Understanding PCP?

Helen28

I went looking for a new car and while I have the money to pay cash I was told all about PCP, better to have the money in the bank for emergencies etc. total BS)

Am I understanding this correctly?

I pay, in total over 4 years, £8400 odd then hand the car back and owe nothing?

Therefore where does the deposit come from to buy a new car after 4 years?

The trade in value of the car I am handing back?

I think not.

To put it simply, I am basically "renting" the car for 4 years. Correct?

Never be a an "old" woman buying a car on her own.:rotfl:.

When/if I go back I shall take a man with me.

Herzlos

After the 4 years, the car has an agreed value. If the car is worth more then that difference is your deposit, if it's not you start again with nothing.


PCP basically allows you to pay the depreciation for the car whilst finances the whole amount. So say you have a £20k car, final value of £10k. You'll pay the £10k value loss back over the 4 years, plus some interest on the outstanding balance from £20-10k.


If you're going to keep it long term, then you may want to just buy it, or you can take the finance deal for the deposit contribution and then phone a couple of days later to clear it. I think that requires Hire Purchase though.

k6chris

Helen28 wrote: »

I pay, in total over 4 years, £8400 odd then hand the car back and owe nothing?

In very simple terms, yes. Three additional points;


1) You will need to hand back the car in an acceptable condition, so there may be a cost to put right any dents, scatches etc.


2) You have the option to buy the car outright, if you wish to


3) If (IF) the value of the car is greater than the Guaranteed Future Value (GFV) then you may have a credit to roll into a new contract.



Treat it as a 4 year lease and put by a few hundred pounds for scratch repair and you should be OK.


Good luck!

motorguy

Another point to add is you dont have to hand the car back to the finance company. You can simply trade it in, taking advantage of any extra value there is between what the car is worth and the residual value (if any)

k6chris

Just to add, if you want a new car and you want to change it after 4 year and you are sure you can keep up the monthly payments for 4 years, then it is a perfectly reasonable way to fund a car.

LandyAndy

You have to assume that the GFV is going to be pretty much the same as the trade value at the end of the PCP and so the answer to 'where does the deposit for the next car come from?' is that you have to save it up over the period of the PCP.

AdrianC

Helen28 wrote: »

I went looking for a new car and while I have the money to pay cash I was told all about PCP, better to have the money in the bank for emergencies etc. total BS)

Am I understanding this correctly?

I pay, in total over 4 years, £8400 odd then hand the car back and owe nothing?

Therefore where does the deposit come from to buy a new car after 4 years?

The trade in value of the car I am handing back?

I think not.

To put it simply, I am basically "renting" the car for 4 years. Correct?

Ish.

You buy a car for £18k.
£2k is paid up front. You are financing £16k.
After four years, the car's value is set in the contract as £7k.
So, over four years, your monthly payments pay back the £9k depreciation plus interest on the balance of the £14k.

At the end of the term, you owe £7k of the £14k you financed.
You can pay the £7k, and own the car.
Or you can swap the car for another shiny new car... If the car is actually worth £8k, you have £1k in equity, which you can put towards your next car. OTOH, if the car is actually worth £6k, you simply walk away without owing the extra grand.

Never be a an "old" woman buying a car on her own.:rotfl:.

When/if I go back I shall take a man with me.

Your date of birth and the contents of your underwear have zero to do with the salesman's commission on the finance products...

facade

Helen28 wrote: »

To put it simply, I am basically "renting" the car for 4 years. Correct?
.

Yes, with an option to buy it at the end for an agreed value- the last P in PCP.


You can also get PCH the last H stands for hire. You do not get an option to buy it at the end, and it has to go back. You cannot simply hand PCH back when you have paid over 50% of the total (including final value) like you can PCP (called VT or voluntary termination)


If you definitely want to keep the car, buy it outright, except sometimes there is an "incentive" (= money from the manufacturer) to take a PCP deal, which makes the price without interest cheaper than you can get it for cash. In this case, you take the PCP and then apply to clear the finance immediately it goes through, keeping the incentive and only paying a few pounds interest.

almillar

Therefore where does the deposit come from to buy a new car after 4 years?

Congratulations! You just DIDN'T fall into the PCP trap. You start from zero next time, you don't have a vehicle to use as a deposit.

The trade in value of the car I am handing back?

Is worth zero to you.

To put it simply, I am basically "renting" the car for 4 years. Correct?

Yep, you rent it for 4 years, then you have the option to buy it, or hand it back.

You'll be told about equity or negative equity. That is, your car is worth more than you have paid, or worth less than you have paid.
If you end up with equity, it just means you've overpaid.
If you end up with negative equity, you've underpaid.

Since there is a Guaranteed Final Value (GFV), neither of the above should worry you. Negative equity is the dealers (or financer's) problem. Telling you you have equity is often used to create that deposit you're missing, to get you started on another car.

Another point to add is you dont have to hand the car back to the finance company. You can simply trade it in, taking advantage of any extra value there is between what the car is worth and the residual value (if any)

MSE's own tamed car salesman!

motorguy

almillar wrote: »

MSE's own tamed car salesman!

EX salesman. Fortunately.

Goudy

What generally happens on PCP is.
You agree to finance a car over a certain amount of months, and as already stated you finance the total invoice price but defer what the car will be worth at the end of those months (GFV) to a final, optional payment which is dependent on mileage and condition (see bvrla fair wear and tear guide)

The options are pay the GFV and keep the car.
Hand the car back to the finance company and walk away.
Trade it in for another car and use any extra they offer you as trade in as your next deposit.

Most PCP deals include a deposit contribution from the manufacturer, so you don't always need to find a deposit yourself.

So as an example you agree to a £20,000 car and the manufacture offers a £2000 deposit contribution.
Now you are left with £18,000 to finance.

Now say the car will depreciate around 50% in three years, this means the GFV will be £10,000 at the end of the contract so you end up paying £8,000 (plus the interest on the £18,000) over 36 months.


The options at the end can work for or against, depending on how you play it.

The main thing against would be to pay the GFV but finance that payment with a loan, you have already paid interest on that money, so you end up borrowing and paying for it twice.

The next is if the car is worth no more than the GFV, you either hand it back or trade it in and take the deposit contribution again on your next deal, no real harm there.

Though there are things that can go or be made to go in your favour.
Used car prices can fluctuate, but the contract is giving you a set figure of what it will be worth at the end before you sign.
If the !!!! falls out of the market and the car is worth a fraction of the GFV, you've saved yourself a clunk of depreciation that you would have suffered if you bought the car outright or on HP, you just hand it back and walk away and they have to suffer the extra depreciation.
I believe Citroen and Peugeot have recently had to suffer a bit of this.
Some of their GFV values took a beating and models were being returned that owed them more than they made at auction.

Say the market is good, then you can trade it in with any dealer and they "may" offer you more than the GFV that you then use as an extra deposit towards your next.
You can negotiate with any dealer this trade in value, if they want your custom they'll push the boat out and work some extra into the trade in value for you.

I have managed this every time I have traded in a PCP at the end, though I had to work at it by visiting and negotiating with a fair few dealers until I got what I was after.
So now you have some value in the trade in AND the deposit contribution toward your next deal.

Something that is becoming more common is for buyers to take advantage of these deposit contributions, yet buy the car outright.
You can usually sign up for a PCP and qualify for the contribution, but then pay up and settle the finance almost immediately, so now you've bought a £20,000 outright but it cost you £18,000.

Another area that can be exploited are various employer schemes that offer bigger deposit contributions.
Some are limited to public service employees, NHS staff and the likes, but I have seen ones for BT and M&S staff and even Aston Villa season ticket holders.

I'm an NHS slave and have had over £12,000 worth of deposit contributions on only three cars.