Understanding PCP

Mr_Singleton

Friend got a car via a PCP and it got me thinking.....

A huge proportion (75%?) of cars in the U.K. are now 'bought' via PCP. I believe that it's 80% of all Mercedes in U.K.

I can understand why consumers do it i.e vanity BUT what happens after 3 years when consumers hand the cars back? PCP companies are left with a huge number of cars that are deprecating so need to sell them on asap. The law of supply and demand says if they dump these cars on the secondhand market the value will crash.
So what's happening?

forgotmyname

The customer who thought they were getting a bargain paid for the cars depreciation and also gave the company a nice profit. The car will goto auction or used car dealers. See all the used cars for sale.. Thats them.

Whether the cars were bought for cash or finance or PC or company cars LOTS hit the market at 3 years old.

Thats why there is a huge choice of used cars at 3 - 5 years old and you can afford to be choosy because there will be another one round the corner.

Car_54

The finance company (whether PCP, lease or contract hire) bases its prices on a realistic end-of-contract value. They've been doing it for donkey's years and they're usually pretty good at it.

As forgotmyname says, the customer pays for the depreciation.

thescouselander

It's nothing to do with vanity - some people just don't want the liability of owning a vehicle and prefer to have known outgoings.

Whatever car anyone owns they always pay the depreciation and PCP/Leasing makes these costs visible . A lot of the time when the car goes back it ends up on the dealer's forecourt as an "Approved Used" car where they make a second lot of profit flogging it on to another customer.

It's in the industries interests to maintain a reasonable residential value for their cars after 3 years to make the financial deal feasible for the first buyer as low residual values make for an expensive deal.

Car_54

Mr_Singleton wrote: »

I can understand why consumers do it i.e vanity BUT what happens after 3 years when consumers hand the cars back? PCP companies are left with a huge number of cars that are deprecating so need to sell them on asap. The law of supply and demand says if they dump these cars on the secondhand market the value will crash.
So what's happening?

This would be a problem if all the Merc customers got their new car on the same day, but they don't. The reality is a steady trickle of used cars after 3 years rather than a glut.

peter_the_piper

Don''t forget that despite a merc looking brand new when sent back they often seem to find faults which cost an arm and leg to fix.

motorguy

Several misconceptions here....

Mr_Singleton wrote: »

I can understand why consumers do it i.e vanity

No. The bulk do it because it wraps up the depreciation, warranty and moreoften service and maintenance now into a single controlled monthly payment - just like pretty much every other bill that people pay these days.

Mr_Singleton wrote: »

BUT what happens after 3 years when consumers hand the cars back? PCP companies are left with a huge number of cars that are deprecating so need to sell them on asap. The law of supply and demand says if they dump these cars on the secondhand market the value will crash.
So what's happening?

No. The vast majority dont go back to the finance company. Most end up being traded in and people are free then to repeat with another PCP, take out a straight high purchase finance agreement, take out a bank loan, or pay with cash for their new car. The car then becomes dealer stock.

Some people pay the residual value and keep the car.

The small percentage that end up back with the finance company get sent straight to auction and bought up usually by dealers as dealer stock - this usually happens within a couple of weeks of the cars return.

motorguy

Car_54 wrote: »

This would be a problem if all the Merc customers got their new car on the same day, but they don't. The reality is a steady trickle of used cars after 3 years rather than a glut.

And some PCP deals are 2 or 4 years so not all end up back as 3 year old cars.

motorguy

peter_the_piper wrote: »

Don''t forget that despite a merc looking brand new when sent back they often seem to find faults which cost an arm and leg to fix.

There is a strict published code of conduct of what is acceptable as wear and tear on a car being returned at the end of a finance agreement or on a VT.

Mercedes Finance, like all other finance companies must adhere to this - they cant just "make things up" or charge a ridiculous fee to fix it.

Also, very few relatively speaking go back to the finance company at the end of the PCP agreement, most end up traded in or bought outright.

Strider590

Mr_Singleton wrote: »

Friend got a car via a PCP and it got me thinking.....

A huge proportion (75%?) of cars in the U.K. are now 'bought' via PCP. I believe that it's 80% of all Mercedes in U.K.

I can understand why consumers do it i.e vanity BUT what happens after 3 years when consumers hand the cars back? PCP companies are left with a huge number of cars that are deprecating so need to sell them on asap. The law of supply and demand says if they dump these cars on the secondhand market the value will crash.
So what's happening?

The new car market is driven by the used car market, people now consider a 3 year old car to be an "old shed" and that's not just vanity, it's been very cleverly drip fed into peoples minds by the car manufacturers, the media and the govt.

For every used car coming onto the market, there is one new car being sold, even if it's a 10 year old car, somewhere up the chain of buyers a new car has been sold. If a car is crashed and written off then that car needs to be replaced and somewhere up the chain a new car is sold.

forgotmyname

Memory rather Vague but....I seem remember an article with what were allegedly figures from the Ford Options scheme.

Business bought x number of Ford cars at a great discount and handed them back with low mileages and less than a year old? Ford knocked a few quid off the list price and convinced customers its an almost new car at a great saving.

Customer still paying more than the business paid in the first place (allegedly of course).