Immediately paying off PCP to get the best deal?

benanderson89

Hello everyone,
I am looking to buy a new car, and the manufacturer in question has 0% APR with an extra £2k discount on top if you buy it via PCP (its an old model about to be replaced).

For demonstration purposes, lets say the car is £10,000 and the "balloon payment" after three years is £2,500. Can I take the PCP deal, immediately pay the £7,500 difference, then for all intents-and-purposes pay nothing until the balloon is due in three years time? Or do I have to pay the full £10,000 up-front? I ask because I can afford to pay the difference but not the full amount.

Thank You
-Ben

Niv

what benefit is it to you to even contemplate this if the APR is 0%? You could put the money is a interest earning account and earn 'free money' from it. (And I don't believe you can pay it off right away - what do the Ts and Cs say?).

benanderson89

The benefit is that I can have a £2k discount and no monthly payment if what I am suggesting is possible. The model in question (Ford Mustang GT) only has 36 months maximum on finance, so the monthly payment ends up rather steep even with 0% (and HP is a whopping 6%). I used to own one but had to sell it due to health reasons plus being fired very abruptly, and I want to buy the same model whilst the deal is still on now that I both a new job and several months of physio under my belt.

PeterProxy

Eh. If you borrow money at 0% you'll pay back the same amount as you borrowed, regardless of the monthly payment been high. (assuming no hidden settlement fees)

So as suggested, keep your lump some in the highest interest earning accounts you can, and make the monthly, 0% APR, payments.

System

benanderson89 wrote: »

The benefit is that I can have a £2k discount and no monthly payment if what I am suggesting is possible. The model in question (Ford Mustang GT) only has 36 months maximum on finance, so the monthly payment ends up rather steep even with 0% (and HP is a whopping 6%).

No you misunderstand. You leave the money in the account and make the monthly payments out of the £7500 you would have paid out in one go so you make more in interest.

Lets say you have a savings account balance of £10k you're going to use, you spend the £7500 on the car as you plan to do, you have £2500 left in the account. It gets 3% a year interest. Total interest over 3 years is £231, at the end of 3 years your account is £2731.

What we're saying is not to pay the lump sum but leave the money in the account earning interest. So tomorrow instead of having £2500 in the bank you still have £10k (dropping £204 a month for the payment) earning interest, at the end of year one you start with £7500 plus any accrued interest earning interest, at the end of year 2 you start with £5000 plus accrued interest earning interest and at the end of year 3 you're down to £2500 plus the interest you've earned.

In each of those years that money earns far more interest than if you paid out the £7500 and just had £2500 sat there earning interest. Year 1 alone will earn MORE interest than your £2500 will earn over the three years.

Year 1 will earn roughly £262 interest. £31 MORE than your £2500 would make in 3 years.
Year 2 will earn roughly £191 interest.
Year 3 will earn roughly £126 interest.

So instead of just earning £231 interest over 3 years you've earned £579 interest. You're £348 better off doing it the way we said and continuing the PCP deal at 0% APR making the monthly repayments out of your stash instead of paying out the lump sum.

Yes you do have big monthly payments but you've still got the cash you would have paid out at once to pay it out of so you are in exactly the same place in that respect in that the pot you've got to pay this lump sum funds the payments so you're not having to fund them from elsewhere.