For saving money, is PCP ever a good idea?

ontheroad1970

You are completely missing the extra compound interest paid on the PCP on the capital that is never paid down.  This does affect the difference in interest paid either way.  Especially as the interest you pay on loans at the moment (and I suspect for the foreseeable future) will be higher than what is paid in any savings account.  In the best of days with very low or 0% interest deals it would be different but we aren't in those halcyon days.

zagfles

ontheroad1970 said:

You are completely missing the extra compound interest paid on the PCP on the capital that is never paid down.  This does affect the difference in interest paid either way.  Especially as the interest you pay on loans at the moment (and I suspect for the foreseeable future) will be higher than what is paid in any savings account.  In the best of days with very low or 0% interest deals it would be different but we aren't in those halcyon days.

You obviously don't understand finance and APRs. I've given an example of PCP at a lower APR than savings rates.

Savings interest compounds too you know. I did the sums above, I'm better off with PCP. Or you do the sums and tell me where I went wrong. Go on.

ontheroad1970

Most new car PCP deals I have seen are 4.9% APR.  Where will you get a savings rate sufficiently high to also cover the extra interest paid on the bubble?

motorguy

ontheroad1970 said:

Most new car PCP deals I have seen are 4.9% APR.  Where will you get a savings rate sufficiently high to also cover the extra interest paid on the bubble?

Zagfles has already said they're looking at a Toyota with 1.9% APR.

https://www.toyota.co.uk/current-offers?types=Retail+Offers+(PCP)

DrEskimo

Yea @zagfles is right, as the interest in the saving account is mirroring the structure of the PCP, the APR are directly comparable, that was my mistake.

My point was similar to @ontheroad1970, which was that a HP at 2.5% APR relative to a PCP at 1.9% APR would be cheaper despite a higher APR, but that wasn't really relevant to the point @zagfles was making (which was my mistake).

So given the current climate and interest rates on savings, anything under around 2-2.5% APR on a PCP would be better than paying in cash I think.

Herzlos

ontheroad1970 said:

You are completely missing the extra compound interest paid on the PCP on the capital that is never paid down.  This does affect the difference in interest paid either way.

It affects the payments, but the APR is still the same. You're just trading off a linear repayment with HP and a delayed repayment with a PCP. If you just pay the payments, then at the end of the term you'll pay more for a PCP than an HP, but you'll have had more free cash flow.

For whatever the outstanding balance is, you're paying APR % interest on it. If that % is lower than savings, then putting it in savings will get you more money. With PCP you'll have more borrowed and thus more to put into savings.

Of course, at the end of the term you've potentially got to find a balloon payment to buy the car outright, but if you put the payment difference between the PCP and HP into savings you should at least have a chunk of it.

Lizmoretti

Judging by the last several comments, it looks like PCP is mainly designed to confuse people!

Herzlos

Lizmoretti said:

Judging by the last several comments, it looks like PCP is mainly designed to confuse people!

It's designed to do 2 things:

1. Create a low monthly payment in an environment where the monthly payment is the most important - the first thing dealers seem to ask these days is your monthly budget

2. Trap buyers into the PCP cycle because people are bad at budgeting and generally don't have the money to clear the balloon payment, so are likely to trade the car back in and start over. 

zagfles

Herzlos said:

Lizmoretti said:

Judging by the last several comments, it looks like PCP is mainly designed to confuse people!

It's designed to do 2 things:

1. Create a low monthly payment in an environment where the monthly payment is the most important - the first thing dealers seem to ask these days is your monthly budget

2. Trap buyers into the PCP cycle because people are bad at budgeting and generally don't have the money to clear the balloon payment, so are likely to trade the car back in and start over. 

Indeed - the relatively low deposit and high balloon payment are clearly designed for people (probably the majority) who don't manage their finances properly so at the end of the term they can't afford to keep the car, and it appears "cheaper" to them to take out a new PCP for a new car!

Like with a lot of other finance packages eg 0% credit cards, regular savings accounts etc, give people a good initial deal then rely on them eg not being able to pay off the 0% credit card deal at the end of the term, or letting their regular saver roll into a very low interest account etc.

We in MSE of course understand these tricks and can take advantage of them...well most of us anyway

ididgetwhereiamtoday

They could get a loan to pay the ballon payment which would be cheaper than a new pcp. But most people are probably bored of the car they have by then.