying 1% interest instead and getting 3% interest on savings then you want to pay late.

If you are undecided then PCP gives you the most options and protects you from a total crash of the 2nd hand car market and you'll need to balance interest rates -v- balloon

kevin63

Thanks mate,

Going to go to volkswagen tonight and see how figures look.

OddballJamie

Just lease a Golf R, everyone else is.