For saving money, is PCP ever a good idea? 17 August 2022 at 9:36AM edited 17 August 2022 at 9:37AM in Motoring 55 replies 2.8K views

Lizmoretti

I’m buying a car for £80k.  I have £80k in cash (when you include my £50k trade-in) but people always seem shocked that I buy cars outright rather than on some form of finance.  Is that because buying outright is a silly thing to do or that buying cars one cannot actually afford is the norm these days?

Is it ever a frugal idea to get PCP?  I can’t think that I’d be able to invest the money in something in the meantime that would cover the interest and earn me more money.

Brie

It's the interest and lack of information available from the "finance guy" that have always put me off.  Why would I want to add X% to the purchase price?

facade

If pcp gives you access to a substantial "incentive" that you can keep if you settle the pcp immediately then there is a saving.

Otherwise you would need to have a means of gaining more interest on your money than you would pay back on the loan.

Why I think pcp is so popular is because people want a new car every 3 years so they'd be trading in, and buying on credit anyway, and the pcp provides a lower monthly cost*- hence why Audi/BMW/Rangerover are so popular- they are only a few pounds a month more than a Ford. The numbers used to work as the Finance Companies paid a lot less than retail for the cars.

*If they bought with a loan the first time they would own the car they are trading in, but have paid out more the first time. Each subsequent time they would be borrowing less and have lower repayments compared to a pcp- surely saving money over say 15 years and still owning an asset.

Grumpy_chap

Lizmoretti said:

I’m buying a car for £80k.  I have £80k in cash (when you include my £50k trade-in) but people always seem shocked that I buy cars outright rather than on some form of finance.  Is that because buying outright is a silly thing to do or that buying cars one cannot actually afford is the norm these days?

Is it ever a frugal idea to get PCP?  I can’t think that I’d be able to invest the money in something in the meantime that would cover the interest and earn me more money.

Buying a car for £80k is not money-saving but, if you have the funds available, you have sufficient reserves to meet other needs and emergencies without going short elsewhere, and it is what you want to do, why not?
Money saving is not about only ever having the bare minimum, but having what you want and can afford in the most efficient way.

With a PCP, you will pay interest and, as the OP says, to actually invest and recover more than that is unlikely, especially when tax is considered as well.

Generally, if you can afford to buy cash, then taking out finance is not MSE.  That applies to PCP.

The exception is if the PCP comes with an incentive, either a discount, or free-fuel offer, or servicing, or whatever.  In that case, it is worth taking the PCP, securing the incentive and then paying down the finance.  I suspect that type of incentive is less-readily available on cars of the £80k mark, especially in the current crazy car market.

So, we are reaching the point that we can conclude that PCP is less attractive than just buying the car.

One other, and I think rare, exception, was some lease deals (not PCP) available summer 2021 where the lease cost over the term was less than depreciation on a new car would be.  I do not think such deals remain available now.

Good luck and hope you enjoy the new car, OP   
By the way, what is it that you are getting?

EDIT: what will the insurance be given the recent deer and speeding incidents?

Lizmoretti

Grumpy_chap said:

Lizmoretti said:

I’m buying a car for £80k.  I have £80k in cash (when you include my £50k trade-in) but people always seem shocked that I buy cars outright rather than on some form of finance.  Is that because buying outright is a silly thing to do or that buying cars one cannot actually afford is the norm these days?

Is it ever a frugal idea to get PCP?  I can’t think that I’d be able to invest the money in something in the meantime that would cover the interest and earn me more money.

Buying a car for £80k is not money-saving but, if you have the funds available, you have sufficient reserves to meet other needs and emergencies without going short elsewhere, and it is what you want to do, why not?
Money saving is not about only ever having the bare minimum, but having what you want and can afford in the most efficient way.

With a PCP, you will pay interest and, as the OP says, to actually invest and recover more than that is unlikely, especially when tax is considered as well.

Generally, if you can afford to buy cash, then taking out finance is not MSE.  That applies to PCP.

The exception is if the PCP comes with an incentive, either a discount, or free-fuel offer, or servicing, or whatever.  In that case, it is worth taking the PCP, securing the incentive and then paying down the finance.  I suspect that type of incentive is less-readily available on cars of the £80k mark, especially in the current crazy car market.

So, we are reaching the point that we can conclude that PCP is less attractive than just buying the car.

One other, and I think rare, exception, was some lease deals (not PCP) available summer 2021 where the lease cost over the term was less than depreciation on a new car would be.  I do not think such deals remain available now.

Good luck and hope you enjoy the new car, OP   
By the way, what is it that you are getting?

EDIT: what will the insurance be given the recent deer and speeding incidents?

It’s an Audi Q8.

We’ve not gone through insurance for the deer damage (was only a few hundred pounds) and never had any speeding incidents, so insurance should be fine.

Herzlos

It depends on the opportunity cost of that £30k, really. Can you do anything better with it?

PCP's are great for a lower fixed cost, but you pay a bit more in interest over HP. But the finance part is the same; are you better borrowing that £30k or taking it out of savings? Are you getting more for the savings than the PCP?

DrEskimo

Herzlos said:

It depends on the opportunity cost of that £30k, really. Can you do anything better with it?

PCP's are great for a lower fixed cost, but you pay a bit more in interest over HP. But the finance part is the same; are you better borrowing that £30k or taking it out of savings? Are you getting more for the savings than the PCP?

Bit more....! In most cases, given the size of the GFV, the actual cost in £ paid in interest on a PCP is the equivalent to a HP with double the APR rate, all else being equal.

Unless the APR is very low, there is very little that will provide a guaranteed return over a 3/4-year period. Anything would come at the cost of substantial risk to your capital.

[Deleted User]

If you get 0% interest it can be. I had mine 8 years ago on 0% finance, paid off and paid the balloon. The money sat in the bank (Santander 123 with the 3% at the time) earned over £1100 in interest that I wouldn't have had if I'd paid for the car outright. I still have the car and hope to keep it under around 2030 when hopefully EV will have sufficient range / fast charging / affordable for the weird way I use the car for sports I am involved in

Ectophile

Something that hasn't been mentioned yet is that people buying on a PCP are likely to get a better deal from the car dealer than someone paying cash.

If you buy a car with cash, then the dealer has sold a car.  If you buy a car on PCP, then the dealer has sold a car and a credit agreement.  That's a nice fat commission for them.

It's totally legal to take out a PCP and pay it off early, having taken advantage of any special deals.

A good diversified portfolio of investments may well equal the rate of interest you end up paying.  But there's a limit to how much you can pay into an ISA every year, and those returns are only an average.  Investments can go down as well as up, etc.

Lizmoretti

Ectophile said:

Something that hasn't been mentioned yet is that people buying on a PCP are likely to get a better deal from the car dealer than someone paying cash.

If you buy a car with cash, then the dealer has sold a car.  If you buy a car on PCP, then the dealer has sold a car and a credit agreement.  That's a nice fat commission for them.

It's totally legal to take out a PCP and pay it off early, having taken advantage of any special deals.

A good diversified portfolio of investments may well equal the rate of interest you end up paying.  But there's a limit to how much you can pay into an ISA every year, and those returns are only an average.  Investments can go down as well as up, etc.

There was no PCP incentive in my case.  I did ask that.

The PCP deal was 8.9% and overall added £9k to the purchase price.

So I’m not missing anything.  When I bought my current car a couple of years ago, a work colleague assumed it was PCP.  When I said it was cash they were shocked and said it was a bad move and you should never buy a car cash, always on finance.  Never worked out why he thought that.

I shall pay cash and be content I’ve done the right thing.

MEM62

You pay cash and you only suffer depreciation.  Finance the car and you suffer depreciation and interest.  It makes any period of ownership that much more expensive and gives you less to spend on the next one.  With cash you also do not have to worry about payments and potentially loosing the car if your financial circumstances take a downturn. Cash is a no-brainer.     

PCP is a great product for putting your backside into a vehicle that you otherwise could not afford.  It is not particularly cheap and at the end of the agreement and all those payments you own nothing.  Personally, never seen the point in that.