Pay off PCP or bank cash?

betterbudgeter2021

Hi there, apologies if this is in the wrong sub-forum, it covers a bit of loans/budgeting/investing/saving so feel free to move if there’s a more appropriate place.

In a position where I have finally paid off debts other than PCP, I have about £22k in the bank and I want to use it in the best way. The main thing I’m not sure about is whether to pay off the PCP agreement on my motorcycle, or bank the cash and continue paying the monthly payment.

My job is relatively secure, I earn £60k and have outgoings of around £2000. We don’t own a house and are not sure if we want to, it’s looking unlikely for the next few years at least. My partner is currently unemployed as a result of the pandemic so disposable income may increase once she returns to work.

My PCP agreement is £189 a month with 40 payments remaining. The final balance to pay at the end would be £7.5K and my settlement figure is currently £11,959. It’s at around 8.5% APR. I love the bike but would likely trade for a new one at the end of the agreement rather than pay the balance. Obviously this is a total estimate but looking at current values a conservative guess would be about £4K equity over the final value at the end of the term.

My goal is to have an emergency fund and invest a sum in something like a passive Vanguard fund, but I’m also conscious of the high rate on my motorbike loan.

Im not sure whether it would be more wise to pay off the PCP, or keep the equivalent cash in the bank towards the emergency fund and invest say £10k into the fund.

I then intend to save around £6-800 pcm which will contribute either to the emergency fund or the ISA.

Any tips are welcome!

Thanks in advance

[Deleted User]

Paying interest on PCP and saving and getting 1% or less is a fool's errand but then again so is the cycle of new bikes every 3 years to keep up with the Jones. A S&S ISA is good but remember it's not as easily accessible as an emergency fund, it's a 5+ year investment which will take some time to turn into cash - nothing wrong with it but it's not intended for that purpose so maybe whack a sum into something like a virgin current account paying interest on the first x thousands or whatever. I'd pay off the finance in full and see where I was e.g. if you can sell the bike privately to use as a deposit in a few years time, or just keep it and not waste money buying new ones and use the ISA in 5+ years time if I *needed* a new bike, not wanted.

betterbudgeter2021

Thanks, that’s helpful. I see your point about paying the PCP interest not making sense. 

Just as a side note, up until last year I’d always had ‘old’ bikes (1990 or older) since I’m generally not a fan of new ones. However I got hit by a car and had a load of metalwork in my leg to repair it so riding old bikes (Harleys in this case) vibrate and rattle so much it became prohibitively painful so I now ride new ones not to look fancy, more just because they’re infinitely smoother and less painful! 

That said, I don’t need a new one now every few years, this one more than does the job. 

[Deleted User]

I got a new car in 2014, people always bang on about the "cost" of depreciation (still waiting for the bill, 6 years on...) That I had a shiny car for 5 months before a new plate came out was great (it was the spec I wanted and after 2 second hand cars it was a treat I got something that no-one else had sat in, wiped their nose on the fitting or whatever) but no-one has ever told me how awful it is that my car is now 6 years old, nor will they in I guess 9 years time when I scrap it and get an electric (fingers crossed to avoid an accident anyway!).

Regular savers or the virgin account are good places for emergency funds for a year with 1-2% interest and the S&S ISA for say 5+ years and you can replace the bike if you really need to

MrFrugalFever

Hi, £189 per month isn’t a huge amount but I would be inclined to look at offering a partial settlement. I would look in to overpaying your agreement enough to bring the monthly payments to £0.01p and have majority of interest rebated, then put the £189 in to a savings account with best interest rate for remaining 40 months that you knowingly committed to initially?

the only benefit of paying the optional final payment is to own it outright and continue keeping the motorbike for a reasonable period thereafter.

Assuming this was a 48 month agreement?.....
monthly payments is £189 * 48 = £9,072
optional final payment you say is £7,500
total amount payable inc APR is £16,572

You’ve made 8 payments at £189 * 8 = £1,512
settlement (rebated interest) = £11,959 as above
£16,572, less £1,512 = £15,060 less £11,959 = £3,108 interest payable (approximately) (£3,108 / 40 remaining months = £77.70pm interest charge (approximately)

what was the OTR price of your motorbike (pre credit charges)?

with the very rough calculations above, you could save yourself the £3,000+ interest by partially settling (speak to finance company first to ensure they allow overpayments and how much), FCA regulation stipulates consumer credit can be settled in full or partial at any time.

betterbudgeter2021

Thanks both, the Virgin account and the partial payment sound like great ideas. I hadn’t considered a partial payment to minimise interest.

The purchase price was £16,695, your calculations are almost spot-on, the savings of paying it off are shown at the time of generating a settlement figure and it is around £3.3k.

@Fartetch - I totally agree, had I not had the crash I wouldn’t have dreamed of a new bike. Sounds silly as I’m sure plenty of people would love a brand new Harley but believe me, if I could still ride and kickstart a 70s one without pain I’d take that over a brand new one! Pain is pain though and the other option is to not ride... which isn’t going to happen.

MrFrugalFever

betterbudgeter2021 said:

Thanks both, the Virgin account and the partial payment sound like great ideas. I hadn’t considered a partial payment to minimise interest.

The purchase price was £16,695, your calculations are almost spot-on, the savings of paying it off are shown at the time of generating a settlement figure and it is around £3.3k.

@Fartetch - I totally agree, had I not had the crash I wouldn’t have dreamed of a new bike. Sounds silly as I’m sure plenty of people would love a brand new Harley but believe me, if I could still ride and kickstart a 70s one without pain I’d take that over a brand new one! Pain is pain though and the other option is to not ride... which isn’t going to happen.

Certainly something to look in to and your finance company should even be able to calculate the rebate with a proposed overpayment for you. 

Sorry to hear of the accident.

£3,000 interest is quite high on that amount borrowed so would definitely look to minimise it HOWEVER, interest applied or not, your motorbike will depreciate monthly and thus such meaning the interest is irrelevant if keeping for the longer term.

betterbudgeter2021

Thank you. I’ve spoken to the finance company and a payment of £6580 would reduce my payments to as close to nil as possible. The saving isn’t as significant as paying it now, however, the flexibility could be useful and assuming the value remains good I could pay-off and sell privately should the need for the funds arise.

Harleys are a bit of a unique beast in terms of depreciation as most models hold their value very well, plateau at around 25 years old and then rise in value. In certain instances (for sought after discontinued models) sell for the original purchase price. 

MrFrugalFever

That’s good news and I think a fair compromise should you not wish to settle in full and final. The remainder of interest is attached to the optional final payment that cannot be eaten away at, it’s either paid in full or it’s not under the t’s and c’s of a pcp agreement.

as a Harley fan, I would agree with you, they’re quite niche and sort of have their own little piece of motorbike market! 

Good luck in whatever you decide.

DrEskimo

MrFrugalFever said:

That’s good news and I think a fair compromise should you not wish to settle in full and final. The remainder of interest is attached to the optional final payment that cannot be eaten away at, it’s either paid in full or it’s not under the t’s and c’s of a pcp agreement.

as a Harley fan, I would agree with you, they’re quite niche and sort of have their own little piece of motorbike market! 

Good luck in whatever you decide.

That's not true. Overpayments can go towards reducing the GFV. It depends on the finance company.

Quite why you would want to have a interest only loan secured on your bike whilst you have savings is a bit beyond me. Swapping it for an unsecured loan at a lower rate would be much cheaper and achieve the same thing, assuming of course you don't want to relinquish all of your savings.

Either way I would concentrate on paying down the interest only loan at 8.9% as priority well before even thinking about investing.

MrFrugalFever

DrEskimo said:

MrFrugalFever said:

That’s good news and I think a fair compromise should you not wish to settle in full and final. The remainder of interest is attached to the optional final payment that cannot be eaten away at, it’s either paid in full or it’s not under the t’s and c’s of a pcp agreement.

as a Harley fan, I would agree with you, they’re quite niche and sort of have their own little piece of motorbike market! 

Good luck in whatever you decide.

That's not true. Overpayments can go towards reducing the GFV. It depends on the finance company.

Quite why you would want to have a interest only loan secured on your bike whilst you have savings is a bit beyond me. Swapping it for an unsecured loan at a lower rate would be much cheaper and achieve the same thing, assuming of course you don't want to relinquish all of your savings.

Either way I would concentrate on paying down the interest only loan at 8.9% as priority well before even thinking about investing.

In all my experience of being a part of an industry that deals with PCP everyday I’ve never come across an agreement that allows a consumer to make overpayments to a GMFV on a PCP agreement. Ever.

a PCP benefits many people for many reasons, specifically for consumer protection and the legalities that surround the consumer with the ability to walk away. A personal unsecured loan against a depreciating asset is only ever good for lower interest in most cases and nothing more.