Should we put a lower mileage than expected on our PCP agreement?

Shinobi_2

We've been encouraged by our current sales advisor to go with a low mileage on our new pcp in order to keep the monthly cost down and increase the guaranteed minimum future value (at least that was my understanding). I'm hesitant to go ahead with it as we know we're going to be doing a lot more mileage than that, and have told them as much.

In the past, advisors have made a big deal about making sure you put enough mileage so you're not hit with excess mileage fees at the end of the contract. This time round however, they're telling us that the mileage figure is irrelevant unless you give the car back to the finance company, and that it would be unlikely we'd do so. Particularly considering we do tend to upgrade before the contact ends.

It's hard to find any solid advice on this outside of their word. So here I am. I guess I just want to know, is it true for starters? And secondly, under what circumstances might we need to give the car back to the finance company and end up paying excess fees?

To be exact, the mileage they put down without asking us on the agreement was 6,000 whereas we were expecting them to use the same figure as on our current agreement of 20,000. Not a small difference.

Billxx

I think you hesitancy is merited.  If you exceed the milage what rate per mile will you be paying?  It is likely to be a substantial cost.  Also on the GFV, I think it is in their interest (not yours) to keep this high, as that is what you will have to pay to retain the vehicle when the PCP comes to an end.

Others with more expertise may have alternate views.  But that is my take on it.

Shinobi_2

Billxx said:

I think you hesitancy is merited.  If you exceed the milage what rate per mile will you be paying?  It is likely to be a substantial cost.  Also on the GFV, I think it is in their interest (not yours) to keep this high, as that is what you will have to pay to retain the vehicle when the PCP comes to an end.

Others with more expertise may have alternate views.  But that is my take on it.

Thanks for the reply Bill. Excess mileage will be charged at 7.5p. Which adds up pretty quickly with such a high discrepancy in play. I understand where they are coming from though, as we probably won't be keeping the vehicle. In the likely scenario that we trade the car back in, in say 24 months, the dealership will evaluate the car based on it's current condition and actual mileage, would the GFV have any bearing at this point or is that also only relevant for the finance company? 

born_again

Go for your expected mileage. 

Ectophile

It won't be the sales advisor paying the excess mileage fee if you do decide to hand the car back to the finance company at the end of the PCP period.

DrEskimo

If you want to consider handing back, then simply calculate the difference in monthly cost relative to the expected excess mileage charge. 

You need to consider that increasing the GFV means increasing the total interest you pay, as you are paying less of the total borrowed (hence the lower monthly payments). 

Depending on the deal/rate I would usually advise against PCP altogether. It’s generally a very expensive way to borrow money for a new car that comes with substantial depreciation costs.

Buying used with cash comes with lower costs, more freedoms and no restrictions and mileage concerns. Buy one with remaining manufacturers warranty you can extend and you get 99% of the same experience too (maybe more as you could buy more car for your money!). 

nologo

My thoughts are if you reduce your miles then you may get a penalty for missing a service? as it won't have come up as due (lf servicing is included in you agreement)
regards nologo

Grumpy_chap

Shinobi_2 said:

We've been encouraged by our current sales advisor to go with a low mileage on our new pcp in order to keep the monthly cost down and increase the guaranteed minimum future value (at least that was my understanding). 

If you do that, you will get a lower monthly payment.
You will pay more interest as the outstanding balance is higher reflecting the higher GMFV.
You will suffer the mileage charge at return of vehicle which will be quite a lot at 7.5 pence per mile and three years' difference (assuming three-year PCP term) between 20k and 6k miles = 14k x 3 x 7.5 pence = £3,150.

Is the issue that you can't afford the payments on the car you wish to have so the sales representative is trying clinch a sale anyway they can?
How will you afford the £3k lump sum when it comes to returning the car?

Shinobi_2

Grumpy_chap said:

Shinobi_2 said:

We've been encouraged by our current sales advisor to go with a low mileage on our new pcp in order to keep the monthly cost down and increase the guaranteed minimum future value (at least that was my understanding). 

If you do that, you will get a lower monthly payment.
You will pay more interest as the outstanding balance is higher reflecting the higher GMFV.
You will suffer the mileage charge at return of vehicle which will be quite a lot at 7.5 pence per mile and three years' difference (assuming three-year PCP term) between 20k and 6k miles = 14k x 3 x 7.5 pence = £3,150.

Is the issue that you can't afford the payments on the car you wish to have so the sales representative is trying clinch a sale anyway they can?
How will you afford the £3k lump sum when it comes to returning the car?

There's no issue per se, we weren't even in the market for a new car. We are about two years into our current PCP and were approached by the dealership with what seems to be a great offer for the new model of the vehicle we have now and have essentially matched our existing monthly costs, taking into account the equity of our current car for part exchange and adding some discounts etc. They wanted to hit their Nov targets so were pulling out all the stops apparently.

Everything seemed great until I noticed the 6,000 miles. I had assumed they had based the new PCP on the same details of our current one but clearly not. So I pointed this out and got the spiel about how it doesn't matter (the expected mileage that is), unless you plan on giving the car back to the finance company. But since we don't plan on doing that, but are more likely to trade-up again in a few years, it's the actual mileage that will be used to value the car for trade-in value. They also said that the GFV also wouldn't affect anything when trading in with the dealership. But everywhere else I look, and from my previous experience, getting the mileage right has been a big deal. It seems to be some new approach to getting the deal done having read this article. https://www.thecarexpert.co.uk/car-finance-top-10-pcp-myths-busted/2/#:~:text=PCP Myth #4: Mileage doesn't matter&text=This is very poor information,the mileage doesn't matter.

So, summary is, we'd like to take the deal because we like the car and if what they are saying is true then it does seem like a bit of a loophole, but of course, I can't push away this gut feeling that it'll come back and bite us in the a**.

DrEskimo

Yea Ok that makes sense. He’s reducing the mileage to make it seem like a better deal to sell you another car. If the mileage was the same you would pay more. 

Of course the mileage matters. It affects the value of the car and therefore what it will be worth relative to what you owe. As a result you also wouldn’t find yourself in equity like you are now, since the car will be worth than you still owe. If you handed back you would be liable for the extra mileage charges. You will have to pay the additional costs either way. 

Goudy

Dealers try a lure you into deals based on monthly payments.
If they can make them look cheap or match your current payments, you might go for the deal.

There are various ways they can do this.
One is extending the period of repayments. So instead of working out the deal on 36 months, they work it out over 48 months. The monthlies drop but you pay more interest.

The other is reduce the mileage on the contract.
This increases the GFV portion of the deal. As the GFV is higher, the monthlies drop.

The problem with signing a contract with too low a mileage is at best there's really nothing in it for you. Worse cases, it's going to cost you.

When I say cost you, you will always be in the situation of paying out for the mileage whatever you do.
Even if you paid cash, a car with 36,000 miles after three years is going lose more than one with 18,000 miles after three.
So buy a car for £X and it's worth £Z after three years/36,000 miles.


Pay the car off completely including the GFV, the excess miles are reflected in it's value.
You've not gained or lost, you have paid the invoice and all the interest and your car with 36,000 miles has a relative value based on that.
(You've paid £X and it's worth £Z)

Trade the car in with excess miles and the trade in value will likely be less than what you still owe. You are in negative equity.
You've paid less up front with the monthlies, but you'll pay it at the back end as they'll still want the outstanding payments settled.
They usually try rolling the difference into the next deal, so you pay more interest on that one.
(You've paid £X and it's worth £Z, but you said it would be worth £Y based on mileage, so you pay the difference between £Y and £Z)

Hand the car back and the finance company will charge you excess mileage.
You have paid less up front with the monthlies, but now it's time to readjust through the excess mileage charge.
(Again, you've paid £X and it's worth £Z but you said it would be worth £Y based on mileage, so you pay the difference between £Y and £Z)

There's nothing in it for you by reducing the contracted mileage.
Ok initially you might get lower monthlies, but at the other end you will pay for that.

You might as well just set the mileage close to what you actually do and save the hassle later on.
You are going to "pay" for those miles, one way or another.