Car financing: PCP

Cornucopia

I think that the opposition to PCPs is spread over various ideas. They are not wrong, more like a "different view". I don't understand why people try to impose their views on others, though.

1. That the cheapest way to own a car is "bangernomics". Which is true, but some people just don't want to do that. They want a newish car with a warranty. In order for there to be bangernomics, there have to have been new cars at some point, so someone has to buy them, and the laws of economics suggest that if fewer private individuals bought new cars then the cost of second-hand cars would increase (more sought after, from a limited stock).

2. That PCPs are indicative of a flawed buy-now-pay-later attitude. There has always been credit, especially for large items like cars. I think some buyers are inclined to over-egg it, getting into PCPs on very expensive cars at £300+ per month, which tie them into massive depreciation costs and can be unaffordable if their circumstances change. OTOH, there are some good PCP/Lease deals out there at below £200pm, which are much better VFM and also fix the depreciation at a more reasonable level.

3. That PCPs are numerical voodoo that hide some of the true financial facts of car buying. Yes and no. In fact PCPs are more transparent than buying the same car on HP. You can see the depreciation figure from day one, and it is underwritten by the Finance company. OTOH, if you don't understand PCPs in the first place, then you won't understand what the figures are telling you.

Keep_pedalling

aphill24 wrote: »

My mate just asked what his finance was after 12 months owning a Kuga bought through the Ford Privilege scheme as an employee. Roughly 3k discount over Joe public
Car £19,500
Value after 12 months £13800 trade
Finance owing £15,300
So he is £1500 in negative equity after just 12 months on a 3 yr term
Anyone who is happy to see that kind of depreciation is nut's in my opinion.Please add the 3k extra for non ford employee's
The car sits in the car park for 12 hrs a day and on his drive for 8 hrs when he's in bed, Nice pose though on the 2 mile school run with all the extras

But depreciation applies regardless of how you finance a new car purchase, and if no one was nuts enough to order s new car there would be no second hand ones.

Chriso

A few points have been made on my post re Car Financing PCP. I was aware that interest would be higher in the early years because only a small amount would have been paid off of the amount loaned (£25190.71) but even allowing for this fact the difference between the amount paid off in monthly instalments (£1694) and the original amount loaned is about £710. Using the declared interest rate over six months the interest should have been around £760 so in my view my settlement figure should be around £220 lower.

XeonSX

Considering you didn't finish initially agreed term of PCP there probably is some fee for exiting early. I'm guessing its not worth it for them to do the admin work on this finance for 6 month's worth of interest on 25k. £200 seems reasonable.

Nearlyold

XeonSX wrote: »

Considering you didn't finish initially agreed term of PCP there probably is some fee for exiting early. I'm guessing its not worth it for them to do the admin work on this finance for 6 month's worth of interest on 25k. £200 seems reasonable.

In terms of a fee the regulations allow for up to 58 days interest to be added to the early settlement calculation.
The lender does this my deferring the settlement calculation (and therefore the notional interest rebate calculation) date to 58 days after the settlement figure request date - you can sort of avoid the extra charge by waiting 57/58 days to redeem the loan though in reality you will have still paid it of course, it just means you've only been charged interest up until the date you redeemed the loan.

Nearlyold

Cornucopia wrote: »

The nature of the numbers is that a typical PCP scheme will be in negative equity for much of its lifetime. This is because the rate of depreciation is exponential, but the repayments are linear, and they meet at a fixed point 3 or 4 years down the line.



There's a lengthier explanation here, from where that graph originates:-

http://www.thecarexpert.co.uk/settle-a-pcp-early-2/

Nice graph but its wrong of course as it ignores the interest element, so the settlement figure would not be decreasing in a straight line either - it would be more or less curving the other way to the value curve

Shakin_Steve

aphill24 wrote: »

My mate just asked what his finance was after 12 months owning a Kuga bought through the Ford Privilege scheme as an employee. Roughly 3k discount over Joe public
Car £19,500
Value after 12 months £13800 trade
Finance owing £15,300
So he is £1500 in negative equity after just 12 months on a 3 yr term
Anyone who is happy to see that kind of depreciation is nut's in my opinion.Please add the 3k extra for non ford employee's
The car sits in the car park for 12 hrs a day and on his drive for 8 hrs when he's in bed, Nice pose though on the 2 mile school run with all the extras

When you say ‘value of car’, do you mean £19500+VAT, or x+VAT=£19500? Obviously if a car has a sticker price of, say, £18000,then that’s a £15000 car with £3000 VAT added.

Shakin_Steve

Shakin_Steve wrote: »

When you say ‘value of car’, do you mean £19500+VAT, or x+VAT=£19500? Obviously if a car has a sticker price of, say, £18000,then that’s a £15000 car with £3000 VAT added.

If you buy a new car and pay the VAT, entering into any finance agreement means your going to pay interest on the VAT as well.

aphill24

Shakin_Steve wrote: »

When you say ‘value of car’, do you mean £19500+VAT, or x+VAT=£19500? Obviously if a car has a sticker price of, say, £18000,then that’s a £15000 car with £3000 VAT added.

The figures I quoted are including vat. There is a Kuga in the dealership with a RRP of £28k on the windscreen yet that car is priced to sell to the public for £23,500 & £20,500 to a Ford employee.

System

XeonSX wrote: »

I don't understand what the deal is... why are people finding this strange or not fair...
Depreciation is always going to be the worst the younger the car is. What PCP and most other loans do is try to minimize the hit and spread out payments as they are easier to pay that way. Instead of paying 400 every month would you prefer if you had to pay 600 in first year, 500 in second year and 300 in third year?

True you are not wrong about depreciation but with PCP you cannot do what you want with the car. You have a limited mileage you can do, some as low as 6,000 miles a year, and you are penalised for every mile you go above that. Got some scratches? More money you're forking out. Would like to make a modification? Kerching, more money you'll be forking out at the end of the deal. And the only way to avoid that is to pay the balloon payment at the end which the vast majority of people who get a car on PCP don't do because they don't have the money to.

The vast majority of those on a PCP deal are left with nothing to show at the end, no car, no money to buy another car, because they either paid out everything they had as a deposit or couldn't save due to the higher monthly repayments, and only the option of signing up to yet another PCP deal so they have a set of wheels and don't have to get a bus home.

At least if you buy a new car on finance you aren't limited to mileage, you aren't penalised for damage, you can do what you want with it and at the end of the agreement you have a car.