"Negative equity" at the end of a PCP deal

AdrianC

Frozen_up_north wrote: »

Welcome to the not so wonderful world of car finance! I've had a PCP deal several cars ago and would not recommend them. Initially they appear good, but at the end of the deal you generally have nothing and have to start from scratch again.

Well, yes. That's a bit of a blatant truism. Just the same as any other finance deal short of repaying the full purchase price over the finance period.

The objections against PCP seem to be based on not actually understanding the product, and not actually being able to calculate the cost. As you can see in the other PCP thread going on at the mo, the sums really aren't that hard.

How on earth would anybody with even basic numeracy skills expect that paying £26k over four years would lead to ownership of a £35k new car that depreciates £20k over the term?

FWIW, in that thread, the OP's paying £6,939 for the finance over four years, £144.56/mo from monthly repayments of £555.83 once the initial payment is amortised over the life of the loan. Putting a similar upfront payment, then borrowing the full remaining purchase price of the car over four years would see monthly payments of £816/month (assuming the same interest rate) with the initial payment similarly amortised, for a total payment of £39,424. OK, the total finance cost is cheaper - £3,923 - but PCP means the OP can drive the same car for £260/month less. Sure, they don't own the car at the end... but, then, they've paid £12,500 less over the four years...

Think of a PCP as an alternative to a lease - with the option to own and/or benefit from any underestimate of the GMFV/overestimate of the depreciation - and you aren't going to go far wrong. Think of it as an alternative to a loan to buy, and you're looking at totally the wrong product.

almillar

The Guaranteed Final Value is just that - guaranteed. Either you pay that amount, and drive away in the car, or hand it back in reasonable condition, with not a penny to pay.
In the second case, if they did get their sums wrong and it's in negative equity, that's their problem. They guaranteed you a value.
They want you to buy another car from them, and they want you to start from less than zero, by getting more money out of you on the car you're giving back!
Simple - hand the car back, go to another garage. Start from zero instead of gobbling up this negative equity rubbish.

What they were essentially saying was that I owed approx £11,000 on the car, but they were only valuing it at £10,000, meaning that if I started a new PCP deal, I would owe them £1,000 on top of the cost of the new car

Politely decline, hand back, find the door. Buy somewhere else without a £1,000 hole in your pocket. They're trying to shaft you, or just aren't that keen on selling cars.

motorguy

helsmet1 wrote: »

Hi all,
I'm about to come to the end of a PCP deal with a certain car manufacturer. I was led to believe when I took out the deal that my car would be worth at least the amount of the final balloon payment, and would probably be worth more if the car was in good condition/had not reached the agreed mileage limit. The manufacturer even have a video on their website stating that the balloon payment represents the guaranteed future value.
When I went to discuss exchanging my car for a new one with the dealership, they told me the car was worth less than I owe, despite being in good condition and not having exceeded the mileage limit. I made a complaint which has been investigated by the manufacturer, and they are claiming that they would never say that the final payment represents the guaranteed value of the car.
I'm planning to escalate by raising a complaint with the financial ombudsman, but would appreciate any advice from anyone with a similar experience. Many thanks in advance!

Congratulations! :beer:

You've won! You've beaten the system!

The finance company got it wrong and now you can simply hand the car back with nothing further to pay and let them suffer the subsequent loss!

Result! :T

motorguy

helsmet1 wrote: »

I started the thread to try and find out if this is common and acceptable practice or whether they have misrepresented the way that the process is supposed to work and whether I have legitimate grounds for escalating a complaint, and whether it has happened to others.

So you're aggrieved because instead of the car being worth £11,000 and you owing £11,000 and handing it back, the car is worth £10,000 and you owe £11,000 but you just hand it back anyway?

I'm not really seeing the problem here?

Effectively the finance company is suffering the loss of the extra £1,000, not you

motorguy

Frozen_up_north wrote: »

Welcome to the not so wonderful world of car finance! I’ve had a PCP deal several cars ago and would not recommend them. Initially they appear good, but at the end of the deal you generally have nothing and have to start from scratch again.

PCP... the law of diminishing returns :mad:

PCP is a vehicle for driving a car for a set length of time, based on a deposit and monthly payments.

It is very rarely a useful mechanism for buying the car outright (unless you plan on clearing the finance after getting the manufacturer incentives OR have access to the funds to cover the residual payment).

Its effectively leasing-with-options.

I dont see how that makes them bad or not as described?

Mercdriver

motorguy wrote: »

PCP is a vehicle for driving a car for a set length of time, based on a deposit and monthly payments.

It is very rarely a useful mechanism for buying the car outright (unless you plan on clearing the finance after getting the manufacturer incentives OR have access to the funds to cover the residual payment).

Its effectively leasing-with-options.

I dont see how that makes them bad or not as described?

Indeed. When Ford first brought out PCP, they called it Options.

Cornucopia

I think what's bothering the OP is this: they have been presented with two different scenarios that are undermining each other.

They can either walk away, pay nothing more, and effectively value their old vehicle at its GMFV, OR they can go with the trade-in in which case the new dealership is valuing the old car at more than its GMFV. Presumably what the OP wants is for the original dealer to honour the new dealership's trade-in price, which they are not obliged to do.

The ideal situation IS if there's equity left in the vehicle, and if the figures work out, then it could be a good deal. What it isn't is a breakdown of the PCP terms. One option with a PCP is always to sell the vehicle at its then market price, settle the finance, and get another one. In this scenario the GFMV and mileage penalties are irrelevant.

I think we probably need a "PCP Terms" sticky.

motorguy

Cornucopia wrote: »

I think what's bothering the OP is this: they have been presented with two different scenarios that are undermining each other.

They can either walk away, pay nothing more, and effectively value their old vehicle at its GMFV, OR they can go with the trade-in in which case the new dealership is valuing the old car at more than its GMFV. Presumably what the OP wants is for the original dealer to honour the new dealership's trade-in price, which they are not obliged to do.

That's what's supposed to happen, and if the figures work out, then it could be a good deal. What it isn't is a breakdown of the PCP terms. One option with a PCP is always to sell the vehicle at its then market price, settle the finance, and get another one. In this scenario the GFMV and mileage penalties are irrelevant.

I think we probably need a "PCP Terms" sticky.

The other thing that people forget is that the (original) dealer doesnt own the car, and the car isnt returned to them. Its the finance companys car and its returned directly to them.

Its not up to the supplying dealer to value the car at whatever the finance company set the residual value at.