Car depreciation rates worsening

[6CylinderMerc]

Thanks for such an informative post. Start to correct me if I am wrong, but would you say PCP has enabled people to drive a better car than they could otherwise afford?

DO you think PCP has then caused car prices to artificially rise (above inflation rate) and residuals to fall, as the balloon payments are meant to resemble a gauranteed future value. In other words, finance companies now set the 2nd hand values as opposed to the market forces (to put it crudely).

No, I think that PCP's have just enabled manufacturers to enable people to change their cars more frequently than they otherwise would, not necessarily drive a better car than they could otherwise afford. This has led to more 2nd hand cars being available which in turn, has helped to drive down 2nd hand values. Supply outstripping demand is bound to have a detrimental effect on values. Being sought after, i.e. easier to sell, is why German marques fare comparably well. The majority of people (who don't own one) either want one or aspire to owning one & aspiration to a particular brand, i.e. brand image, is what any manufacturer of any product wants more than anything.

The finance companies set their GMFV's but do they not directly affect the true values of vehicles through PCP's. If a GMFV is set too high & the car is handed back, who takes the hit? - The finance company. Who owns the manufacturer backed finance companies? - The manufacturers. It's all about virtually guaranteeing that customers change - every three years without fail.

The upshot is that you can get a lot of 2nd hand car for your cash these days compared to 10 or 15 years ago.

 

[C240Sport97]

that's pretty much the conclusion I have arrived at

Personally, having sold plenty of these schemes, I wouldn't touch them with a bargepole. - I guess that statement makes me a bad person ​

 

[hawk20]

Oh boy. How can anyone begin? PCP is so misunderstood by so many.
First it is not true that it guarantees that people change car after 3 years. I have bought two A class cars on PCP's and I fully understand the economics of the deals I have done. I happen to be an economist. I fully intend after 3 years to buy at least one of the two cars. The guaranteed figure is £8,750 for an A180cdi Avantgarde. It will be three years old and will have 30k miles on the clock. I will have owned and run the car from new, will know all about it, will have serviced it regularly at an MB dealer, and will know the mileage is genuine. I will be able to buy it at the guaranteed final value (roughly part ex value) rather than retail value. Suits me fine. I can at the end of the 3 year deal either buy the car at the GFV for cash, or refinance it, or I can walk away and buy something else if I prefer.

And what does it cost? Well, the proper economist's way to look at it would be to set out the full cash flow (the deposit, the monthly payments and the admin fee and solve for the APR). I have done this and it checks out at the 5.7% claimed by MB.

A simpler way to look at the deal is to take the deposit and divide by 3 to get a rough annual cost. Then add the payments and you now have the annual cost of owning the car.

Suppose the deposit is £1500 and the payments are £100 per month to keep the arithmetic simple. The deposit equals £500 per year for 3 years. The payments are £1200 per year for 3 years. So the total capital cost of the car is £1,700 per year. And that covers all depreciation and interest on capital (on the finance deal). A pretty genuine capital cost figure in my book.

And I like paying annually the depreciation that is really happening.

And I like knowing the value I will get in three years time and the fact that it is guaranteed.

I adore the thought of not having the dealer say, 'Oh what a shame you chose the 270 engine just before they upgraded it' and 'Oh dear, What colour did you say' and then 'I'm afraid the best we can do is.....' Just lovely to avoid all that.

And if residuals on fuel efficient and VED efficient cars like this one get better over time, I may get a better figure for the car as a trade in than from the GFV. If so I get that improved value towards my next car or towards buying this one outright.

But if, instead, residuals get worse and worse, I don't need to give a damn because I will not get less than the GFV.

Well I think that is a cracking deal especially since when I chose it in September 2007 I was expecting the economy to go pear shaped, and was expecting the govt to get nasty towards big cars. And especially since MB were offering the deal at only 5.7% APR and I can, and do, earn more than that on my investments. So why tie up my capital in a car when I can tie up theirs at such an advantageous rate instead.

Now take the car I probably won't buy. The second A class. After three years I think there will be lots of seriously interesting changes in technology to choose from. The bluetec diesels will apparently do 60mpg in a C class. There is a new E class coming (so although that is the normal choice for me, I kept away because new models cause serious increases in depreciation). That may be our chosen first car in three years time. Who knows. But we will be unencumbered. Free to hand one A class back in. Nothing more to pay. No worries about finding a buyer, Or about what state the market will be in. Walk away and buy what we like. Suits me just fine.

I think PCP is a marvellous way to run cars, paying each year the real depreciation which is happening instead of waiting till you come to change and then having to find a big wad of capital to replace the car. PROVIDED that the APR is not far off the market rate of interest. AND provided the GFV is a good percentage of the price you actually pay.

My target was, and normally is, to buy a car where there is a good chance of getting a 50% residual after 3 years. But how rarely that is actually achieved what with facelifts and new models coming so frequently nowadays. BUT with the MB PCP on the A class I got a guaranteed residual (or FV) of that percentage. No risk. No worries. peace of mind. Lovely grubbly say I.

Knock PCP as much as you like; I think it is wonderful.

 

[Rose Chap]

I think Hawk20 has a good point. I bought a brand new MkIV Golf GT TDI on a PCP deal in 2002.

Whilst not an economist (though I do have an Economics A Level) I am a dab hand with spreadsheets, so I put in the deposit, the 36 monthly payments, the GFV, and the admin costs in, worked out a figure, and contrasted that against buying through other means, loans, HP, saving up(!), etc.

My belief is as long as you are in a position to be able to buy the car outright at the end of the deal, it needn't be an expensive way of getting a new car.

No doubt where some people get caught out is thinking "ooh I can afford xxx per month", without giving any thought to what will happen after the end of the term. All costs need to be considered to check whether it's affordable or not.

 

[Rory]

Suppose the deposit is £1500 and the payments are £100 per month to keep the arithmetic simple. The deposit equals £500 per year for 3 years. The payments are £1200 per year for 3 years. So the total capital cost of the car is £1,700 per year. And that covers all depreciation and interest on capital (on the finance deal). A pretty genuine capital cost figure in my book.

I love the way you casually mix the real example of your own PCP purchase with fantasy figures to better support your position.

Even the A150 special deal is £200/mth with a £1500 deposit, and you have an A180CDi, which I will be even dearer.


I do think PCP's are OK for some people and/or some cars. You need to go in with your eyes open and (sorry hawk20) ignore the % (which changes with every element of the deal) and look at the ££'s - as Rose Chap did. My local Citroen dealer is doing C1's for £99/mth with no deposit. The GMFV was something completely ridiculous like £4500 (how's that for a good residual %?!!) but if you're starting off with nothing and know nothing about looking after a car, then I think that's a good deal to get someone up and running in a brand-new car that they're effectively renting for 3yrs for £99/mth.

Also on a car with uncertain depreciation, it's a way of minimising the risk. There's a thread on here from someone who declined a PCP on an E Class and then found the p/x value he offered at 3yrs was lower than the GMFV he'd been offered.

I always like to ask for a PCP quote - it's usually quite funny as the salesman will have been telling me how well the car will hold its value and then the PCP comes back with a stupidly low GMFV. At least it seems stupid until you realise that that is all the car is likely to be worth. It's enough to put you off some deals.


By the way - on the depreciation thing: The story you linked to was from Jan 2004.

 

[hawk20]

I love the way you casually mix the real example of your own PCP purchase with fantasy figures to better support your position.

Read my posting again and you will see I clearly stated that I used simple figures for illustration only.

You need to go in with your eyes open and (sorry hawk20) ignore the % (which changes with every element of the deal) and look at the ££'s .

This is so misleading. The APR only changes if the provider of the lease chooses to change it. That is their choice. Your choice is to check the APR and only accept it if it is at a reasonable level.

Some lease providers change the APR if you choose a very low deposit (more risk for them so fair enough)

Some lease providers, as I found with Honda, advertise a low APR on one particular model with one particular spec but if you choose any other model they craftily change the APR hoping, presumably, that you will not notice. (I know some people -wrongly-think the APR has a mind of its own and changes mysteriously. But that is not so. It is a decision variable and the APR is always CHOSEN by the lease provider.)

The MB deal on the A class turned out to be dead straight, just as it said on the tin. I checked the APR on a spreadsheet and it was the same whichever model and whichever combination of extras I chose.

Here is one to watch. Some extras add to the GFV. For example, Automatic does. So the effect on payments is quite small as part of the cost is increasing the value in three years time.

But some extras, add nothing to GFV so if you choose gold cupholders you will pay the full cost of them over the three year lease. Before you choose extras worth asking which ones add to GFV. Many, many do not so then it is only fair that you pay their full cost.

 

[6CylinderMerc]

Oh boy. How can anyone begin? PCP is so misunderstood by so many.

Not by me. I spent the best part of a decade being trained in it & selling it so I'm kind of qualified to understand it.

First it is not true that it guarantees that people change car after 3 years.

Absolutely correct. It does however guarantee that they have to do something. For the vast majority of PCP users that something means changing the car.

I have bought two A class cars on PCP's and I fully understand the economics of the deals I have done. I happen to be an economist. I fully intend after 3 years to buy at least one of the two cars. The guaranteed figure is £8,750 for an A180cdi Avantgarde. It will be three years old and will have 30k miles on the clock. I will have owned and run the car from new, will know all about it, will have serviced it regularly at an MB dealer, and will know the mileage is genuine. I will be able to buy it at the guaranteed final value (roughly part ex value) rather than retail value.

Would you still intend to buy it if the retail value ended up at less than £8750? Obviously not. Like I said, the GMFV is a certain amount of guesswork.

Suits me fine. I can at the end of the 3 year deal either buy the car at the GFV for cash, or refinance it, or I can walk away and buy something else if I prefer.

Just like I said, you have to do something. Doing nothing is not an option at the end of a PCP agreement. That is exactly what manufacturers want. The whole notion of them is to reduce customers change cycles without excessively increasing monthly payments as you would on a reduced term of HP.

And what does it cost? Well, the proper economist's way to look at it would be to set out the full cash flow (the deposit, the monthly payments and the admin fee and solve for the APR). I have done this and it checks out at the 5.7% claimed by MB.

An excellent rate & subsidised by MB as there's no way you can borrow money that cheap. It's a calculated risk on MB's part. By the sounds of it they're unlikely to recoup any of that risk in your instance but for the majority the risk will pay off as they'll sell another car in 3 years time.

A simpler way to look at the deal is to take the deposit and divide by 3 to get a rough annual cost. Then add the payments and you now have the annual cost of owning the car.

Suppose the deposit is £1500 and the payments are £100 per month to keep the arithmetic simple. The deposit equals £500 per year for 3 years. The payments are £1200 per year for 3 years. So the total capital cost of the car is £1,700 per year. And that covers all depreciation and interest on capital (on the finance deal). A pretty genuine capital cost figure in my book.

And I like paying annually the depreciation that is really happening.

And I like knowing the value I will get in three years time and the fact that it is guaranteed.

You're missing the point. The value is a guaranteed minimum & not its true or reflected value. If the real value turns out to be less then you have two options. 1, part exchange the car for another. 2, hand the car back & walk away with nothing having paid out £5100 over three years, which for most is the option they are least likely to take. Manufacturers know this, that's why you have got such a good rate.

I adore the thought of not having the dealer say, 'Oh what a shame you chose the 270 engine just before they upgraded it' and 'Oh dear, What colour did you say' and then 'I'm afraid the best we can do is.....' Just lovely to avoid all that.

And if residuals on fuel efficient and VED efficient cars like this one get better over time, I may get a better figure for the car as a trade in than from the GFV. If so I get that improved value towards my next car or towards buying this one outright.

But if, instead, residuals get worse and worse, I don't need to give a damn because I will not get less than the GFV.

Well I think that is a cracking deal especially since when I chose it in September 2007 I was expecting the economy to go pear shaped, and was expecting the govt to get nasty towards big cars. And especially since MB were offering the deal at only 5.7% APR and I can, and do, earn more than that on my investments. So why tie up my capital in a car when I can tie up theirs at such an advantageous rate instead.

Now take the car I probably won't buy. The second A class. After three years I think there will be lots of seriously interesting changes in technology to choose from. The bluetec diesels will apparently do 60mpg in a C class. There is a new E class coming (so although that is the normal choice for me, I kept away because new models cause serious increases in depreciation). That may be our chosen first car in three years time. Who knows. But we will be unencumbered. Free to hand one A class back in. Nothing more to pay. No worries about finding a buyer, Or about what state the market will be in. Walk away and buy what we like. Suits me just fine.

I think PCP is a marvellous way to run cars, paying each year the real depreciation which is happening instead of waiting till you come to change and then having to find a big wad of capital to replace the car. PROVIDED that the APR is not far off the market rate of interest. AND provided the GFV is a good percentage of the price you actually pay.

My target was, and normally is, to buy a car where there is a good chance of getting a 50% residual after 3 years. But how rarely that is actually achieved what with facelifts and new models coming so frequently nowadays. BUT with the MB PCP on the A class I got a guaranteed residual (or FV) of that percentage. No risk. No worries. peace of mind. Lovely grubbly say I.

Knock PCP as much as you like; I think it is wonderful.

Obviously for you but I say again, they're not for everybody. Manufacturers finance divisions didn't dream up PCP's to do people a favour. They are intended solely for the purpose of making people do something at the end of a given period of 2 or 3 years. That something in the vast majority of cases is to part-ex & start again, thereby selling more cars. I also say again that given the knowledge I have & coming from an ex-car & finance salemans point of view,rather than an economists, I wouldn't touch them with a bargepole even though I sold hundreds of them.

 

[Rory]

I love the way you casually mix the real example of your own PCP purchase with fantasy figures to better support your position.

Read my posting again and you will see I clearly stated that I used simple figures for illustration only.

Yes but you quoted it in the context of other valid data, like the car, APR, deposit, so it presents a wholly misleading picture, which 6CylinderMerc picked up and extrapolated to £5100 cost over 3yrs. The real figure would be over £9000.


Manufacturers can give great PCP rates as they own the finance companies giving those rates, and the finance companies get the cars at transfer pricing which is way below any pricing ever available to the general public. There's nothing wrong with taking advantage of that but for the unwary PCP's are a trap. I've come across several people who don't realise that with their first PCP the deposit is "lost" the moment it's paid, so they p/x a car, pay a good looking monthly amount and they come out of the end of it with nothing. The only thing the average person in the street looks at is the monthly payment.

 

[hawk20]

Depreciation and the benefits of PCP's are linked but in case we are dragging this a bit off topic I've put a comparision of PCP and HP up as a new thread. Hope this helps.
http://mbclub.co.uk/forums/showthread.php?t=48970