Comparing PCP APR to cash in the bank interest rate

valmiki

Hello

New car being delivered shortly to dealer, who will be chasing me soon no doubt to sort out the paperwork.

I have to take out PCP to get the manufacturer's contribution.

I know I can take out the PCP and then settle immediately with cash in full, but the current rates of APR on offer is 2.9%. Considering that bank savings rates are currently 4% and rising, would I be better taking out finance with the lowest deposit / monthly payment and keeping my cash?

Just wondering if it is straightforward as comparing "Representative APR" to bank saving rate, or their "Fixed rate of interest"

Obviously I would wait to see the figures before deciding!

Thanks

CliveOfIndia

In simple terms, yes.  If you can earn more in interest from your savings than what you're paying for a loan, that makes sense from a purely monetary point of view.

The only thing you may want to consider is the effect on your credit record.  Having an ongoing credit agreement will affect the affordability calculations made by any future lender.  So if you're planning on taking out any further credit during the time that the PCP is running, it may affect the amount/rate you're offered.  This may or may not be an issue for you, but it's just something to bear in mind.

jlfrs01

It is perfectly possible to settle your PCP early if that is what you want to do but you will need a settlement figure from the lender. This will include all the interest which would be due over the contract term and the final balloon payment.

Therefore, there is no financial gain to be made by settling the PCP early, if you've got the money to do so it's best to squirrel it away in a savings account or in premium bonds and make the monthly payments for the contract duration.

If however your goal is outright ownership then either use your own cash or get a loan and negotiate a discount with the dealer, or use a service like CarWow or the WhatCar website to highlight where you can get the vehicle from at the best price.

IMHO this is preferable to a PCP which will lock you into a set mileage figure (which you'll be penalised for if breached), usually insists on genuine manufacturer parts when servicing, their approved tyres and if handing the car back, charge you for anything other than wear and tear. Furthermore, it is advisable to take out GAP insurance in the event you suffer a loss and the value of the car is less than the money needed to pay the PCP lender back.

valmiki

It was ordered from CarWow, dealer contribution of 3.7k and a lease contribution of 2.25k on a car with list price approx £37k

Yes, goal will be to keep the car to the bitter end.

We have no other loans and don't intend to have any in the future as we are more spend what you have rather than borrow! It's just in this case (if the APR figures don't change) it would make more sense to take out the lease.

"It is perfectly possible to settle your PCP early if that is what you want to do but you will need a settlement figure from the lender. This will include all the interest which would be due over the contract term and the final balloon payment."
- I wasn't aware of this.

DrEskimo

jlfrs01 said:

It is perfectly possible to settle your PCP early if that is what you want to do but you will need a settlement figure from the lender. This will include all the interest which would be due over the contract term and the final balloon payment.

Therefore, there is no financial gain to be made by settling the PCP early, if you've got the money to do so it's best to squirrel it away in a savings account or in premium bonds and make the monthly payments for the contract duration.

If however your goal is outright ownership then either use your own cash or get a loan and negotiate a discount with the dealer, or use a service like CarWow or the WhatCar website to highlight where you can get the vehicle from at the best price.

IMHO this is preferable to a PCP which will lock you into a set mileage figure (which you'll be penalised for if breached), usually insists on genuine manufacturer parts when servicing, their approved tyres and if handing the car back, charge you for anything other than wear and tear. Furthermore, it is advisable to take out GAP insurance in the event you suffer a loss and the value of the car is less than the money needed to pay the PCP lender back.

The part I’m bold is false. You don’t pay future interest if you settle early. 

OP, the calculation is slightly complicated by the fact that with PCP the payment structure is different, as you are paying interest on the balloon payment but it doesn’t reduce over the term. Therefore even at a lower APR the PCP May accrue higher absolute cost in interest relative to a saving account at a a higher APR. 

I would always compare absolute costs best you can to be sure. Not simply compare APRs.

valmiki

Sigh, I thought it would get complicated lol.

I don't suppose someone cleverer than me has created a calculator that you can enter all the figures to calculate the optimum payment method? Or at least until the ballon payment becomes payable.

MrFrugalFever

With regards to the PCP, to keep it simple for you focus on 2 lines in your quotation or agreement;

- Total Amount of charges (interest)
- Total amount payable (this will include the original OTR price of car, all deposit contributions from dealer/manufacturer and your own deposit input, including interest applied)

Providing you aren’t purchasing through a business (I.e it is a personal purchase) then the CCA 1974 applies and it becomes a regulated hire agreement, at that point the lender is obligated to rebate all interest less 58 days should you wish to settle in FULL.

I suspect, unless you have the full £37k - less deposit contribution and your deposit input,  sat in your savings account, you may find the savings rate gains will be less overall.

valmiki

MrFrugalFever said:

I suspect, unless you have the full £37k - less deposit contribution and your deposit input,  sat in your savings account, you may find the savings rate gains will be less overall.

I do have the full amount in my savings account, but sorry for sounding a bit thick, could you clarify what you mean when you say the gains could be less? Does comparing the APRs not work

MrFrugalFever

valmiki said:

MrFrugalFever said:

I suspect, unless you have the full £37k - less deposit contribution and your deposit input,  sat in your savings account, you may find the savings rate gains will be less overall.

I do have the full amount in my savings account, but sorry for sounding a bit thick, could you clarify what you mean when you say the gains could be less?

It’s not an easy or quick calculation and without seeing everything on the table as it were it is difficult to say but the following is a summary as to why it *could* be less;

- The interest is fixed for the life of the agreement, savings is NOT
- The residual value (GMFV/Optional final payment) will be determined by term and mileage selected, the higher this figure the greater your interest
- The interest is fixed on the optional final payment throughout the entire term and cannot be affected by over payments
- You will need to make monthly payments to maintain your agreement - if these are to come out if your savings pot then each month you’ll have a depreciating pot of savings earning less
- If your savings drop below the GMFV/Optional final payment then you will likely be operating at a loss
- Not directly related to your OP in the strictest of terms but each month that passes, your car is depreciating (worse in the first 12 months), in real terms that’s a net loss in either camp (pcp or outright purchase

The magic number for you is TOTAL AMOUNT OF CREDIT, vs term. If you can recoup over and above this number over the same term in a EA account or similar then potentially savings have won.

valmiki

That’s brilliant. Thank you very much 👍

TrickyDicky101

DrEskimo said:

OP, the calculation is slightly complicated by the fact that with PCP the payment structure is different, as you are paying interest on the balloon payment but it doesn’t reduce over the term. Therefore even at a lower APR the PCP May accrue higher absolute cost in interest relative to a saving account at a a higher APR. 

I would always compare absolute costs best you can to be sure. Not simply compare APRs.

I think you are incorrect.  £37k owed on PCP at 2.9% costs less than is earned by having £37k sat in a bank account earning 4% (ignoring any tax effects).  

Was that really what you meant?