PCP - How to overpay and reduce interest, is it worth doing?

IAMIAM

I have bought a car on PCP over 48 months with a 10k final payment at a rate of 8.9% with Zopa to commence shortly.

What are the recommendations for overpayment, I ideally want to have minimal monthly payments circa £25-£50 a month maybe instead of the £390 quoted. Once the account is live, is it wise to overpay the maximum I can, as I believe Zopa let you and auto recalculate the payments until I get to £25 over the next few months. 

Is this a wise thing to do? I ultimately want the flexibility of having a car for 4 years with minimum payments and the option to return the car or keep it at the end with minimal interest.

I just do not know whether to overpay monthly and let the £391 dwindle down over a year as the overpayments happen, lump sum overpay (potentially 10k plus) or leave as is.....and just overpay my savings/mortgage

Any advice or suggestions?

IAMIAM

I have bought a car on PCP over 48 months with a 10k final payment at a rate of 8.9% with Zopa to commence shortly.

What are the recommendations for overpayment, I ideally want to have minimal monthly payments circa £25-£50 a month maybe instead of the £390 quoted. Once the account is live, is it wise to overpay the maximum I can, as I believe Zopa let you and auto recalculate the payments until I get to £25 over the next few months. 

Is this a wise thing to do? I ultimately want the flexibility of having a car for 4 years with minimum payments and the option to return the car or keep it at the end with minimal interest.

I just do not know whether to overpay monthly and let the £391 dwindle down over a year as the overpayments happen, lump sum overpay (potentially 10k plus) or leave as is.....and just overpay my savings/mortgage

Any advice or suggestions?

Mildly_Miffed

Bet your savings aren't getting anywhere near 8.9% interest, even ignoring the tax difference.

Why leave a small monthly? Why not just repay all bar the balloon, and have £0 monthlies - and only the interest on the balloon?

IAMIAM

Mildly_Miffed said:

Bet your savings aren't getting anywhere near 8.9% interest, even ignoring the tax difference.

Why leave a small monthly? Why not just repay all bar the balloon, and have £0 monthlies - and only the interest on the balloon?

You cannot do this

Mildly_Miffed

IAMIAM said:

Mildly_Miffed said:

Bet your savings aren't getting anywhere near 8.9% interest, even ignoring the tax difference.

Why leave a small monthly? Why not just repay all bar the balloon, and have £0 monthlies - and only the interest on the balloon?

You cannot do this

Ah, I wonder if the £25-50 monthlies are simply the interest on the outstanding balloon. You've repaid all the outstanding principal...

DrEskimo

Overpay as much as possible as quickly as possible.

But you already have the option to hand the car back, without the need for finance. You can trade it in to any garage or dealer any day you like from the day you buy it. You just don't have the option to hand it back to the finance company at the pre agreed price of £10k at the end of the loan.

So how likely is it that the car will be worth less than £10k in 48months time with your anticipated mileage?
What's the cheapest 4-year version on AutoTrader of the car today?

IAMIAM

TBH I am actually 50/50 wanting to keep the car anyway, the finance was a buffer in case I get bored, but as I tend to look after cars, it will be traded in in 7-8 years instead

DrEskimo

Well then I would certainly pay off as much as possible.

Keeping the £10k GFV is going to cost you around £3,500 in interest. So the only scenario where keeping the PCP finance and handing the car back to the finance company will be a benefit for you is if the car is worth <£6,500. If it’s worth £10k or more after 48 months and you just trade it in, you’ve spent £3,500 for no benefit. 

You’ve already said you’re likely to keep it longer so it really isn’t worth paying that much interest if you don’t have to. 

IAMIAM

DrEskimo said:

Well then I would certainly pay off as much as possible.

Keeping the £10k GFV is going to cost you around £3,500 in interest. So the only scenario where keeping the PCP finance and handing the car back to the finance company will be a benefit for you is if the car is worth <£6,500. If it’s worth £10k or more after 48 months and you just trade it in, you’ve spent £3,500 for no benefit. 

You’ve already said you’re likely to keep it longer so it really isn’t worth paying that much interest if you don’t have to. 

So if I pay off the PCP up to and including everything, leaving say a balance of £500, and a final payment of £10k so i can continue paying monthly (around £10) will mean I will still have paid £3500 in interest at month 48? how does that work?

DrEskimo

IAMIAM said:

DrEskimo said:

Well then I would certainly pay off as much as possible.

Keeping the £10k GFV is going to cost you around £3,500 in interest. So the only scenario where keeping the PCP finance and handing the car back to the finance company will be a benefit for you is if the car is worth <£6,500. If it’s worth £10k or more after 48 months and you just trade it in, you’ve spent £3,500 for no benefit. 

You’ve already said you’re likely to keep it longer so it really isn’t worth paying that much interest if you don’t have to. 

So if I pay off the PCP up to and including everything, leaving say a balance of £500, and a final payment of £10k so i can continue paying monthly (around £10) will mean I will still have paid £3500 in interest at month 48? how does that work?

Yes that’s right. 

Because you are borrowing the entire cost of the car, including the £10,000 final payment. So the £10,000 is accruing interest over the 48months (whilst not reducing) at 8.9% APR. 

facade

The only way to have zero monthly payments is to settle the finance (including the 10K GFV/ballon) then you own the car outright. Otherwise you are perpetually paying 8.9% on the fixed £10,000 GFV- about £74 a month.

I think they can charge 90 extra days interest if you do this outside the 14 day "cooling off" period.

It will save you an absolute fortune over the 4 years if you have the cash available, or quite a bit if you have to take out a loan at 6% to do it.