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Understanding PCP?
Comments
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OK, so remove 1.5% interest from a savings account. If the PCP is around the typical APR of 5%, why would I pay 5% in interest, to save 1.5% in savings? The net cost is 3.5%, so I am better off just paying off the debt on the car. If you have a PCP deal that is <1.5%, then yes, this is the 'low or 0% PCP deal' that I mentioned I may consider. The vast majority are not this though....
And my point being, even IF you're only getting 1.5% on your interest and you get a deal at 2.9% APR or your scenario of 4.9% APR, then to some people that is a worthwhile price to pay to still have the freedom of having the cash to do other things with.
Quite a few deals @ 2.9% APR or less, quite a lot of ways to get more than 1.5% on savings.
If you don't pay the interest on the PCP finance you are guaranteed to save that money. No independent financial advisor is going to even recommend investing over a 3/4yr period, let alone suggest that you can get a 5% net return that are low risk. Why risk it at all? Why not just not use PCP and have zero risk and save 5%?? For some reason there is this view that I am dead worried about the almost zero risk of the car becoming worthless, so I want the 'protection' from the GFV of a PCP, then in the next breath are advocating extremely high risk investment strategies to try and mitigate the costs of going with a PCP!
You are the only one banging this drum. No one else does a PCP deal for this reason.
My point being - again - is that if someone has £40,000 in cash sitting somewhere, chances are its not @ 1.5% in some account, they are going to have it invested in a higher rate of return account.
Discussing pensions is not a fair comparison. You can't invest in a pension for the duration of a PCP! Anyway, people should be ensuring they have good pension provisions before they set out their budget for a car. Not choosing between the two! Again, borrowing money as leverage to invest is generally not advisable. Doing it with high cost interest borrowed against a high depreciation asset is just plain daft IMO...
It is a fair comparison as its one example of how you can have the money working better for you elsewhere.
Someone may wish to overpay their mortgage instead, that would be another example.
Ah I think this is the heart of where we disagree...!
I don't think getting a car for a high monthly payment is a benefit.
Typical PCP is what, maybe £250 a month? Maybe £300? Thats not a high monthly payment. A household with even just two average incomes is pulling in around £4,500 a month. Is £250 a big amount to budget for all your car problems rolled up in to one monthly amount you can budget for?
I don't think people should be buying things they otherwise couldn't afford, as there is financial risk involved. No one can guarantee their income will stay the same, or their outgoing will stay the same. Paying month to month for things is precisely how people get into financial trouble, as they are not looking at the bigger picture and planning for the unexpected.
You mean like a mortgage on a house for example?
No one can guarantee their income, no, however if you have stability and are confident of your abilities then people may wish to budget an amount for a car per month. I dont think that is particularly unreasonable.
If someone is risk averse then fine. No one is saying PCP is the answer for everyone.
Right, but you see that it didn't save you £4,000. It saved you £4,000 - the interest you paid, which may have been around the £2/3k mark (at a guess)?
I budgeted for the interest in the monthly payment, based on the overall benefits i was getting for my £x per month, so no i didnt pay £3,000 in interest just to offset the risk of the price varying at the end of the term.
The reality is, another benefit of a PCP deal is you have fixed costs. You know exactly what you're paying and for how long. That can be budgeted for. That works for a lot of people.
A cash purchase - you dont know what you're going to get back at the end of that term, and its not like it frees you from payments.
If you put in £20K in cash in to a new car you can maybe hope to get £10K back after 3 years.
To ensure you've got that £20K back in to savings at the end of that you need to be saving an extra £277 a month just to get you back to where you were. And then theres interest you lost. So you're back to putting £300 a month in.
I dont think it would be terribly difficult to get a £20K car for £300 a month on a PCP deal?0 -
PCP isnt for everyone. There are some people it works for, there are a lot of people it doesnt.
Its not my most prevalent way of buying a car, looking back over the years, but i guess that is in line with my view that i look at the best funding option for me at the time for the car i want, rather than assuming any one method is better than any other.0 -
No, the cheapest option would be outright. You would buy the £12,165 car on PCP,
Hang on a minute, to buy the car the cheapest is via PCP and settle early, but you have to have a PCP deal in the first place to get it this way.
So now we have a PCP deal that's cheaper than 0% finance and cheaper still if you take out PCP and settle early.
So PCP is bad?0 -
Hang on a minute, to buy the car the cheapest is via PCP and settle early, but you have to have a PCP deal in the first place to get it this way.
So now we have a PCP deal that's cheaper than 0% finance and cheaper still if you take out PCP and settle early.
So PCP is bad?
Exactly.
Its totally about looking at it objectively and not being blinkered that one particular option is better than any other combination.0 -
£688 cheaper because of £1,550 "contribution", offset against £2,319.54 "charge for credit".
Something's not making sense there.
Both £12,165 cash price.
Both £1,824.24 customer deposit.
To drive away at the end of the term in a 500 you own...
PCP: (47 x £131.73) + (£3,460 + £10) = £9,661.31 (+ £1,550 = £11,211.31)
HP: (48 x £215.42) = £10,340.16
Not quite, it's like this
£1824.24 deposit + (47 * £131.73) + £3,460 + £10 = £11,485 for PCP
Or
£1824.24 deposit + (48 x 215.42) = £12,164.40 for 0% HP.
Or
£1824.24 deposit + (47 * £131.73) + £3,460 + £10 but settle the 47 * £131.73 + £3460 + £10 early and save the interest charge of 3.5%.
Three ways, two are cheaper than the other.
The two cheaper involve taking out a PCP deal, so without them you're left with the last option that works out more expensive (but apparently looks the cheapest to those that don't fully understand it)
To those that are actually interested, Fiat, Alfa, Abarth, Jeep etc offer even bigger deposit contributions and some lower interest rates via the Privilege scheme (PCP) and up to 25% off a straight buy via their Affinity Scheme, if you qualify.
I bought my Abarth on the Privilege scheme as it was still cheaper than 25% off list.0 -
And my point being, even IF you're only getting 1.5% on your interest and you get a deal at 2.9% APR or your scenario of 4.9% APR, then to some people that is a worthwhile price to pay to still have the freedom of having the cash to do other things with.
Quite a few deals @ 2.9% APR or less, quite a lot of ways to get more than 1.5% on savings.
Are there?? Please can you link them, as I have savings in a Marcus savings account that is only 1.5%, as it's the best place I can find to put anything over £10k that I don't need to spin money around in, and will only reduce by 0.15% after the first year.
If you need money for other things, why not borrow that using a lower cost personal loan? Remember, a PCP in terms of interest paid is typically equivalent to a personal loan of around 50% higher APR. So a 2.9% APR PCP will typically cost the same in interest costs as a ~5% personal loan due to the GFV not decreasing (obviously highly dependent on the value borrowed and GFV amount). So why not just pay for the car outright, then get a personal loan at 3%, which will be cheaper if you need the money in the account?
I mean, I personally don't see why you would borrow money at 3%, to have it stuck in your savings account only earning 1.5% 'just in case', but if you are going to do it, why not use a cheaper finance product?You are the only one banging this drum. No one else does a PCP deal for this reason.
Fair enough...it was mentioned in this thread by another user as an advantage of using PCP over cash, and you yourself mentioned how it saved you £4k negative equity (although as below, it didn't save you £4k, which is the only point I am trying to make...!).My point being - again - is that if someone has £40,000 in cash sitting somewhere, chances are its not @ 1.5% in some account, they are going to have it invested in a higher rate of return account.
Again, if you can link me somewhere where I can get a guaranteed return of >1.5% on £40k over just a 3/4yr period with zero risk to my capital, please do!It is a fair comparison as its one example of how you can have the money working better for you elsewhere.
Someone may wish to overpay their mortgage instead, that would be another example.
My mortgage is currently 1.4%. I think most fixed rates are in the 2% region. Again, why borrow money at a higher cost to pay off other debt at a lower cost?Typical PCP is what, maybe £250 a month? Maybe £300? Thats not a high monthly payment. A household with even just two average incomes is pulling in around £4,500 a month. Is £250 a big amount to budget for all your car problems rolled up in to one monthly amount you can budget for?
But if you pay cash, you get the same benefits, and as we seem to have established, it's likely the car will be worth more than the GFV, so you save on the interest. Why needlessly pay interest and structure it as a monthly payment if you have the cash?You mean like a mortgage on a house for example?
No, you need a house to live in, and it generally appreciates in value. It's nothing like a brand new car....I would much prefer to buy a house with no mortgage, but it makes zero financial sense, as the house will appreciate faster than I can save, so the money I spend on interest on the mortgage is offset by the increase in house value.No one can guarantee their income, no, however if you have stability and are confident of your abilities then people may wish to budget an amount for a car per month. I dont think that is particularly unreasonable.
If someone is risk averse then fine. No one is saying PCP is the answer for everyone.
It's not unreasonable no, I just don't understand why someone in the position to buy the car would chose to borrow the money and pay it monthly when they can save money by paying for it outright.
If they can't afford to pay it outright, then they are being unreasonable as the potential risk is quite large. If they lose their job, become ill, or can no longer afford the payment due to increases in outgoings (e.g. new baby), then suddenly they are looking at having to not only get rid of the car and be without a potentially vital tool in their daily lives, but also dig into their now precious savings to pay the shortfall between the settlement and the cars value.I budgeted for the interest in the monthly payment, based on the overall benefits i was getting for my £x per month, so no i didnt pay £3,000 in interest just to offset the risk of the price varying at the end of the term.
I was only making the simple point that your net savings was not £4k. Take my Audi example:
Invoice: £38.5k
PCP payments £14.5k
GFV £27k
Now lets suppose my best trade in valuation was £24k. As you have suggested with your BMW, the PCP has saved me from £3k negative equity. But that isn't the net saving compared to if I had bought it with cash. The cash buyer would have spent £14.5k in depreciation (£38.5k - £24k), and the PCP buyer only paid £11.5k in depreciation due to the GFV (£38.5k-£27k), however the PCP buyer also paid £3k in interest, so spent £14.5k overall as well.
Despite being 'protected' from £3k negative equity, it cost £3k in interest to get this 'protection' so the net effect is that the PCP did not economically benefit at all.
That's the only point I am trying to make. I think we agree that it isn't a advantage to PCP now anyway, particularly as GFV's are getting lower and lower as finance houses reduce their risk.The reality is, another benefit of a PCP deal is you have fixed costs. You know exactly what you're paying and for how long. That can be budgeted for. That works for a lot of people.
A cash purchase - you dont know what you're going to get back at the end of that term, and its not like it frees you from payments.
If you put in £20K in cash in to a new car you can maybe hope to get £10K back after 3 years.
To ensure you've got that £20K back in to savings at the end of that you need to be saving an extra £277 a month just to get you back to where you were. And then theres interest you lost. So you're back to putting £300 a month in.
That assumes you can get the same interest on your savings as you are paying on the PCP. I still maintain that you can't. Not without looking at investing in higher risk products, which come at a cost and where your capital is at risk.0 -
Hang on a minute, to buy the car the cheapest is via PCP and settle early, but you have to have a PCP deal in the first place to get it this way.
So now we have a PCP deal that's cheaper than 0% finance and cheaper still if you take out PCP and settle early.
So PCP is bad?
I don't count taking a car on PCP to get the deposit contribution and then settling the next day as 'buying a car on PCP'....! That's paying outright, but using PCP to get a good discount on the car.
I did it with my current used car in fact.
Of course I mean taking PCP finance, and paying the monthly sum over the duration of the term. It's not that I think it's 'bad'. That's subjective. I just rarely see it as a good financial tool to buy cars. It's generally the most expensive way to do it.0 -
But you are taking a PCP deal.
If it wasn't for these PCP deals and deposit contributions you could not buy it that way and make the savings.
Just because you don't count it as taking it on PCP, you've still bought it cheaper because it exists, you know you can use it to buy the car cheaper and have done.
We've looked at three ways to buy a certain car.
The two cheapest involve PCP and without it you're left with only one and that, even with 0% interest works out more expensive.0 -
Are there?? Please can you link them, as I have savings in a Marcus savings account that is only 1.5%, as it's the best place I can find to put anything over £10k that I don't need to spin money around in, and will only reduce by 0.15% after the first year.
Genuinely - talk to your financial adviser.
If you need money for other things, why not borrow that using a lower cost personal loan? Remember, a PCP in terms of interest paid is typically equivalent to a personal loan of around 50% higher APR. So a 2.9% APR PCP will typically cost the same in interest costs as a ~5% personal loan due to the GFV not decreasing (obviously highly dependent on the value borrowed and GFV amount). So why not just pay for the car outright, then get a personal loan at 3%, which will be cheaper if you need the money in the account?
I mean, I personally don't see why you would borrow money at 3%, to have it stuck in your savings account only earning 1.5% 'just in case', but if you are going to do it, why not use a cheaper finance product?
Agreed. There are various ways you can cut the cake. All involve paying interest or not earning interest.
Fair enough...it was mentioned in this thread by another user as an advantage of using PCP over cash, and you yourself mentioned how it saved you £4k negative equity (although as below, it didn't save you £4k, which is the only point I am trying to make...!).
Thats the key phase - "an advantage". You've interpreted that as THE advantage. Its a small, potentially beneficial side effect, not a driving reason to go for a PCP deal.
Again, if you can link me somewhere where I can get a guaranteed return of >1.5% on £40k over just a 3/4yr period with zero risk to my capital, please do!
You're not going to get zero risk, clearly. Investments can rise and fall. But you can certainly get better than 1.5% with relatively low risk.
My mortgage is currently 1.4%. I think most fixed rates are in the 2% region. Again, why borrow money at a higher cost to pay off other debt at a lower cost?
If you're returning the money to your mortgage account to cover the withdrawal and to get you back to the point you started with, then yes it may be cheaper. If you've buying a car using a remortgage or offset mortgage and not returning it, then all those 1.4%s per year every year add up...
And again, you're back to the realms of at some point you're paying or losing interest somewhere. And then deciding if the difference between the two is worth the benefit. To some it is, to some it isnt.
But if you pay cash, you get the same benefits, and as we seem to have established, it's likely the car will be worth more than the GFV, so you save on the interest. Why needlessly pay interest and structure it as a monthly payment if you have the cash?
IF you have the cash and its otherwise not working harder for you and you're risk averse and you've nothing else upcoming to commit the money to, then there may be benefit yes. I very much doubt too many people fit all that criteria though.
As i said, PCP isnt a one size fits all answer. If you fit the above very narrow criteria, then clearly PCP isnt for you. I'm not trying to convince you otherwise, just explaining how it can work well for some people.
No, you need a house to live in, and it generally appreciates in value. It's nothing like a brand new car....I would much prefer to buy a house with no mortgage, but it makes zero financial sense, as the house will appreciate faster than I can save, so the money I spend on interest on the mortgage is offset by the increase in house value.
I would say theres quite a few people over the last 10-12 years who have lost far more on property value than they have on car value. Can you really say you believe house prices will, for example in the next five years go UP?
And it was an example of how people seem to be quite sniffy about a car payment (typically their second biggest financial commitment) but are quite happy with a house payment.
It's not unreasonable no, I just don't understand why someone in the position to buy the car would chose to borrow the money and pay it monthly when they can save money by paying for it outright.
I keep telling you - if someone IS in that position, and are risk averse and have no other purpose for the money then PCP isnt for them. Thats ok. I keep saying its not for everyone.
If they can't afford to pay it outright, then they are being unreasonable as the potential risk is quite large. If they lose their job, become ill, or can no longer afford the payment due to increases in outgoings (e.g. new baby), then suddenly they are looking at having to not only get rid of the car and be without a potentially vital tool in their daily lives, but also dig into their now precious savings to pay the shortfall between the settlement and the cars value.
I dont think it is "quite large". I think its quite a low risk. Someone gets made redundant, they'll generally get another job in a month or two. If they're planning for a baby, dont buy a new FIAT 500, etc, etc. And the trick is not to let any one payment take you close to your limits.
I think too many people knee jerk along the lines of "OH DEAR GOD I'VE BEEN MADE REDUNDANT I MUST HAND MY CAR BACK IMMEDIATELY AS ITS GOING TO COST ME £200 A MONTH AND I'VE NO JOB". When in reality, they're going to need a car when they get their next job in a month or two, tops.
Likewise, if you dont have confidence in getting another job, dont take on a PCP loan or otherwise
.
I was only making the simple point that your net savings was not £4k. Take my Audi example:
Invoice: £38.5k
PCP payments £14.5k
GFV £27k
Now lets suppose my best trade in valuation was £24k. As you have suggested with your BMW, the PCP has saved me from £3k negative equity. But that isn't the net saving compared to if I had bought it with cash. The cash buyer would have spent £14.5k in depreciation (£38.5k - £24k), and the PCP buyer only paid £11.5k in depreciation due to the GFV (£38.5k-£27k), however the PCP buyer also paid £3k in interest, so spent £14.5k overall as well.
Despite being 'protected' from £3k negative equity, it cost £3k in interest to get this 'protection' so the net effect is that the PCP did not economically benefit at all.
That's the only point I am trying to make. I think we agree that it isn't a advantage to PCP now anyway, particularly as GFV's are getting lower and lower as finance houses reduce their risk.
That assumes you can get the same interest on your savings as you are paying on the PCP. I still maintain that you can't. Not without looking at investing in higher risk products, which come at a cost and where your capital is at risk.
Overall in your scenario, you effectively didnt pay any interest, so that was a win.
And again, the interest should be factored in to overall costs, not added each time to each of the benefits.
"I've got a new car for £1,000 down and £200 a month" - but you paid interest on that.
"Ok, but i've got the benefits of a new car such as warranty, breakdown cover, set monthly payments, known costs, guaranteed future value so i know my costs are capped" - but you paid interest on that.
Its an either / or. Either you include the interest in your overall calcs OR you cost it against all those perceived benefits.
You cant include it against both as you're then just double counting.0 -
And again, the market for PCP deals on new cars is NOT cash buyers, its people who would previously have taken out maybe a £10K HP loan on a 3-5 year old car and repeated every 3 years or so anyway.
The amount of cash buyers for brand new cars is close to NIL. It always was. Even 30 years ago when i was first selling cars i dont think i EVER saw anyone walk in with cash or ready with a bank transfer for the FULL cost of the new car in cash.
So savings relative to cash on a new car is for 99.99% of the population a totally moot point.0
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