PCP Advice

SP218

Hi all,

I'm hoping someone can help me decide what to do with my PCP finance as I'm sort of confused what to do.

I purchased a new car - we were quite desperate for a second car due to house moves and I wanted an electric car due to large distances travelled so whilst I knew at the time it was never going to be a good financial decision, I sort of accepted it for the peace of mind it gave me in resolving the car situation.

Anyway, I took out a 4 year PCP on a car worth about £33k and paid a deposit of £3.5k - the APR is approx 7.9%. Monthly payments are £450 a month and there is a balloon payment of £14,450. The agreement has been running for about 18 months and I am in a position where I can pay off the full amount or make a partial settlement.

The car has bombed in value so if I were to sell it, I'd be lucky to get £19k for it. I love the car and am happy to keep it so I'm not actually looking to get rid. I have the option of making a maximum partial settlement of about £12,500 which would bring the monthly payments to 1p a month but I was told this would only save me £1,200 in interest as I guess interest would build up over the remaining 2.5 years and I'm not paying anything off (other than the 1pm a month). At the same time, I could pay off the full amount in which case I'd save all remaining interest.

Common sense dictates that if I can save the interest then pay it all off but the reason I'm confused about what to do is that by the end of the 4 years, I don't see how the car will be worth £14.5k so in my mind, I'd end up handing the car back so the dealer takes the hit. Am I overthinking this?

Goudy

Probably a little but what's driving this, saving interest? Dodging any possible excess depreciation? Or a bit of both?

A partial payment that takes you to or very close to paying off 50% of the total amount payable would give you another option, Voluntary Termination..
As long as you have paid 50% of the total payable you have the right just to hand the car back to the finance company at any time. (as long as it's a personal contract, not business contract).

This leaves all the options on the table for you going forward.
Keep it until the GFV is due and hand it back.
Or pay the GFV and keep it.
Hand it back anytime between now and then by VT'ing it.
And save on a chunk of interest, while enjoying the car.

Grumpy_chap

I am not sure that the VT option will ever make great sense here.

SP218 said:

4 year PCP on a car worth about £33k 
balloon payment of £14,450.

To have the VT option, the OP needs to have paid 50% of the total, so £16.5k plus whatever interest has accrued to then.  Only leaves £16.5k, so £2k above the balloon value.

If the OP simply keeps the car until the balloon is due, the hand back is not much less than the VT cost but the OP has had the additional period of use of the car 2.5 years.

ev51

The problem with a partial settlement is you still have the interest to pay on the GFV, in your case around £95 per month on the £14,450. Over the 48 months you would "only" pay £2,500 interest on the £15,050, but £4,500 interest on the GFV, total interest around £7k...

It sounds like the car will be worth less than the GFV at end of term so there would be no equity towards another car, likely better to hand back unless it is worth more to you (like the car, know it's history etc).

As above, VT also an option but I would try to get a bit more "value" out of the car meantime.

Goudy

Grumpy_chap said:

I am not sure that the VT option will ever make great sense here.

SP218 said:

4 year PCP on a car worth about £33k 
balloon payment of £14,450.

To have the VT option, the OP needs to have paid 50% of the total, so £16.5k plus whatever interest has accrued to then.  Only leaves £16.5k, so £2k above the balloon value.

If the OP simply keeps the car until the balloon is due, the hand back is not much less than the VT cost but the OP has had the additional period of use of the car 2.5 years.

I wasn't saying VT it, but maybe have that possible situation covered by making a big enough partial payment.

If they were thinking of making any type of partial payment and didn't know how much, that might be the target I would aim to cover off, 50% of the total.
Then all options are available at any time, not just at the end of the contract.

Personally I would just pay it off and then the car is mine to do with as I please but I understand there is some worry regards to value around the time the GFV is due.

Finance companies don't often get this GFV's wrong, sure mistakes and markets change but there will usually be some leeway in the GFV to cover these things. It's not uncommon for owners to eek out a little value above GFV when trading in and businesses like WBAC cropped up, often doing the same.

born_again

How much is the total settlement figure now?

If you are happy/want to keep it, then don't look at it's value now.

Mildly_Miffed

born_again said:

If you are happy/want to keep it, then don't look at it's value now.

If there's a difference between the current settlement figure and current value, it may well be worth paying to hand it back then buy something very similar, but a lot cheaper than paying off the finance now.

SP218

Thanks all - there are clearly a few things I need to consider!

For me the main driver behind the settlement was about saving the most money I can and ultimately reducing interest was a big driver of this but the really bummer was realising that the bulk of the interest sits in the GFV. I do think I need to extract more 'value' out of the car and I think everyone has agreed that handing the car back at this moment in time would be the worst decision. I'm tempted to make the maximum partial settlement because that is a £1.2k saving that I can make regardless and then maybe I need a few more months to decide whether to make the full settlement or not.

The other point is that I might exceed the mileage allowance by the end of the 4 years (unless I change jobs - something I am looking to do), so making full payment probably makes sense in that case.

SP218

Mildly_Miffed said:

born_again said:

If you are happy/want to keep it, then don't look at it's value now.

If there's a difference between the current settlement figure and current value, it may well be worth paying to hand it back then buy something very similar, but a lot cheaper than paying off the finance now.

I think the current settlement figure is about £25k and the car is probably only worth £19k...eek!

Herzlos

If you don't hand the car back at the end then the mileage is irrelevant. Then it may make sense to pay off the entire finance and buy the car. BUT

If you're planning on handing the car back, or the value is much below the GFV then it may make more sense to pay the partial settlement but not the GFV and just take a hit on mileage.

How old is the car and what is it? You said it was new and a 4 year PCP but I don't see how far into it you are, because the depreciation isn't linear. The car will lose more value in year 1 than 2 and so on. There will also be a drop outside of warranty but that could be 3/5/7 years.

SP218

Herzlos said:

If you don't hand the car back at the end then the mileage is irrelevant. Then it may make sense to pay off the entire finance and buy the car. BUT

If you're planning on handing the car back, or the value is much below the GFV then it may make more sense to pay the partial settlement but not the GFV and just take a hit on mileage.

How old is the car and what is it? You said it was new and a 4 year PCP but I don't see how far into it you are, because the depreciation isn't linear. The car will lose more value in year 1 than 2 and so on. There will also be a drop outside of warranty but that could be 3/5/7 years.

Yes - the mileage was one of the reasons why I thought of paying the car off in full because if I save £2k in interest by making a partial settlement but then have to pay £1-2k in excess mileage, it's all a bit pointless.

The car is an MG4 registered in May 23 so I'm 18 months into it - in terms of the 'value', I know I need to run the car for longer or else I'm just taking a hit on the larger up front depreciation.

I think my options seem to be - make the partial settlement to save some interest and keep the VT option open and keep re-assessing depending on how much lower the used cost goes or, as someone else said, maybe I should be ignoring the market value and just run the car until I feel like I've gotten an acceptable 'cost per year' of running it before trading it in. I think worse case, if I pay off the car in full now and it was worth £10k in four year, I would have paid about £6.5k per year which I'm happy with.