Can Someone Explain PCP?

TractorFactor

I know there's a whole amount of info out there but I still don't really understand it very well.

Let's say I have a car that's worth £5000 for trade in (as a deposit).
Let's say the car I want to "buy" is worth £25,000.

I guess this means I will owe £20,000, of which will be 0% for 2 years.
And let's say I pay £300 a month for those two years = £9600.

After the 2 years, I either have to find £10,400 to pay off the balance (or get a loan out) - is that correct?

Or I can trade the car in and get another deal on another car.
If so, how much would the trade in price be? And how is that broken down?

I've always owned a car outright but this whole diesel prices lark might be the nail in the coffin for mine as I'd be looking for full electric.

Ayr_Rage

It is not that simple.

The final value is set by the PCP provider using the anticipated value at the end of the term, it is not the initial price minus the payments made.

If the vehicle is less than the balloon payment you can hand back the vehicle to the finance company and walk away.

You can pay that sum at the end of the term to buy the vehicle (cash or loan) and if the vehicle hasn't depreciated as much as forecast you have a bargain if it is in good condition.

Alternatively if you have equity above the balloon payment that can be rolled into a new contract as all or part of the deposit on another vehicle.

Sounds like you need to do a bit more research.

On-the-coast

300 x 24 months = £7200, not £9600 (that would mean paying £400/m for two years.
Don’t forget mileage and maintenance - and gap insurance.

Cornucopia

The point of PCP is to get you to the end of your agreement where you'll have a balloon payment pending (which you'll know from the outset) and the current value of the vehicle (which you won't know until the relevant time).

Ideally, you'll have some equity still in the vehicle that can contribute towards a deposit on a new deal.

You don't need to buy new to get a reasonable EV these days. There are viable used options (depending on your needs) from around £10k.

This video contains a worked example comparison between different types of car finance:

https://www.youtube.com/watch?v=LCrG1v5sJv4

Mildly_Miffed

Let's say the car is £25k, and is predicted to be worth £15k in three years - the "balloon" or GMFV, Guaranteed Minimum Future Value.

So you borrow £25k, the full purchase price of the car.
You then pay back £10k of capital across the three years, plus interest on the full £25k - so at the end of three years, you still owe £15k.

You then have a simple binary choice.
1. Hand the car back and walk away.
2. Buy the car for £15k.

Where it gets confusing is that people think "trade it in for something else" is a third choice. It isn't. If the car is ACTUALLY worth £18k, the dealer they're trading it in with pays the £15k balloon to the original financier. The other £3k is then credited towards the new car.

Of course, if the car is ACTUALLY worth £12k, you simply hand it back and walk away - that shortfall is the original financier's problem.

Goudy

PCP is actually just HP but it's structured differently and has some options before all the repayments are made.

So HP on a £25,000 car with a £5000 deposit means you borrow £20,000 and that £20,000 plus interest is paid back in even amounts over however many years you take the finance over until it's paid off.

So let's say you borrow £20,000 over four years on HP at something like 6.8%.

You will pay something like £475 x 48.

PCP on a £25,000 car with £5000 deposit still mean you borrow £20,000 and pay the interest on that but there is a portion of repayments which is deferred. The structure means you still own £20,000 plus interest but how you repay it is different.

(The finance company will usually offer you a deposit contribution to take PCP, which means you borrow slightly less)

They will predict what the cars future value will be at the end of the contract and defer that payment until the end. This means your monthly payments are initially worked out on the difference between that £20,000 and GFV, including all the interest on that £20,000 PLUS the final GFV/Balloon payment.

An example of a PCP deal with a GFV of say £12,000 you would pay something like

£120 x 48 PLUS a final payment of £12,000.

As already mentioned, you have options on this £12,000 GFV when it's due (but you have to decide a month or so before).

Pay it and the finance is settled and the car it yours OR arrange to hand it back to the finance company and if it's within the mileage and condition set out in the contract, walk away.

You are free to trade in at any time, but as with any car on finance, there's a point in the repayments where what you owe and the car value match or exceed what you owe. You can be fairly certain this point on a PCP will be very close to when the GFV is due. This means it makes it a better time to trade it in and you can usually negotiate some equity towards your next car (but it's not guaranteed with a trade in).

MyRealNameToo

https://forums.moneysavingexpert.com/discussion/6684732/can-someone-explain-pcp

PCP is a marketing name for HP with a balloon.

At the end of the period you have two choice, buy the car for the balloon or surrender it. Of cause you trade the car in which is effectively a simultaneous transaction of you paying the balloon and selling the car but in practice the dealer just pays the money directly to the finance company rather than passing it via your bank account.

The trade in price will be what the price is… in principle it should be close to the balloon but sometimes lenders get it wrong but thats ok because you can then simply surrender the car.

born_again

Be careful of PCP on 2nd hand cars. As if car needs major repairs you will have to fund these even if you want to hand the car back @ end of term.

LukeB_92

One thing that hasn't been mentioned yet — with regulated PCP deals you also get a voluntary termination right under the Consumer Credit Act. Once you've paid half of the total amount payable, you can hand the car back and walk away owing nothing more, regardless of what the car is worth at that point.

The catch is that 'total amount payable' includes the balloon, all the interest and any fees, so the halfway point usually lands later than people expect — often not until fairly close to the end of the agreement. Still, it's worth knowing about as a backstop, and it's one of the reasons PCP is generally considered lower-risk than it looks.

Cornucopia

https://forums.moneysavingexpert.com/discussion/comment/82151263#Comment_82151263

This is also an issue with new car PCPs of, say, 48 months duration when the vehicle warranty is a fixed 3 years.

daveyjp

Only useful if your monthly business mileage payments cover the cost of the vehicle. If not its an expensive way of renting a car for a few years, with an option to buy it at the end (most don't).

Also remember any monthly payment needs to include replacing the initial deposit amount as it is unlikely the car will be worth far more than the GFV.