For saving money, is PCP ever a good idea?

MEM62

born_again said:

MEM62 said:

MalMonroe said:

MEM62 said:

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.     

It's not so bad if you have 0% interest PCP deal and you sell the car before the term is up so you can pay the finance off and then buy another car with the profit you make. 

You don't make any 'profit' on owning a car.  (Investing in classics excepted)  Own a car for a typical PCP period of two or three years and you will not sell it for more than you bought it for.   

EXcept in the current climate where new cars are in short supply. Meaning 2nd hand cars are in demand, as such their prices have risen.
Example I was offered £2k more than I paid for my car (ex demo) by the dealer that sold me the car at it's 1st service. So they knew exactly I had paid for it.
Once new car production & supply is back to normal, watch this crash & 2nd hand prices drop like a brick.

Put forward any statement and someone will come along and say 'except'.  Maybe the current car market does allow you to achieve more for a used car than you otherwise would but it is not a normal market and you certainly won't be selling it for more than you paid for it over the typical three or four-year PCP cycle.  Anyone relying on your exception to make money on a car will be disappointed.    

JohnDorian

It depends on a person’s personal finances. Not everyone sees the equation as simple as - I have £x spare if I PCP over 3 years so can I do better by keeping the cash vs not PCPing. Some individuals will have investment portfolios that are longer term than the PCP deal with their returns tied into a longer term strategy. So for them it won’t be a case of ‘can I stick it on a savings account’ or ‘should I just put it in an ISA’. They are committing to a strategy where they believe longer term investments will over time provide them with gains. Those people may not want to reduce their contributions or maybe even be in a position where they may have to take money out to fund a car. For them it probably makes sense to PCP.

But of a person is thinking along the lines of should I keep the cash with me for the 3 years then, unless there are substantial incentives involved, it’s not worth it because the interest will outstrip cash in a savings account.

Flight3287462

Yes is the short answer, but you need to do the arithmetic.  The current climate (lack of supply) will make it near impossible.

But if you go back a few years when manufacturers needed to shift excess stock you could get some very good lease or PCP deals.  Manufacturers were loathe to drop the headline price of cars to shift them and leasing and PCP could hide that (to some extent).

Just keep running the sums when things get back to normal (if they ever do).

zagfles

I'm looking at getting a new Toyota. Taking PCP is a no-brainer, 1.9% APR plus a £1250 "deposit contribution". You can get 2 or 3 year fixed rate bonds at over 3%, so you can make more interest than you pay, plus get the £1250 off. The discounts offered by the likes of carwow are a bit more for cash than PCP, but nowhere near as much as £1250.

DrEskimo

zagfles said:

I'm looking at getting a new Toyota. Taking PCP is a no-brainer, 1.9% APR plus a £1250 "deposit contribution". You can get 2 or 3 year fixed rate bonds at over 3%, so you can make more interest than you pay, plus get the £1250 off. The discounts offered by the likes of carwow are a bit more for cash than PCP, but nowhere near as much as £1250.

You need to look at the actual cost in £ of the interest, not just compare rates with a PCP, since you need to factor in the final payment which never decreases over the term, but still accrues interest.

https://www.toyota.co.uk/new-cars/yaris/yaris-hybrid-gr-sport-retail-offer

Take this example. This is costing £994 in interest. A straight personal loan at 1.9% over 3.5years for £19,033 would cost just £654 in interest. Therefore the PCP in terms of actual interest paid is closer to 2.8%.

So yes, you'll make a bit more in a 3% fixed savings account, but not a huge amount. About £150-£200 more over 3.5yrs. Once you factor in the interest you could accrue in a regular savings account for the £219/month you are no longer paying a finance company, I'm not sure there will be much in it at all.

There is nothing stopping you taking a PCP, benefitting from the deposit contribution and then settling the finance the next day, as has been raised a few times in this thread. It's what I did for my current car.

zagfles

DrEskimo said:

zagfles said:

I'm looking at getting a new Toyota. Taking PCP is a no-brainer, 1.9% APR plus a £1250 "deposit contribution". You can get 2 or 3 year fixed rate bonds at over 3%, so you can make more interest than you pay, plus get the £1250 off. The discounts offered by the likes of carwow are a bit more for cash than PCP, but nowhere near as much as £1250.

You need to look at the actual cost in £ of the interest, not just compare rates with a PCP, since you need to factor in the final payment which never decreases over the term, but still accrues interest.

No you don't. You just need to compare the APR with interest rate you could earn (after tax if applicable). That's the point of APRs, they allow an easy comparison!

https://www.toyota.co.uk/new-cars/yaris/yaris-hybrid-gr-sport-retail-offer

Take this example. This is costing £994 in interest. A straight personal loan at 1.9% over 3.5years for £19,033 would cost just £654 in interest. Therefore the PCP in terms of actual interest paid is closer to 2.8%.

It's not a straight personal loan where you pay off £19,033 over 3.5 years though, is it? You're paying off £219 a month, ie £8979 over the 3.5 years with your monthly payments, then £11,047.50 at the end. So you can't compare to a personal loan where you pay off the entire £19033 in equal monthly payments over 3.5 years. The APR is correct, it's 1.9%. It's directly comparable to interest you could earn in a savings account.

So yes, you'll make a bit more in a 3% fixed savings account, but not a huge amount. About £150-£200 more over 3.5yrs. Once you factor in the interest you could accrue in a regular savings account for the £219/month you are no longer paying a finance company, I'm not sure there will be much in it at all.

OK let's do it the hard way. You have £25,340 which you could use to buy this car. 

Option 1: pay cash price £25,340

Option 2: take out the PCP deal. Pay £6307.25 deposit. Shove £10k into the MSE best buy 3 year fixed rate at 3.45%, for the balloon payment. Put the other £9032.75 into the MSE best buy easy access account at 1.81% which you can use for the monthly payments.

The £10k will be worth £11071 after the 3 year fix then maybe half a year at 1.81% so about £11171. 

The £9032.75 put in the instant access account will make about £290 interest, and leave about £344 after the 41 payments of £219.

So you have a total after 3.5 years £11515. Your balloon payment to keep the car is £11047. You've made £468.

You could do even better for instance using 1 and 2 year fixed rates for the second and third years' monthly payments etc. Or paying the monthly payments from income allowing you to put the whole £19033 into a 3 year fix

But the point is you don't even need to calculate the numbers. Just compare the APR with interest you could get (after tax if applicable).

With the car I was looking at (the Corolla) there's also a deposit contribution of £1250, so that would be over £1700 saving total.

There is nothing stopping you taking a PCP, benefitting from the deposit contribution and then settling the finance the next day, as has been raised a few times in this thread. It's what I did for my current car.

I did that for my last car. But at 1.9% APR, I'd keep the loan.

ontheroad1970

You do need to factor in the optional final payment - the balloon.  It never decreases, and yes interest is charged on it.  

zagfles

ontheroad1970 said:

You do need to factor in the optional final payment - the balloon.  It never decreases, and yes interest is charged on it.  

And accounted for in the APR quoted.

ontheroad1970

zagfles said:

ontheroad1970 said:

You do need to factor in the optional final payment - the balloon.  It never decreases, and yes interest is charged on it.  

And accounted for in the APR quoted.

No.  What you are missing the fact that the balloon amount never gets reduced.  That's a glaring omission.  You will always pay back more on a PCP over the term than a normal HP at the same APR.

zagfles

ontheroad1970 said:

zagfles said:

ontheroad1970 said:

You do need to factor in the optional final payment - the balloon.  It never decreases, and yes interest is charged on it.  

And accounted for in the APR quoted.

No.  What you are missing the fact that the balloon amount never gets reduced.  That's a glaring omission.  You will always pay back more on a PCP over the term than a normal HP at the same APR.

I'm not missing anything, you are. I'm not comparing with HP with the same APR, I'm comparing with what you could make in a savings account. It's blatently obvious that you'll pay more interest in total if a large chunk of the loan is left till the end, compared to paying the whole loan in equal chunks, but that's not the point.

The point is, if you can get a higher interest rate from your savings than the APR of the PCP (or HP, or any loan) then you're better off with the PCP.  Particularly if you get a deposit contribution on top.

I will get PCP if/when I buy my new Toyota and it will be much better value than buying in cash.