PCP or buy outright?

JamieBadman

So today we test drove a car and really like it. We thought everything was going to be simple until we spoke to the salesman who told us about PCP as an option. We had intended to just buy the car outright but PCP seemed to be an interesting alternative that gives us scope to simply switch cars in three years using what we had paid off on the finance towards a new model. For cars less than a year old, the loan percentage is much lower too.
My question is... are we insane for thinking PCP is a good option vs outright payment? Are we being blinded by linguistic trickery into taking something that isn’t financially sensible?

Thanks

Mrjuls33

PCP deals work for some people as you can get a higher value car as your paying a amount but there’s a ballon payment at the end, what you need to be aware of is you pay interest on the whole value of the car including the ballon payment.
 If you have the cash to buy why not go for a 1 year old car that’s deprecated heavily already instead........ and buy out rite.

DrEskimo

JamieBadman said:

So today we test drove a car and really like it. We thought everything was going to be simple until we spoke to the salesman who told us about PCP as an option. We had intended to just buy the car outright but PCP seemed to be an interesting alternative that gives us scope to simply switch cars in three years using what we had paid off on the finance towards a new model. For cars less than a year old, the loan percentage is much lower too.
My question is... are we insane for thinking PCP is a good option vs outright payment? Are we being blinded by linguistic trickery into taking something that isn’t financially sensible?

Thanks

The part in bold is not correct. The payment for a PCP will only cover the depreciation and interest. Since cars depreciate exponentially, and your payments to cover the d expected depreciation over the term (+ interest) is linear, you are likely to be in a position where the cars value is lower than the finance owed through most of the term. 

There is nothing unique about trading in a car on PCP every few years. It's the same process whether you have finance on it or not. Think of PCP as a finance agreement. No more, no less. It's a loan to buy a car. Looks at the cost of that loan like you would any other finance agreement. PCP happens to be a very expensive way to borrow money, despite the low interest, as you borrow the entire amount, but only pay down the capital on a portion of it. So don't get mislead by the APR and look at the actual amount charged in interest. 

If you don't want to pay that interest charge on top of the cost of depreciation of a new car (the car will depreciate the same regardless of how you buy it), then stick to buying with cash. 

However, sometimes manufacturers will offer incentives with their finance deals. This can be in the form of deposit contributions or free servicing. It may be worth taking out the finance on the car, but then settling the finance the next day to get the best deal, while paying minimal interest. 

DCFC79

Do you need said car ?
Could you do with a cheaper alternative ?

DrEskimo

DCFC79 said:

Do you need said car ?
Could you do with a cheaper alternative ?

Well it's perfectly fine to buy a new expensive car if you have the money for it. 

The bit I struggle with is what value you get from buying a new car over a used one. Side by side, apart from the license plate and odometer they are generally exactly the same. So what tangible benefit does the new car actually give you for the thousands extra it costs to buy, and will cost you in depreciation? Extra warranty, but this can be bought for only a few hundred quid...

As far as I can see, it's not logical, but emotional. Just having a car knowing it's only been owed by you. Again fine, but not something I'm personally willing to pay thousands for!

But then I should be thankful, otherwise there would be no used cars for me to buy

phillw

DrEskimo said:

If you don't want to pay that interest charge on top of the cost of depreciation of a new car (the car will depreciate the same regardless of how you buy it), then stick to buying with cash. 

However, sometimes manufacturers will offer incentives with their finance deals. This can be in the form of deposit contributions or free servicing. It may be worth taking out the finance on the car, but then settling the finance the next day to get the best deal, while paying minimal interest. 

You have to take into account the lost interest and maybe even opportunity cost with paying with cash.
Dealers like PCP because it gives them a steady supply of second hand cars at a known time, this is why they tend to push PCP. To the point that they may offer 0% finance if you take PCP, but charge interest on a straight loan.

Clive_Woody

DrEskimo said:

Extra warranty, but this can be bought for only a few hundred quid...

From what I have read, these stand alone warranties are of very limited value (i.e. you get what you pay for).

MEM62

Everything IS simple until your speak with the salesman.  Take anything he tells you at face value at your peril.  My preference would be to buy cash.  No matter how attractively he tries to wrap up the PCP it is a finance package, you will be paying interest, there will be mileage restrictions on the use of the car and you will have to pay for any damage if the car is less than pristine when you hand it back.  

poppy10_2

You'll pay more for PCP over the term, but the salesman will push the PCP as that's how they make their bonuses - most car salesmen make more money on selling finance than on selling cars. 
Use that to your advantage. Usually with PCPs there are hefty sweeteners - a large discount on the purchase price, free servicing for x years etc. Ask what they will give you, take out the PCP and then pay it off immediately. You've essentially bought outright but have got the bonuses from PCP

DrEskimo

phillw said:

You have to take into account the lost interest and maybe even opportunity cost with paying with cash.
Dealers like PCP because it gives them a steady supply of second hand cars at a known time, this is why they tend to push PCP. To the point that they may offer 0% finance if you take PCP, but charge interest on a straight loan.

Yes you do, but unless the finance is 0%, then you're unlikely to find risk free methods of getting a good return on your money anyway. Leveraging your investments through secured finance on a car doesn't seem the most sensible idea...there are much cheaper ways to borrow money than car finance if that is what you want to do....

I would even be wary of 0% PCP. Whilst there have certainly been instances of it, I have often found that these deals can't be used in conjunction with the highest discount offers, so you are in effect paying the interest (often greater amounts) through higher purchase prices. But each deal would be worth investigating in detail to determine if it's a good idea or not.

Clive_Woody said:

From what I have read, these stand alone warranties are of very limited value (i.e. you get what you pay for).

Absolutely, stay well clear of these third party warranties. Sorry I meant the extended warranties from the manufacturers themselves. For example Renault allow me to extend the warranty on my car for £289, but I have to do it before the 4year factory warranty expires. If I don't, the option to extend is gone. These tend to be just as good as the factory warranties.

ncass

The 3rd option, albeit not for the specific car you test drove is leasing. The trick is to get the timings right as main dealers attempt to get rid of stock backlogs. If you time it right leases for brand new cars are available for monthly figure which is lower than depreciation over the term
While the general advice on here is helpful there are so many variables that no one answer will fit every scenario. I would suggest sitting down and do the math to see which stacks up