Opinions on forking out on a PCP deal?

motorguy

Tarambor wrote: »

the debt free wannabe boards are littered with people who got cars on PCP/HP, found their circumstances changed and are shafted with the monthly payments trying to find a way out.

Just to put "littered with people" in to perspective...

Of 5308 pages of threads on the Debt Free Wannabe with approx 25 threads per page (so approx 132,700 threads)

Only 7 out of 132,700 have PCP in the title
https://forums.moneysavingexpert.com/search.php?searchid=179274587

Around 200 out of 132,700 have "Car" & "Finance" in the title
https://forums.moneysavingexpert.com/search.php?searchid=179274650

Around 100 out of 132,700 have "HP" in the title
https://forums.moneysavingexpert.com/search.php?searchid=179274672

Around 50 out of 132,700 have "Hire" & Purchase" in the title
https://forums.moneysavingexpert.com/search.php?searchid=179274672

which i total to be 357 ish which equals just 0.269% of the 132,700 threads.

OR to put it another way, on average only one in every 371 threads mentions one of the above phrases.

The last time anyone started a thread with PCP in the title was over a year ago.

Hardly "littered".

DrEskimo

OK....

So...let's assume the optional final payment (GFV, balloon payment..all the same thing!) is accurate and a garage would give you £7,753 for the car in 36months time with the stipulated mileage.

Cash = £14,920 purchase price. Drive for 36months and X amount of miles and decide you want a new car so trade it in and get £7,753 for it.
Total cost = £7,167

That's it's expected depreciation cost. This will be the same, whether you buy it on finance or with cash.

So the only additional costs involved with finance are the costs to borrow the money (interest).

On your PCP at 5% it would be:
£4,000 deposit + 36 payments of £117.91.
Car trade is £7,753, which is the final payment, so nothing given or nothing owed at the end.
Total cost = £8,244.76

That's made up of the £7,167 depreciation, and now £1,077.76 in interest costs to borrow £10,920.

What about other forms of finance, like a personal bank loan...let's assume you can get it at the same 5% rate.

You have £4,000 deposit, so only need to borrow £10,920, which at 5% APR over 36months is £326.74.
£4,000 deposit + 36 payments of £326.74 = £15,762.64
Unlike the PCP, you now own the car and have no final payment. So you trade the car in and get £7,753 for it.
Total cost = £8009.64

That's made up of the £7,167 depreciation, and now £842.57 in interest costs to borrow £10,920.

So cash would save you £1,077 over PCP, personal loan will save you £235 over the PCP. If you can get a personal loan at 3%, you would save around £550 over the PCP loan.

Are the lower monthly costs of the PCP worth the higher total cost over the term? That's what you need to ask yourself.

Then there is the risk that the BMW will be worth < £7,753 in 36m time. How likely do you think this is? If you can get a 3% personal loan, then the difference in interest paid is £550. If the car is only worth £7,200, then that £550 saving in interest would be washed out by unexpected depreciation.

IMHO, this is trade valuation, so if the trade value had reduced, I would just sell private and recoup that cost, which is why I always favour guaranteed savings in interest, over low risk hypothetical savings in unexpected depreciation, but YMMV.

HTH :beer:

motorguy

oscart1111 wrote: »

Thanks a lot :beer: because I like to change my car quite often so I thought PCP would be useful in that respect. With a personal loan at least that car will effectively be owned by me and I am free to sell it after 3 years? as opposed to a PCP whereby I will have to settle any outstanding finances beforehand?

Yes, and you'll pay less interest, the car will be your own from day 1, and you can sell it whenever you like.

Its over a longer term, yes, but you are moving towards achieving ownership of it, rather than after three years merely having rented it.

All IMHO of course.

You could buy a cheaper car - say £10K and pay off £6K over three years. There may be merit in that. Will either be older though or less "sporty".

loskie

PCP tends to be expensive for a used car. have you looked at new or taking out a loan for a used car?

motorguy

loskie wrote: »

PCP tends to be expensive for a used car. have you looked at new or taking out a loan for a used car?

He's got a 5% APR deal on a PCP which is reasonable.

We've enlighted him to cheap(er) loans.

oscart1111

DrEskimo wrote: »

OK....

So...let's assume the optional final payment (GFV, balloon payment..all the same thing!) is accurate and a garage would give you £7,753 for the car in 36months time with the stipulated mileage.

Cash = £14,920 purchase price. Drive for 36months and X amount of miles and decide you want a new car so trade it in and get £7,753 for it.
Total cost = £7,167

That's it's expected depreciation cost. This will be the same, whether you buy it on finance or with cash.

So the only additional costs involved with finance are the costs to borrow the money (interest).

On your PCP at 5% it would be:
£4,000 deposit + 36 payments of £117.91.
Car trade is £7,753, which is the final payment, so nothing given or nothing owed at the end.
Total cost = £8,244.76

That's made up of the £7,167 depreciation, and now £1,077.76 in interest costs to borrow £10,920.

What about other forms of finance, like a personal bank loan...let's assume you can get it at the same 5% rate.

You have £4,000 deposit, so only need to borrow £10,920, which at 5% APR over 36months is £326.74.
£4,000 deposit + 36 payments of £326.74 = £15,762.64
Unlike the PCP, you now own the car and have no final payment. So you trade the car in and get £7,753 for it.
Total cost = £8009.64

That's made up of the £7,167 depreciation, and now £842.57 in interest costs to borrow £10,920.

So cash would save you £1,077 over PCP, personal loan will save you £235 over the PCP. If you can get a personal loan at 3%, you would save around £550 over the PCP loan.

Are the lower monthly costs of the PCP worth the higher total cost over the term? That's what you need to ask yourself.

Then there is the risk that the BMW will be worth < £7,753 in 36m time. How likely do you think this is? If you can get a 3% personal loan, then the difference in interest paid is £550. If the car is only worth £7,200, then that £550 saving in interest would be washed out by unexpected depreciation.

IMHO, this is trade valuation, so if the trade value had reduced, I would just sell private and recoup that cost, which is why I always favour guaranteed savings in interest, over low risk hypothetical savings in unexpected depreciation, but YMMV.

HTH :beer:

Many many thanks for this detailed breakdown, has changed my view of these loans somewhat. As the thread is heading towards a personal loan for used cars, I will check them out tomorrow as I guess it would be nicer to own the car rather than to effectively rent it!

oscart1111

motorguy wrote: »

Yes, and you'll pay less interest, the car will be your own from day 1, and you can sell it whenever you like.

Its over a longer term, yes, but you are moving towards achieving ownership of it, rather than after three years merely having rented it.

All IMHO of course.

You could buy a cheaper car - say £10K and pay off £6K over three years. There may be merit in that. Will either be older though or less "sporty".

Owning the car would work out better I reckon as I like to add some subtle touches to my vehicles but am not sure if this is permitted on PCP. One thing that worries me though is that I may not be able to obtain those 2.8% rates, as my lack of credit history may lead to those 9.9% rates!

DrEskimo

motorguy wrote: »

Just to put "littered with people" in to perspective...

Of 5308 pages of threads on the Debt Free Wannabe with approx 25 threads per page (so approx 132,700 threads)

Only 7 out of 132,700 have PCP in the title
https://forums.moneysavingexpert.com/search.php?searchid=179274587

Around 200 out of 132,700 have "Car" & "Finance" in the title
https://forums.moneysavingexpert.com/search.php?searchid=179274650

Around 100 out of 132,700 have "HP" in the title
https://forums.moneysavingexpert.com/search.php?searchid=179274672

Around 50 out of 132,700 have "Hire" & Purchase" in the title
https://forums.moneysavingexpert.com/search.php?searchid=179274672

which i total to be 357 ish which equals just 0.269% of the 132,700 threads.

OR to put it another way, on average only one in every 371 threads mentions one of the above phrases.

The last time anyone started a thread with PCP in the title was over a year ago.

Hardly "littered".

I'm not agreeing of disagreeing with the claims made by Tarambor, but just pointing out that your methodology is not very robust at proving your point...

There are plenty of threads where car finance is found to be an issue (such as a high outgoing after SOA has been given), which are not explicitly detailed in the thread title.

E.g. on the DFW 8 threads down is a thread titled "Attachment of Earnings"
https://forums.moneysavingexpert.com/discussion/5909776/attachment-of-earnings
This is about debt relating to car finance, but would not count in your statistics.

Furthermore, many threads about PCP may not be about financial problems, but merely clarification on procedures.

It would therefore entail going through every single thread to establish whether financial difficulties are related to car finance is abundant or not...something I don't think anyone is going to do anytime soon...!

oscart1111

loskie wrote: »

PCP tends to be expensive for a used car. have you looked at new or taking out a loan for a used car?

Thanks, the general consensus is that a personal loan appears to make more sense. I wouldn't want to PCP a brand new 18 plate, personally!

DrEskimo

oscart1111 wrote: »

Many many thanks for this detailed breakdown, has changed my view of these loans somewhat. As the thread is heading towards a personal loan for used cars, I will check them out tomorrow as I guess it would be nicer to own the car rather than to effectively rent it!

Pleasure.

Now for my boring old man advice (at the ripe old age of 30...) keep your £6k car and put the money towards house deposit, and some of the monthly payments towards additional pension contributions. In all likelihood your current car will depreciate at half the rate, will cost £0 in interest and probably be cheaper in maintenance overall....

In 30years time you will absolutely think back at how great it was that you got on the housing ladder as early as you did, and that you took advantage of your disposable income to build your pension....you rarely think back and go...I'm so glad I drove that 2 series BMW for a few years....!