PCP v Lease

ontheroad1970

Most HP won't go above 5 years, and most aren't very good rates.  Personal loans are nearly always better value and you can have them over 7/8 years to lower the monthlies, though you will pay more interest over the term of the loan.  You do have the advantage that the car is yours from day one - albeit depreciating.  

motorguy

ontheroad1970 said:

Most HP won't go above 5 years, and most aren't very good rates.  Personal loans are nearly always better value and you can have them over 7/8 years to lower the monthlies, though you will pay more interest over the term of the loan.  You do have the advantage that the car is yours from day one - albeit depreciating.  

Exactly.

Thats why i dont understand why scrappy thinks its a better option. 

iwb100

Been looking for a while for new cars and looking in depth at leasing VS PCP finance. So thought I’d contribute - sorry it’s a bit late.

Bottom line is that comparing deals like for like, as far as is possible, it’s usually cheaper purely as a sunk cost to get the same car on PCH than it is on PCP. It will be cheaper over that 3 or 4 year period in most cases. But there are some times when a PCP incentive will mean that’s not the case. But this is rare. Especially now.

So if you want a new car every three or four years then PCH is cheaper each time. BUT you need a deposit (and days of lots of low PCH deposits are slipping away) every time of 3 to 6 months readily available and you need to include maintenance really to avoid heavy penalty costs, or drive very very carefully and have very good reputable servicing garages. So it’s very good but limits itself to those with thousands of pounds available every 3 or 4 years for a deposit.

PCP is more expensive over the term. But the term isn’t fixed, you can at any point sell and pay off the settlement. Understanding this and the market trends for second hand cars is also very important. PCP only works IF you either take the deal to get the manufacturer incentives then pay it off….OR if you are careful and pick cars that are likely to retain their value and leave you with equity in the deal. SUVs have been a PCP buyers dream in recent years as their values have retained leaving equity in the deal towards the end letting people just trade in and get a new car on a better deal. But you have to accept that there is a gamble. This won’t always happen or always be the same. But there are lists of cars that depreciate more than others. Saloons and estates in general have suffered more as their popularity declines. PCP only works if you are successful in beating the negative equity trap.

Finally, never, ever, ever ever keep a car by paying the fee at the end of a PCP. This is literally the worst and most expensive way to buy a car. PCP only works as a way to ‘trade the car markets’. Trading in at the right point when value to settlement ratio is highest. Picking the right cars is critical in a PCP. And obviously sometimes that needs foresight. I imagine EVs in 5 years will be goldust on the second hand market and those picking them up new now will have huge equity to swing into a new deal. 

SouthLondonUser

iwb100 said:

. PCP only works IF [...] you are careful and pick cars that are likely to retain their value and leave you with equity in the deal. SUVs have been a PCP buyers dream in recent years as their values have retained leaving equity in the deal towards the end letting people just trade in and get a new car on a better deal. But you have to accept that there is a gamble. This won’t always happen or always be the same. But there are lists of cars that depreciate more than others. Saloons and estates in general have suffered more as their popularity declines. PCP only works if you are successful in beating the negative equity trap.

Well, if the car finance company has done its job properly, you should have as close to zero equity in the car as possible. PCP can work if the car finance company has got its numbers wrong and you turn out to have more equity than the guaranteed value they estimated. This is possible, but it means beating them at their game. What are the odds that the average Joe will have more comprehensive data to estimate all of this than the companies which do this for a living? I'd say practically zero.

Let's not forget that the current market is driven by a combination of covid and problems with supply chains, which is certainly not something anyone could have foreseen before 2020.

As for never paying to keep a car at the end of a PCP, I disagree. It can make sense. Obviously don't do it if the market value is lower, but if it's higher or in line it can make sense. It all depends on what you want to do with the car: if you want to keep it for - 5-8 more years, then buying a car which is already 3 years old and has already depreciated can be a very good deal. Plus, you know its conditions because it's you who has been using it!

iwb100

SouthLondonUser said:

iwb100 said:

. PCP only works IF [...] you are careful and pick cars that are likely to retain their value and leave you with equity in the deal. SUVs have been a PCP buyers dream in recent years as their values have retained leaving equity in the deal towards the end letting people just trade in and get a new car on a better deal. But you have to accept that there is a gamble. This won’t always happen or always be the same. But there are lists of cars that depreciate more than others. Saloons and estates in general have suffered more as their popularity declines. PCP only works if you are successful in beating the negative equity trap.

Well, if the car finance company has done its job properly, you should have as close to zero equity in the car as possible. PCP can work if the car finance company has got its numbers wrong and you turn out to have more equity than the guaranteed value they estimated. This is possible, but it means beating them at their game. What are the odds that the average Joe will have more comprehensive data to estimate all of this than the companies which do this for a living? I'd say practically zero.

Let's not forget that the current market is driven by a combination of covid and problems with supply chains, which is certainly not something anyone could have foreseen before 2020.

As for never paying to keep a car at the end of a PCP, I disagree. It can make sense. Obviously don't do it if the market value is lower, but if it's higher or in line it can make sense. It all depends on what you want to do with the car: if you want to keep it for - 5-8 more years, then buying a car which is already 3 years old and has already depreciated can be a very good deal. Plus, you know its conditions because it's you who has been using it!

The finance company doesn’t really lose though. They lend you £X with interest just like a bank loan. And you pay it back and either pay off full amount plus interest or hand the car back at the end. If you’ve paid full amount plus interest then they have the return on your loan they agreed. If you hand the car back then they don’t want that car to be worth less than the GFMV which is the outstanding amount you owe them as the car return is in lieu of that. 

On top of that they need your business again so positive equity means another pcp and the ball rolls on. Same for dealers. Of course they aren’t wanting to be giving them away so there is a balance as you say. But a single car that costs a dealership £30K could easily be PCP’d by the dealer and the manufacturer finance company three times, once new and twice second hand.

Not suggesting that the thing is on the side of the customer just that it’s possible to do well if you pick carefully or get lucky. The current market is crazy I just part ex’d a car purchased 2 years ago, new, for just under £24,500 with 7000 miles on it for £23,750. Imagine that a few years back…drive off the forecourt and 15% was gone.

SouthLondonUser

Well, if, at the end of the PCP, you can buy for £10,000 a car that is worth £12,000 , they lose the £2k they could make by selling it on for £12k, or they lose all the income they could make by financing it for £12k.

The current market is due to unique circumstances no one could have foreseen. But, in normal times, finance companies rarely get it this wrong. A greater degree of uncertainty possibly exists for completely new models, but even there there tends to be comps and benchmarks. Maybe now the depreciation of non-Tesla EVs is a big unknown because there aren't many benchmarks, e.g. will a Kia EV6 depreciate like a petrol Kia, will it be perceived as more premium and hold its value better, etc.

iwb100

SouthLondonUser said:

Well, if, at the end of the PCP, you can buy for £10,000 a car that is worth £12,000 , they lose the £2k they could make by selling it on for £12k, or they lose all the income they could make by financing it for £12k.

The current market is due to unique circumstances no one could have foreseen. But, in normal times, finance companies rarely get it this wrong. A greater degree of uncertainty possibly exists for completely new models, but even there there tends to be comps and benchmarks. Maybe now the depreciation of non-Tesla EVs is a big unknown because there aren't many benchmarks, e.g. will a Kia EV6 depreciate like a petrol Kia, will it be perceived as more premium and hold its value better, etc.

Sure but the finance company get their slice anyway. Yes they lose out on the asset but still get the full amount plus interest.

Buying cars via pcp is not a good deal for the customer though (which is why hardly anyone pays the balloon payment at the end) because even if your car is worth more the interest cost is almost always higher than if you’d just taken out a bank loan or financed by other means, it’s not a cost effective solution if you wan to own that car for a long period.

motorguy

iwb100 said:

Been looking for a while for new cars and looking in depth at leasing VS PCP finance. So thought I’d contribute - sorry it’s a bit late.

Bottom line is that comparing deals like for like, as far as is possible, it’s usually cheaper purely as a sunk cost to get the same car on PCH than it is on PCP. It will be cheaper over that 3 or 4 year period in most cases. But there are some times when a PCP incentive will mean that’s not the case. But this is rare. Especially now.

So if you want a new car every three or four years then PCH is cheaper each time. BUT you need a deposit (and days of lots of low PCH deposits are slipping away) every time of 3 to 6 months readily available and you need to include maintenance really to avoid heavy penalty costs, or drive very very carefully and have very good reputable servicing garages. So it’s very good but limits itself to those with thousands of pounds available every 3 or 4 years for a deposit.

PCP is more expensive over the term. But the term isn’t fixed, you can at any point sell and pay off the settlement. Understanding this and the market trends for second hand cars is also very important. PCP only works IF you either take the deal to get the manufacturer incentives then pay it off….OR if you are careful and pick cars that are likely to retain their value and leave you with equity in the deal. SUVs have been a PCP buyers dream in recent years as their values have retained leaving equity in the deal towards the end letting people just trade in and get a new car on a better deal. But you have to accept that there is a gamble. This won’t always happen or always be the same. But there are lists of cars that depreciate more than others. Saloons and estates in general have suffered more as their popularity declines. PCP only works if you are successful in beating the negative equity trap.

Finally, never, ever, ever ever keep a car by paying the fee at the end of a PCP. This is literally the worst and most expensive way to buy a car. PCP only works as a way to ‘trade the car markets’. Trading in at the right point when value to settlement ratio is highest. Picking the right cars is critical in a PCP. And obviously sometimes that needs foresight. I imagine EVs in 5 years will be goldust on the second hand market and those picking them up new now will have huge equity to swing into a new deal. 

Eh?

I dont agree with you there.  

The residual price could be £9,000 on a car and the car at that point could be worth an easy £12K.  You'd be literally giving away thousands.

motorguy

iwb100 said:

SouthLondonUser said:

iwb100 said:

. PCP only works IF [...] you are careful and pick cars that are likely to retain their value and leave you with equity in the deal. SUVs have been a PCP buyers dream in recent years as their values have retained leaving equity in the deal towards the end letting people just trade in and get a new car on a better deal. But you have to accept that there is a gamble. This won’t always happen or always be the same. But there are lists of cars that depreciate more than others. Saloons and estates in general have suffered more as their popularity declines. PCP only works if you are successful in beating the negative equity trap.

Well, if the car finance company has done its job properly, you should have as close to zero equity in the car as possible. PCP can work if the car finance company has got its numbers wrong and you turn out to have more equity than the guaranteed value they estimated. This is possible, but it means beating them at their game. What are the odds that the average Joe will have more comprehensive data to estimate all of this than the companies which do this for a living? I'd say practically zero.

Let's not forget that the current market is driven by a combination of covid and problems with supply chains, which is certainly not something anyone could have foreseen before 2020.

As for never paying to keep a car at the end of a PCP, I disagree. It can make sense. Obviously don't do it if the market value is lower, but if it's higher or in line it can make sense. It all depends on what you want to do with the car: if you want to keep it for - 5-8 more years, then buying a car which is already 3 years old and has already depreciated can be a very good deal. Plus, you know its conditions because it's you who has been using it!

The finance company doesn’t really lose though. They lend you £X with interest just like a bank loan. And you pay it back and either pay off full amount plus interest or hand the car back at the end. If you’ve paid full amount plus interest then they have the return on your loan they agreed. If you hand the car back then they don’t want that car to be worth less than the GFMV which is the outstanding amount you owe them as the car return is in lieu of that. 

On top of that they need your business again so positive equity means another pcp and the ball rolls on. Same for dealers. Of course they aren’t wanting to be giving them away so there is a balance as you say. But a single car that costs a dealership £30K could easily be PCP’d by the dealer and the manufacturer finance company three times, once new and twice second hand.

Not suggesting that the thing is on the side of the customer just that it’s possible to do well if you pick carefully or get lucky. The current market is crazy I just part ex’d a car purchased 2 years ago, new, for just under £24,500 with 7000 miles on it for £23,750. Imagine that a few years back…drive off the forecourt and 15% was gone.

It doesnt really matter if the finance company "loose" or not.  Its about what works out best for the individual.

In the case of a PCP at the end of term if theres equity in it, its better that is in the customers pocket not the finance companies.

Granted in more normal times the numbers may not be as compelling but the other side of that is, you could well have an opportunity to buy a car you already know as you've had it for three years, effectively at trade price.  Why wouldnt that be a good idea?

motorguy

iwb100 said:

SouthLondonUser said:

Well, if, at the end of the PCP, you can buy for £10,000 a car that is worth £12,000 , they lose the £2k they could make by selling it on for £12k, or they lose all the income they could make by financing it for £12k.

The current market is due to unique circumstances no one could have foreseen. But, in normal times, finance companies rarely get it this wrong. A greater degree of uncertainty possibly exists for completely new models, but even there there tends to be comps and benchmarks. Maybe now the depreciation of non-Tesla EVs is a big unknown because there aren't many benchmarks, e.g. will a Kia EV6 depreciate like a petrol Kia, will it be perceived as more premium and hold its value better, etc.

Sure but the finance company get their slice anyway. Yes they lose out on the asset but still get the full amount plus interest.

Buying cars via pcp is not a good deal for the customer though (which is why hardly anyone pays the balloon payment at the end) because even if your car is worth more the interest cost is almost always higher than if you’d just taken out a bank loan or financed by other means, it’s not a cost effective solution if you wan to own that car for a long period.

On used cars, yes, almost certainly.  On new cars though they often offer 0% APR or heavily subsidised finance rates.  These are often cheaper than a personal loan.