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

DrEskimo

Goudy said:

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.

Great summary.

Minor caveat on the paying the GFV and owning the car outright at the end:

By going with a lower mileage with a higher GFV you will incur more interest charges compared to going with a higher mileage and lower GFV. So as with any loan, if your plan is to pay off in full, pay as much as possible as quickly as possible to reduce interest paid.

Goudy

DrEskimo said:

Goudy said:

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.

Minor caveat on the paying the GFV and owning the car outright at the end:

By going with a lower mileage with a higher GFV you will incur more interest charges compared to going with a higher mileage and lower GFV. So as with any loan, if your plan is to pay off in full, pay as much as possible as quickly as possible to reduce interest paid.

That's right, you will pay a bit more interest if the GFV is higher.

When I have been asked before regarding PCP deals by friends and family, I always try and gauge what they will do at the end of the contract.

If like most they trade it in, I would recommended very slightly under estimating the mileage, but not by many thousands.

I say this because trade in values are based on mileage and condition, there's a bit of leeway in trade in values.
Plus the dealer will know what you owe the finance company, so know what you need for your trade in to get the next deal over the line. If the gap is not massive you can more often get them to close it up.

Also, settlement figures are in reality, negotiable.
As a normal customer you probably won't get any joy trying to negotiate with them yourself, but a big dealership that deals with many settlements with all the big finance companies, they will likely have arrangements in place to save a few quid on all these settlements.

By the time the settlement/GFV is due, the finance company would have already maximised the profit (interest) out of the deal and the finance company know there's a cost and risk involved trying to turn the car's value back to cash at the auctions if the dealer tells the owner just to hand it back.
There's also a good chance of more interest out of it if the dealer/finance company's relationship is close, as when the dealer sells it, it might be refinanced through them.