Thoughts on PCP?

PunkRoquefort

My car is 8 years old now and I normally buy a new one when they are about 5 years old.

Several relatives and friends have recommended PCP, instead of me handing over a lump sum/cashing in investments, as a way of driving the car and getting another new one every 3 or 4 years.

At the end of the monthly payments, instead of paying the balloon payment to buy the car, I set up another PCP for a new car and still have my lump sum/s.

I know I do not own the car on PCP, but can it also make good sense?

DullGreyGuy

Owning a new car every 3-4 years doesn't typically make financial sense but not everything is about money.

You will pay more interest in absolute terms on a PCP because you are always paying interest on the balloon and so if you have cash in the bank then its questionable why you'd pay for a loan unless the interest rate on your savings is more than the PCP interest rate. 

Obviously you never pay the balloon so you never own the car and therefore it feels relatively cheap but arguably that's no different from a lease. 

Flight3287462

If you can do a spreadsheet, pop all the figures in there (inc. how much interest you receive on your savings)  The only real guess is the residual but the PCP residual will give you a clue.

Lease cars are another option and can work out cheaper than pcp, but choose the deal and not the make/model, cars that aren't selling or a new model is on the way tend to have good lease prices.

ratrace

If your current car is fine why change it, Going in to debt to buy a brand new car which will have lost 50% of its value in 3 to 5 years time does not make any financial sense

you bought your current car when it was 5 years old which means someone took the first 50% hit before you bought it, now you have had it 3 years

so compare the the price you paid to the price its worth now divide by 36 months (the time you have had it) that will give you a figure of how much it has cost you of the time you have owned it now compared that to the pcp deals you have seen and you will see a saving straight away

the fact you have investments tells me you are financially savvy so think carefully before you go into thousands of pounds worth of debt, ps: unless freinds and family are willing to pay the pcp payments every month for you i would take thier views with a pinch of salt...

hope that helps

Ayr_Rage

I am mid way through a 4 year PCP at 0% and unbelievably, to myself and the dealer, the vehicle is worth more than the settlement figure at this time which is a reflection of the crazy secondhand car market at the moment.

That may change.

You'll have to use your crystal ball as to where there market is going, particularly if considering an EV, values are falling in that segment, leasing an EV may be a better option then a PCP.

DrEskimo

PunkRoquefort said:

My car is 8 years old now and I normally buy a new one when they are about 5 years old.

Several relatives and friends have recommended PCP, instead of me handing over a lump sum/cashing in investments, as a way of driving the car and getting another new one every 3 or 4 years.

At the end of the monthly payments, instead of paying the balloon payment to buy the car, I set up another PCP for a new car and still have my lump sum/s.

I know I do not own the car on PCP, but can it also make good sense?

It's just a form of finance to spread the cost of a new car.

The option of getting a new car every 3/4yrs is available to everyone regardless of whether they use finance or not. Most dealers/garages will buy a car from you whenever you like and offer you a price. As will online companies like WBAC.

It comes down to whether it's a cost effective way to do it. Two main costs involved are depreciation and interest. New cars typically depreciate much heavier than used. Depending on the deal, PCP finance can cost a lot in interest (compare actual cost, not just rate).

I still maintain that buying a new car with finance that you trade in every 3/4 years will be substantially more expensive than a used car without finance that you also trade in every 3/4 years.

Compared to a lease, it also frees you of any contractual obligations about how long and how much you can drive it

mark5

I think its a great way to get a new car if you can afford the monthly payments and want a brand new car. 

Financially though compared to buying a similar car 4/5 years old its a lot more expensive. 

I did it twice on 2 x36 month contracts but paid off the last one and kept the car. 

Play around with a calculator and see how much a typical pcp deal costs you.

Ibrahim5

We have lived opposite the same people for 25 years. They obviously have cars on PCP for 3 years max. I just keep mine until they die. We both normally have about 3 cars on the drive. I would say that the vast majority of the time all of them are working just fine. Just start them and go where we want. No difference there.
I assume they would get them serviced. Probably only one visit in 3 years on modern cars. They would just drive them. Wouldn't dream of checking oil/coolant/brake fluid/tyre pressures. Probably never need new tyres or any other spending. They did have a real lemon so had regular visits from a breakdown truck that kept taking the car away. They have quite a few visits from main dealer 'service' vans. If they needed windscreen washer fluid they would send for these vans or take them to the main dealer.
I do regular oil/coolant checks to make sure my engine is well protected. Apart from that I expect to spend a few hundred on tyres, brake pads/discs, exhaust, batteries, timing belts. That seems to be the big difference. If you are happy to spend a few hundred on those items you can save thousands (or in my neighbours case hundred of thousands) over the years. I have never found that my cars have needed more unexpected repairs as the cars age. They don't become less reliable.

PunkRoquefort

Maybe it was my fault in the way I worded my original post, but what I meant was I have tended to buy brand new cars, from dealerships, then when they hit about 5 years old, trade them in for a totally brand new car.

I did not mean buying a car that someone else has previously owned for 5 years.

The monthly interest payments, for the PCP term, for example, 3 or 4 years, not paying the balloon payment/buying the car, will be far cheaper than buying a car outright, but will be a cheaper way of driving a brand new motor every few years, compared to writing a cheque, owning the car and then facing depreciation. 

I will also get to keep my investments growing/working for me, rather than paying a lump sum.

Does it make sense?

Ayr_Rage

You are paying for the depreciation AND the finance interest, it may not be cheaper than buying the car outright, but at least with PCP you know your costs over the term.

Buying outright you are always at the mercy of the market when the day comes to sell your car.

It made sense for me two years ago, a discounted vehicle (try getting that now), a contribution from Toyota finance and an interest rate of 0.

It can make sense and if you choose the right investments that could negate some of the interest.

DrEskimo

PunkRoquefort said:

Maybe it was my fault in the way I worded my original post, but what I meant was I have tended to buy brand new cars, from dealerships, then when they hit about 5 years old, trade them in for a totally brand new car.

I did not mean buying a car that someone else has previously owned for 5 years.

The monthly interest payments, for the PCP term, for example, 3 or 4 years, not paying the balloon payment/buying the car, will be far cheaper than buying a car outright, but will be a cheaper way of driving a brand new motor every few years, compared to writing a cheque, owning the car and then facing depreciation. 

I will also get to keep my investments growing/working for me, rather than paying a lump sum.

Does it make sense?

Depreciation is the same. It’s only lower if it goes lower than the GFV, but vast majority simply trade the car in as you would had you bought it outright. 

And of course, this typically comes at a cost. So it really depends on the specific deal and how much interest it’s charging you. 

If it’s 0% then makes sense (just be sure it’s not being captured in an inflated price), but borrowing at a cost to keep in savings/investments is not without its risks or costs.