Understand the equity in a car on PCP

EHesp

I'm looking into buying a new (nearly) on finance, via PCP.

After the 4 year term is up, there is one part I'm currently unsure of even after Googling and speaking with the dealer.

They are telling me one option is to use the car as equity to have another car after the term (48 months) is up. The GMV they are stating based on my milage is £12,000.

I currently have my own car, but I'm looking to part-ex it which makes up the bulk of my deposit. The thing I don't understand though, is after the term is up, I give them the car back and start a new PCP deal. But I give them the car back to make up the £12,000 - meaning I have no deposit.

The dealer however, seemed to think differently saying I could use the cars equity to re-new a deal.

Can someone explain how that would even work?

TLDR: How can a car give me equity for a new PCP deal, when I'm giving it back to cover the remaining PCP balance?

InsideInsurance

You have a fixed price you can buy the car for, £12,000 in your case.

In 4 years time the car may be worth £15,000 though rather than £12,000 and so effectively you have £3,000 equity in it as the dealer would pay off the £12,000 for you and use the £3,000 as a deposit towards the next vehicle.

Now if something happens and the bottom drops out of the market your car could only be worth £9,000 in which case there is no equity and so unless you have particular emotional connection to the vehicle you'd be best just handing it back rather than paying £12k for a £9k car.

OddballJamie

The equity would come from the difference between the trade in value and the GMFV.

If they've given a conservative future value and your vehicle is worth more then you're quids in.

However if in the next few years someone releases a range of £10k premium cars that run on air and water then your car will be worth next to nothing, so hand it back with no equity in it.

^I wasn't quick enough^

EHesp

Right that does make sense!

I said to the dealer I don't do more than 10k miles per year, to which he said "we'll base it on 7k miles per year". This confused me, since if I go over this and want to re-new a PCP deal then I won't have any equity.

Cheers for clearing that up... can't work out whether to do this or not, 11% APR means half the year I'd be paying back interest... blergh.

OddballJamie

Look into leases, you may find it's cheaper.

AdrianC

EHesp wrote: »

I said to the dealer I don't do more than 10k miles per year, to which he said "we'll base it on 7k miles per year". This confused me, since if I go over this and want to re-new a PCP deal then I won't have any equity.

You may still have equity in it.

If they base the GMFV on 4yo/28k, and reckon it's worth £10k at that point, but at 4yo/40k it's worth £13k, then you still have £3k equity.

The mileage on the contract makes a difference because you will be paying a certain extra price per mile over the contracted mileage, but 12,000 miles of Xp/mile may well be cheaper than the difference in 48 lease payments between 7k/year and the next step up - which may be 15k/year..

Foxy-Stoat_3

You could buy £250 worth of Premium Bonds every month and on month 48 you could finish paying for the car and keep it, unless your numbers have come up!!!!

familyfitz

EHesp wrote: »

Right that does make sense!

I said to the dealer I don't do more than 10k miles per year, to which he said "we'll base it on 7k miles per year". This confused me, since if I go over this and want to re-new a PCP deal then I won't have any equity.

Cheers for clearing that up... can't work out whether to do this or not, 11% APR means half the year I'd be paying back interest... blergh.

We were looking into doing PCP for a new to us car and the dealer said that if our plan would be to trade the car in for a new one, then the over contract mileage wouldn't matter. And he would always say set it lower for a cheaper monthly cost. He said it was only if you handed car back to finance company did the over mileage play a part.
I presume there is still that risk that when trading it in u don't end up with any equity for a deposit in a new deal.

How accurate above is I don't know as we opted for a loan as when comparing the two payment methods we favoured a loan over 5 yrs and still having car as deposit to a new deal compared to 4 yr pcp deal saving us about £500 in total over the time (& likely no equity towards new car).
Hope that makes sense and of course everyone has different circumstances.

sharp910sh

familyfitz wrote: »

We were looking into doing PCP for a new to us car and the dealer said that if our plan would be to trade the car in for a new one, then the over contract mileage wouldn't matter. And he would always say set it lower for a cheaper monthly cost. He said it was only if you handed car back to finance company did the over mileage play a part.
I presume there is still that risk that when trading it in u don't end up with any equity for a deposit in a new deal.

How accurate above is I don't know as we opted for a loan as when comparing the two payment methods we favoured a loan over 5 yrs and still having car as deposit to a new deal compared to 4 yr pcp deal saving us about £500 in total over the time (& likely no equity towards new car).
Hope that makes sense and of course everyone has different circumstances.

You only pay the excess millage if you hand the car back to the dealer. There are many options you can consider once the four years is up:

1) Hand the car back, and if the car is in reasonable condition and no excess millage you dont pay a cent.

2) Trade in the car and start in a new PCP. You can trade in the car to any dealer to get a new car and they will value the car, and pay off the GMFV. If the offer is greater than the GMFV that will form your "deposit" for the new car. The value of the car will be based on the millage and condition, so you could do 2k miles over the contract amount, but it may have a small effect on the value of the car.

3) Sell the car privately, which will usually give you more money. The buyer then pays off the finance company. If the value of the car is worth more than the GMFV that money is yours to keep.

4) Pay of the GMFV and the cars is yours to keep.

Remember the GMFV is set very low. So there is equity in the car, however you will not know how much the car is worth in 4 years times, unless of course you have a crystal ball.

Remember equity is not real money you have saved, as you are paying a lot of interest when taking out finance. The interest is a killer.

zappahey

familyfitz wrote: »

We were looking into doing PCP for a new to us car and the dealer said that if our plan would be to trade the car in for a new one, then the over contract mileage wouldn't matter. And he would always say set it lower for a cheaper monthly cost. He said it was only if you handed car back to finance company did the over mileage play a part.

Which is all well and good if the trade in value is higher than the GMFV. No one can guarantee that.

I know it's hard to believe, but it's not unknown for salesmen to stitch up buyers so they can close the deal.

familyfitz

zappahey wrote: »

Which is all well and good if the trade in value is higher than the GMFV. No one can guarantee that.

I know it's hard to believe, but it's not unknown for salesmen to stitch up buyers so they can close the deal.

Absolutely...Another reason for us deciding to go with a loan...we are an active family who, while we take care of our vehicles, do use bikes on racks etc etc and this may affect condition. Couldn't be sure we'd end up with anything 'in our pocket' against another car whereas loan lets us pay off and still have value of car to trade in.