PCP Question - Negative Equity

paradigm_2

A quick one hopefully

I'm 7 months into a 4 year PCP and currently sat at around £6k negative equity.

Question is: Is this gap between value and finance settle going to increase, decrease or stay broadly the same?

I guess what I really want to know is, should I just bite the bullet now (if getting out of the PCP is essential) or am I better off waiting 6 or 12 months (noting that the ideal would be to just last the whole agreement!!).

Thanks in advance

neilmcl

paradigm wrote: »

A quick one hopefully

I'm 7 months into a 4 year PCP and currently sat at around £6k negative equity.

Question is: Is this gap between value and finance settle going to increase, decrease or stay broadly the same?

I guess what I really want to know is, should I just bite the bullet now (if getting out of the PCP is essential) or am I better off waiting 6 or 12 months (noting that the ideal would be to just last the whole agreement!!).

Thanks in advance

The "gap" will be at it's highest now but will slowly decrease over time. The way PCP is designed is you'll be in negative equity all the way until near the end of the agreement.

LandyAndy

With a PCP you are always in negative equity nearly to the end. In the last few months you will have an idea whether the GFV is higher or lower than the market value.

Because initial depreciation is very steep this is when negative equity is at its greatest.

Edit: neilmcl can type faster than me.

paradigm_2

neilmcl wrote: »

The "gap" will be at it's highest now but will slowly decrease over time. The way PCP is designed is you'll be in negative equity all the way until near the end of the agreement.

Thanks Neil, I was hoping this would be the case

DrEskimo

As a statistician, I am a firm believer that graphs are a beautiful way of conveying relationships between numbers, and I can't think of a better way to illustrate the relationship between car value and PCP finance payments than this graph:



As you can see, if the GFV is accurate, you will always be in negative equity, as the product is designed to just pay the depreciation (and interest) every month. As this is calculated overall, and then split equally over the term (say 36 months), it progresses linearly. In contrast, depreciation is exponential, so it gives rise to this 'negative equity' gap.

If the GFV is pessimistic you could end up with the two lines meeting earlier. Likewise, if you put in a large upfront payment, your starting position may be lower down, given you positive equity at the start. The amount, and for how long, depend on the exact figures.

HTH

foxy-stoat

paradigm wrote: »

A quick one hopefully

I'm 7 months into a 4 year PCP and currently sat at around £6k negative equity.

Question is: Is this gap between value and finance settle going to increase, decrease or stay broadly the same?

I guess what I really want to know is, should I just bite the bullet now (if getting out of the PCP is essential) or am I better off waiting 6 or 12 months (noting that the ideal would be to just last the whole agreement!!).

Thanks in advance

You can VT at any time, you just need to find the money to settle the PCP contract to 50% of the total price, the longer you leave it the lower that amount will be.

Any reason why you cant continue to the end of the PCP agreement and hand the car back to them?

paradigm_2

DrEskimo wrote: »

As a statistician, I am a firm believer that graphs are a beautiful way of conveying relationships between numbers, and I can't think of a better way to illustrate the relationship between car value and PCP finance payments than this graph:

As you can see, if the GFV is accurate, you will always be in negative equity, as the product is designed to just pay the depreciation (and interest) every month. As this is calculated overall, and then split equally over the term (say 36 months), it progresses linearly. In contrast, depreciation is exponential, so it gives rise to this 'negative equity' gap.

If the GFV is pessimistic you could end up with the two lines meeting earlier. Likewise, if you put in a large upfront payment, your starting position may be lower down, given you positive equity at the start. The amount, and for how long, depend on the exact figures.

HTH

Yes thanks, that is the graph I came across in my research. It shows a contradictory narrative to the one above in that the "gap" increases to a point (generally 50% through the term) and then decreases to the settlement date. Is there any way of seeing/predicting if the value curve is accurate in its trajectory?

paradigm_2

foxy-stoat wrote: »

You can VT at any time, you just need to find the money to settle the PCP contract to 50% of the total price, the longer you leave it the lower that amount will be.

VT not really an option as it would leave me with a significantly larger bill than selling the car after getting a loan to cover the settlement

foxy-stoat wrote: »

Any reason why you cant continue to the end of the PCP agreement and hand the car back to them?

New baby

Smellyonion

DrEskimo wrote: »

As a statistician, I am a firm believer that graphs are a beautiful way of conveying relationships between numbers, and I can't think of a better way to illustrate the relationship between car value and PCP finance payments than this graph:



As you can see, if the GFV is accurate, you will always be in negative equity, as the product is designed to just pay the depreciation (and interest) every month. As this is calculated overall, and then split equally over the term (say 36 months), it progresses linearly. In contrast, depreciation is exponential, so it gives rise to this 'negative equity' gap.

If the GFV is pessimistic you could end up with the two lines meeting earlier. Likewise, if you put in a large upfront payment, your starting position may be lower down, given you positive equity at the start. The amount, and for how long, depend on the exact figures.

HTH

Looks wrong to me.


At time Time point 0.1 (on the X axis), the gap is minimal It is not until 1.3 where the gap appears to be at its largest.




The Value line should cross the Y axis at a lower point than the settlement line. Since the Vehicle immediately loses most of its value from day 1.

foxy-stoat

paradigm wrote: »

Yes thanks, that is the graph I came across in my research. It shows a contradictory narrative to the one above in that the "gap" increases to a point (generally 50% through the term) and then decreases to the settlement date. Is there any way of seeing/predicting if the value curve is accurate in its trajectory?

For what purpose?

Figures you need to know is:

Monthly cost and number of months to the end of the agreement.
Total cost to 50% point (VT without paying any further)

The market value at any point in time is not relevant if you want to VT it....unless you want to work out if you should buy it and sell on for more, which probably wont happen to your advantage.

foxy-stoat

paradigm wrote: »

VT not really an option as it would leave me with a significantly larger bill than selling the car after getting a loan to cover the settlement

New baby

What are similar cars advertised for on Autotrader or Car Giant?

That will give you an approximate valuation in todays market. Depending on the car type and value you may struggle to sell it on the open market as folk like to buy a nearly new car from a dealer using finance so expect to get less than others.