Getting personal loan instead of PCP

Tastybowl

My partner isn't the best with money and I am trying to help her get sorted. She currently has an Audi on PCP costing £280 a month and realises she doesn't need such an expensive car for what she does. She can hand her car back but would owe almost £2000 on it. My thought was that she could take a personal loan out for £12,000, pay off the amount owed and buy a used for with the remaining £10,000. The repayments on the loan would be a lot cheaper so she could save money every month and own a car at the end of it. The banks won't allow the loan through the applications online because she has outgoings (the PCP agreement) which she wouldn't have if she got the loan. What can we do?

molerat

Where are you getting "hand the car back and owe £2K" as PCP doesn't generally work like that.

Tastybowl

molerat said:

Where are you getting "hand the car back and owe £2K" as PCP doesn't generally work like that.

Because she has only had the car a year and it has depreciated more than she has paid off I believe.

Altior

This plan appears very upside down. However much more information is needed for an informed judgement. How long is left on the agreement, what's the interest rate, what's the gmfv, what's the loan rate, exactly what car it is & mileage. 

Quite often there will be equity in the car at the end of the pcp, for example I did a pcp a few years ago and my gmfv was £10K and I sold it to a main dealer for £12.2K. The finance gets cleared and that would then provide the capital to purchase a cheaper used vehicle. Not enough numbers like I said, but it doesn't feel like the plan will be net positive. 

Tastybowl

I have never bought a car on PCP personally so don't know the ins and outs but she has been told that she is in negative equity on the vehicle. It is a 4 year PCP agreement at £280 a month. They are saying that because she has been in the contract a year she hasn't paid off enough to cover the initially depreciation you get once you take the car. She has paid roughly £3640 off so far but they are saying the car is worth £5640 less than when she bought it, hence her owing £2000 if she was to terminate the contract early. Just not sure what the best thing to do is so she can get saving money.

I have always bought cars outright so haven't paid much attention to PCP but it seems like a huge trap to me gets people in an endless cycle of PCP.

Altior

The monthly payments are linear, but depreciation is not. The first calculation needed is an estimate of the value 48 months after purchase vs the gfmv. Audi is obviously a prestige brand and depreciation levels off pretty quickly after the inevitable hit after purchase (unless electric).

molerat

Tastybowl said:

I have never bought a car on PCP personally so don't know the ins and outs but she has been told that she is in negative equity on the vehicle. It is a 4 year PCP agreement at £280 a month. They are saying that because she has been in the contract a year she hasn't paid off enough to cover the initially depreciation you get once you take the car. She has paid roughly £3640 off so far but they are saying the car is worth £5640 less than when she bought it, hence her owing £2000 if she was to terminate the contract early. Just not sure what the best thing to do is so she can get saving money.

I have always bought cars outright so haven't paid much attention to PCP but it seems like a huge trap to me gets people in an endless cycle of PCP.

Who is she getting these figures from ?  It won't be the finance co as they will take the car back under voluntary surrender, sell it at auction and bill the difference between what she owes and what they get plus fees. The other option is that she is £2K off the half way point on the finance when she can hand the car back under voluntary termination and pay nothing but if that is the case she may as well carry on driving the car for another 8 months as she would be able to just hand the car back then.  A dealer may value the car and get a settlement figure from the finance which could be where the £2K comes from - we will give you £X, the finance want £Y, £Y - £X = £2K. You need to be certain where these figures have come from.  As to where she can get £12K, as she has found she will not get a loan until the PCP is finished and she can't finish the PCP until she gets a loan.

And your last statement, PCP can be of benefit to those that don't need it but unfortunately it can lead people into buying (renting) cars they cannot afford and put them in a never ending PCP cycle - always having a car but always in debt as they can't afford to buy the car and handing it back at the end will leave them with no car and no money.

Altior

280 pcm is not horrendous for (assuming) a brand new car anyway, as there are advantages such as a full dealer warranty and no MOT for 3 years. The 'damage' has been done by entering into the agreement in the first place, but it might not be as bad as the OP thinks, and following through with this plan could make things worse. 

Tastybowl

She says she can't find the full contract but has this latest settlement. She has found something saying that the final payment would be £12,977 and is paying £283 a month currently.

molerat

So that says she needs to pay £18858.54 to buy the car off of the finance co.  They will not take the car back, she needs to find someone to buy it off of her so I assume a garage has offered her £16K to £17k leaving her £2K short.

Keeping the car for the next 3 years is going to cost her another £10.2K, £8.2K more than ending the finance, then she just hands it back or finds someone to give her over £13K for it and pay off the finance.  If it is really only worth £16-17K now it is not going to be worth £13K in 3 years time.  She is already taking the hit on depreciation so keeping it for the next 3 years could make sense then just hand it back, the finance co will then be left with a car not worth £13K.

Has she got a value from the likes of Arnold Clark or We Buy Any Car ?

What age is the car ?

MEM62

Tastybowl said:

What can we do?

It is pretty much an automatic thought process when considering a new car to finance it.  Here is some alternative thinking.  Cut back and save like crazy until she has £4K or so. Give the car back, settle any outstanding finance and then she can buy a £2 or £3K car that she can afford to pay for with cash.  From that point on keep saving something towards its eventual replacement / upgrade.