Which PCP deal is best

LukeSadler05

Hi,

We’re looking to purchase a new car via PCP and the dealer are offering 2 different deals.

Deal 1:
£3500 deposit followed by 47 monthly payments of £321 and an optional balloon payment of £14,746. This is based on an APR of 6.4%

Option 2:
£3590 deposit followed by 23 monthly payments of £334 and an optional balloon payment of £19,055. This is based on 0% APR



I can’t for the life of me work out whether we’d be better off taking 0% over 2 years, or 6.4% over 4 years. If we took the 2 years at 0% we would then look to take another car in 2 years and we don’t intend on paying the balloon payment for either deal. 

I know it sounds obvious that 0% would be better as it means no interest is paid, but I can’t seem to get my brain to understand the savings over the 4 year period. I’m thinking this may be due to the fact that the initial depreciation of the car is the greatest, and by taking 2 new cars over the 4 years we’d be subject to twice this greater depreciation.

I’m hoping someone with a knowledge of car PCP or a greater logical brain than me can help 🙌

DrEskimo

Assuming the price of the car is the same across the two deals, and you don't have additional deposit contribution on the interest bearing loan, then the 0% deal is cheaper.

The real question is whether it's prudent/MSE to be on a constant cycle of using borrowed money to finance brand new cars. It's costing you near enough £5k a year to rent a car. Not to mention all the associated running costs.

If you have the money in savings, with sufficient net worth to lose so much money on a high depreciating asset then please feel free to ignore the rest, but if not you may want to consider whether this is a priority and whether that money could be better spent elsewhere to increase your overall wealth (e.g. savings/investments/pension). Not to mention the additional risk of taking on debt that could become a serious burden if your circumstances were to suddenly change.

silvercar

Interesting what you say. I've always owned cars outright, but I've just sold it and leased a car instead. As a depreciating asset, if I bought outright it is going to be worth a lot less in 4 years time, so buying automatically means a loss. The attraction of having servicing/ repairs/ insurance etc all in one monthly price with no risks of having to find extra money was too good. Also, I've bought electric, so there are financial advantages at the moment. I worked out that it would cost me about the same on a lease as an outright purchase, taking into account the car's likely value in 4 years time.

CliveOfIndia

silvercar said:

Interesting what you say. I've always owned cars outright, but I've just sold it and leased a car instead. As a depreciating asset, if I bought outright it is going to be worth a lot less in 4 years time, so buying automatically means a loss. The attraction of having servicing/ repairs/ insurance etc all in one monthly price with no risks of having to find extra money was too good. Also, I've bought electric, so there are financial advantages at the moment. I worked out that it would cost me about the same on a lease as an outright purchase, taking into account the car's likely value in 4 years time.

That's probably a valid argument if you're talking about buying a brand new car, and changing it every 3 or 4 years - yes, you'll take a massive hit on depreciation.

I know a few people who buy a brand new car outright, with the intention of keeping it for many years (typically well in excess of 10 years), in that scenario buying outright makes financial sense.

Me personally, I always buy older cars outright, so the depreciation is not such an issue.  My current car was bought at 6 years old, I've had it for 4 and fully intend to keep it for a good while longer yet.

I think it's a case of horses for courses - some people prefer to run newer cars, others are happy with the more "bangernomics" approach.  It would be difficult to argue that either approach is "better" than the other.

And you're right, adding EVs into the mix probably adds another dimension to the economics of things.

silvercar

CliveOfIndia said:

silvercar said:

Interesting what you say. I've always owned cars outright, but I've just sold it and leased a car instead. As a depreciating asset, if I bought outright it is going to be worth a lot less in 4 years time, so buying automatically means a loss. The attraction of having servicing/ repairs/ insurance etc all in one monthly price with no risks of having to find extra money was too good. Also, I've bought electric, so there are financial advantages at the moment. I worked out that it would cost me about the same on a lease as an outright purchase, taking into account the car's likely value in 4 years time.

That's probably a valid argument if you're talking about buying a brand new car, and changing it every 3 or 4 years - yes, you'll take a massive hit on depreciation.

I know a few people who buy a brand new car outright, with the intention of keeping it for many years (typically well in excess of 10 years), in that scenario buying outright makes financial sense.

Me personally, I always buy older cars outright, so the depreciation is not such an issue.  My current car was bought at 6 years old, I've had it for 4 and fully intend to keep it for a good while longer yet.

I think it's a case of horses for courses - some people prefer to run newer cars, others are happy with the more "bangernomics" approach.  It would be difficult to argue that either approach is "better" than the other.

And you're right, adding EVs into the mix probably adds another dimension to the economics of things.

Previously I have bought 1 yr old or less, ex demo's or the like and kept them for 5-6 years. I think there is an extra risk with electric, that technology may have moved on so much in the next few years that the second hand value of a 6 yr old one could be a lot less, especially if newer electric cars start to improve on battery size. The clincher was the tax advantages of leasing at the moment, effectively as the BIK is so small, I'm paying out of gross salary rather than net.

MrFrugalFever

If you are looking at it from a purely financial perspective then the TOTAL AMOUNT PAYABLE will be cheaper on the 2 year 0% PCP all day long.

If you are thinking of the possibilities and advantages further down the line then it’s a tough one - on the balance of probabilities the following is likely to happen;
- interest rate increase
- manufacturer deposit decrease
- cost of new car OTR increase

So if you are thinking of changing in 2 years time, your next monthly payment could be much greater with no 0% option on the table thus causing you to end up paying more longer term as opposed to a longer term fixed cost such as the 48 month PCP. The issue you have is that you cannot predict the future (& if you can, please can you DM the EuroMillions winning lottery numbers I’d be much obliged).

lopsyfa

I see why you are a bit confused. This is mainly because you don't intend to pay the balloon. So let's look at that.

In two years, you will pay more on the 0% deal than the 6.4% deal. This is because, even though the interest rate is lower, you are paying the steepest part of depreciation on the 2 years deal while you get to enjoy the depreciation paid for more on the 4 years deal. Also, you have the security of knowing your car cost will be fixed over 2 extra year. With the 0% deal, if car prices increases in the next two years, you may be looking at increased monthly cost for your next "brand new" car. 

So, I will say the 6.4% is probably better than that 0% deal. However, if it was me, I will ask the dealer if we can do the 0% deal over 4 years and then it should definitely make the comparison/decision easier for you. The 0% will be better if you intends to pay the balloon and keep the car.

Saying that, I agree with the others about not changing car that often. So whichever deal you go for, pay the balloon and keep the car for a long time. In this case, the 0% deal will be better or buy a slightly older car.

In the end, we it depends on whether you value driving very new car or not. Everyone will be different.