How to Buy a Gas Guzzler

[scumbag]

I think my issue is this.

If you buy the car cash, you own it, full stop. It worth whatever its worth whenever you decide to sell. I know the car artifically depreciated heavier in the first year as you have to write off the VAT,new CAR TAX etc. and all the other associated costs for buying the car of your choice. You therefore have equity in the car. This car be used as a deposit for a new one.

If you buy the car with HP/Loans or whatever, you are paying a deposit with your own money, theny paying for using someone elses to buy the rest of your car. Porviding you comply with the ruls of buying this way, its effectively your car and at some point will be worth something which you can realise. And if you have the money in the bank, with these interest rates, you can pay this loan off at any time if you choose to do so. You therefore have equity in the car. This can be used for a new one

If you pcp the car, you pay for it like HP/LOANS etc, but you never effectively own the car while you are in the deal, therefore you don't have any equity on the car. Now going by Hawks view here, thats if I have it right, is that if you buy a car thats not going to be good value at the end of the term mercedes take the risk with that. But the problem still exists. you have no equity on the car. Therefore at the end of the deal, if the car is worth the GFV or less, you have no money, or value on the car to part ex, use as a deposit etc.

Seemingly the only benefit is lower monthly repayments. But to have the ownership of the car so you can use the vaule in it at a later time, will cost you more in the long run. And if it has a better GFV than the car is worth, you are no better off, and you have paid more for being no better off.

I think the only way to compare PCP and HP/LOANS etc, is to use a value for deposit on HP by adding the GFV and deposit (You would use for PCP) and use that as the deposit for HP etc.

an apr of 7.6% can be got readily today

Anybody want to try a calculation based on the above posters quoted prices using best known value PCP, and HP based on my thoughts here.

It should prove definitive as we know the size of GFV and the term, and we know the load rates available!


I still don't see how PCP are in any way a good idea, unless you value that lower monthly payments, with no equity at the end of deal is assuemd to be a good idea! You never own the car, you never get any equity released from it if the GFV is more than the car is actually worth, and you appear to be paying more for it in the first place.

Paying for a car you don't own, on the basis that you can give it back after 3 years, and walk away with nothing, does not seem like a sensible way of doing things.

if you buy it outright, either by your own hard earned, or by someones money, you always have the value in the car, this can be used later.

I assume that what is being made here, is the estimated value of the car, under GFV is greater than the car is worth, so by giving it back, you have saved yourself paying that. But as pointed out, you have only saved youself the capital payments of that GFV, and if you want to realise that, you have to pay out more.


And I am sure I am right in saying that you can't offer a deal that cannot be used for cash buying.

In other words, a dealer deposit is exaclty that, available to anyone wishing to buy a car no matter how they chose to pay. therefore the dealer deposit is either put towards your car as deposit if you pay PCP or HP, or is taken off the price of the car.

Any finance people out there know the law on this.

 

[hawk20]

Here is the comparison with paying with cash for a standard rate taxpayer.

Say you can get 6.25% on the High Street (Tesco, Abbey etc).
You pay standard rate so after tax that is worth 5%.
(I assume you have done your ISA and wife’s if relevant. If not, do that and get 6.25% tax free.)
Still take the Scumbag example of a £15k car (if not just scale the answer pro rata and double the figures for a £30k car etc)
If buying on PCP you need to take out £3k from your savings to pay the deposit.
That leaves £12k in the bank earning 5% after tax. At compound interest that will accumulate to £1,3891.50p within 3 years. So you will make £1,891.50p in interest.

How much will the PCP interest be? Answer: - there will be £1,064 of interest on the PCP plus you must pay the £180 admin fee.

You also make £7,500 of capital payments to cover depreciation. And after 3 years you can walk away and not pay the option to purchase fee.

So after 3 years you have £13,891 in the bank and no car.

If you buy for cash from your £15k, you have nothing left of it in the bank and therefore earn no interest. After 3 years you have a car worth £7,500 which you can sell (less any advertising costs). So you have lost £7,500 in depreciation and £1,891.50p of interest you could have earned on the £12k that could have stayed in the bank (after paying the deposit on the PCP). Total cost for 3 years is £9,391.50p. A bit over £3k per year for depreciation and interest on capital.

You do not need to make the payments on the PCP of £3,000 deposit, £5,564 in monthly payments and £180 admin charge. These total £8,744. A lower cost than paying by cash (under £3,000 per year) if you allow for the interest earning power of the cash –the ‘opportunity cost’ of using it to buy a car.

To make it simple. If you wish you can take my word for it that the arithmetic will always show it pays to take the PCP IF the interest rate you can earn on savings (after tax) is a higher percentage rate than the APR interest you pay on the PCP.

So if you can earn 4.6% after tax then a PCP at an APR of 4.6% costs the same as using your own money.

You may still prefer a PCP even if it is a bit dearer –because you want the depreciation guarantee or you don’t want the hassle of selling your car in 3 years time.

Or you may reject the PCP even if it is cheaper because you like the freedom of not being tied in for 3 years.

Figures subject to checking etc etc. T’s and C’s apply!

 

[scumbag]

it seems to me the depreciation is not an actual figure.

In all the examples given above, the only one where you end up paying more for a car, is the PCP. And it only gives you an advantage of lower monthly repayments. It also means that at the end of it, you have to find some money to keep you car, or find some money to buy a new one.

Lets try it like this.


Car worth £15k. and assume the value in 3 years is 50% or £7500.

Buy car cash. Cost £15k. No interest on £15k over the life of the car, so thats lost, but in 3 years you have a car worth £7500 which you can put towards another car. Lets say another car costs the same £15k. Therefore in 3 years you have to find £7500 to buy another car!

Downside, no interest on money in bank
Upside, no monthly payments and car is worth market value


Buy it HP or Loan. You pay £12000 borrowed, and £3k deposit. You lose the £3k interest on the money over 3 years, and you pay interest on the borrowed amount over 3 years and that is included in the costs. However in3 years, you have a car worth £7500 which you can use to fund another car. So if you buy another car at £15k you need to find £7500 again, which you either take out of your bank, or you borrow.

Downside, high monthly payments,
upside, you have market value in car, and receive interest on money in bank

If you buy it pcp, You make a deposit of £3k, you borrow £12k in interest payments, but you defer the capital of £7500 for 3 years. When you come to replace your car its worth nothing. So to buy the car at £15k in 3 years, you need to find £15k again.


Downside, you have no value in your car and therefore nothing to put towards a new car. You still have to find the GFV if you wish to keep the car.
Upside, you have lower monthly payments and you recieve interest on money in bank.

So, is this right or have I missed something?

 

[scumbag]

Interesting thread.


P.S. It's not really a big headache as there are far more impotant things in life than this so I am very lucky I suppose that I have this choice
M.

I have tried to put it in my terms given the figures you have supplied.

Option 1.

Cash, cost £55k, 2 years time, car worth market value. No interest earned and none to pay. Accordingly GFV £32k means £32k for a new car

Option 2.
HP or Loan. Price £55k. Deposit £30k, £25 to finance over 24months. No interests earned on £30k, interest to pay on £25k and car worth market value.
Accordingly GFV £32k means £32k for a new car

You can borrow this on APR OF 7.6 %.

Will someone work out the payments please?


Option 3. PCP.
Cost £55k
Deposit £18k, finance interest on £37k, capital payments on £5k. 2 years time car needs £32k to own, or give back. No money for new car.

Payments at 4.6% please?


Then we can debate the reasons for and against after we have the figures.

 

[mw_C32]

Option 2.
HP or Loan. Price £55k. Deposit £30k, £25 to finance over 24months. No interests earned on £30k, interest to pay on £25k and car worth market value.
Accordingly GFV £32k means £32k for a new car

You can borrow this on APR OF 7.6 %.

Will someone work out the payments please?

This is a definate:
APR 7.2%
£25k = £1132.66 per month x 24 Total charge for credit = £2183.84

M.

 

[scumbag]

Copied my old post and added in new information.


I have tried to put it in my terms given the figures you have supplied.

Option 1.

Cash, cost £55k, 2 years time, car worth market value. No interest earned and none to pay. Accordingly GFV £32k means £32k for a new car

Option 2.
HP or Loan. Price £55k. Deposit £30k, £25 to finance over 24months. No interests earned on £30k, interest to pay on £25k and car worth market value.
Accordingly GFV £32k means £32k for a new car
Cost of borrowing £27183.84. + £30k = £57183.84. (plus cost of no interest on £30k deposit).

You can borrow this on APR OF 7.2 %.




Option 3. PCP.
Cost £55k
Deposit £18k, finance interest on £37k, capital payments on £5k. 2 years time car needs £32k to own, or give back. No money for new car. ( plus Loss of interest on £18 for deposit.)

previous information had £500 x 24 =£12000. Plus £18k = £30k and £32k for GFV =£62000. if you want to keep the car, or £30k and have nothing for a new car.


So cash means you lose interest on the whole lot but have a car worth £32k.
Cost is £55k minus any saving you manage to scrap together in the 2 years.

HP means you pay out £57183.84, have a car worth £32k and £2000 in interest. So thats just over £55k costs with this option.


and pcp means you pay out £30k, have almost £3k in interest and no car, or pay out £62k, have almost £3k interest and have a car worth £32k. That means its cost you just over £59k for this option.

is the PCP worth £4k just to have lower payments?

or am I missing something again?

 

[crockers]

And they appear to appreciating assets.

Not always............. Hence the term "negative equity"

 

[mw_C32]

Scumbag,

Re. PCP
It's not just the lower payments but the added insurance of the car being worth less than their GFV. As Crockers suggests if it goes into negative equity you win on a PCP.

Usually the car is likeley to be worth more than their GFV as what finance company want you to just hand back the car? They don't.

Who knows what this car might be worth in 2 years considering the "credit crunch" and fuel costs along with the tax element. If I based my purchases on the national news/press I'd never buy anything!!!

But thanks for your analasys it's basically how I figure it out and it makes me want to go down the loan route even more.

I just hope this car is still a sort of niche car and maybe it will retain a certain extra value.

Cheers Mark.

 

[st4]

Scumbag,

Re. PCP
It's not just the lower payments but the added insurance of the car being worth less than their GFV. As Crockers suggests if it goes into negative equity you win on a PCP.

Usually the car is likeley to be worth more than their GFV as what finance company want you to just hand back the car? They don't.

Who knows what this car might be worth in 2 years considering the "credit crunch" and fuel costs along with the tax element. If I based my purchases on the national news/press I'd never buy anything!!!
.

Never a truer word spoken. Look at PCP as a guarantee/insurance scheme against depreciation.

Remember the difference between trade and retail prices though. What you get a PX i.e. what your car is worth, is not what they'll sell it for. i.e. your GMFV is £10k, they say @ end time its worth £9k. They are in negative equity as you hand the car back, what will they retail it on for, £11k-£12k probably - don't feel too sorry for the dealer/finance company.

 

[hawk20]

Scumbag I think you need to read my posting above one more time.

You say: - “it seems to me the depreciation is not an actual figure.” This is wrong. The depreciation is from £15k new to a Guaranteed Future Value of £7,500. Just give the car back. Nothing to pay. You have lost £7.500 in depreciation. And lost about £1k in interest as well. So the car cost you (capital cost and interest) a bit under £3k p.a. Not bad for a new £15k car.

You say: - “In all the examples given above, the only one where you end up paying more for a car is the PCP.” This is wrong. You pay more than cost if you do Hire Purchase because you pay interest (almost certainly more than on an MB PCP).

And even if you pay cash, the car doesn’t just cost £15k as you assume, because you lose the interest you could have earned on the £15k.

Read my posting above and you will see the PCP is the cheapest way of owning the car for three years. Don’t confuse yourself by planning the next three years as well. Buy it; own it for three; sell it. Compare method 1 with 2 with 3. Simple.

It may help if we look at the MB deal on the E220cdi in a much simpler way. See the MB website.

The list price is £33,625
Customer deposit £5,499
Dealer contribution £3,448 (so you are buying the car for £30,177- a nice discount).
Guaranteed residual or GFV which MB call the ‘Optional Purchase Payment’ is £15,000. That is almost a 50% residual on the price you pay. (EXCELLENT and way above what will be offered in the market in 3 years time IMO)

N.B. The Total charge for Credit is £2,441 as shown on the website. This is less than the retailer contribution. The discount you get covers all the interest you pay, and covers the admin fee and covers the option to purchase fee (they are all in that figure). So really you are buying with no interest to pay at all.

I know you will say you could get a discount for cash. True. But you need to get more than the interest you could earn by keeping your cash and investing it.

AND remember, the so called ‘retailer contribution’ comes from MB. So you can get a discount from your dealer AND have the PCP deal on the website. Am I sure? Yes. That is what I did with the A class I bought. Great deal.

 

[scumbag]

Obviously I am missing something.

Having placed the figures for mw-C32, new car. with known figures. How does it work out cheaper by PCP than HP or cash.

I have placed in the losses, or accumlated gains from interest when keeping the money, and worked out the overall costs.

In 2 of them you get the market value of the car at the end of the term, and in one you either keep the car after paying out more than the other 2, or you give it back and as a result have nothing to show for it!

How does that benefit.

Ok, if the GFV is more than the car is worth, you may see some figure, but you can't do anything with it. If you try to part ex, you get back nothing unless you have bought wisely and have a car thats worth more thanthe GFV, And even then, you will only get the difference between the GFV and the actual amount.

So if the car value is better than the GFV is better not to have it on pcp.

So how much is depreciation in all this is real money. What and where is the actual vaule of depreciation given we already know the figures.


And come on, do we discount the fact that we may do something with the car in 2 years just because that appears to make it look good. How? And you will undoubtly consider what you intend to do with it at the end of its term. and here, clearly, PCP is not cheaper nor does it benefit.

Where is the evidence that makes PCP anything worth having compared to HP or a cash buy?


I have re read all the posts and I cannot yet see what makes these anything but something to avoid, unless that is, you do not have the cash for a large deposit, or the cash for an outright purchase, and you don't earn enough to pay the HP, and you have decided you want a car that your means don't actually allow you to have. So you chose to have, low deposit, low payments and give the car back, as you can't afford the damn thing in the first place.

If you could, and you are intent on buying, and you know about money and its worth, you would do like mw-c32 and either buy on HP, or cash up front. Clearly that is what he is doing, and these figures show why!

 

[hawk20]

mwC32 I could work out the best option for you. But really it turns on the APR you are being asked to pay which unless I have missed it you have not specified. As a simple rule if the APR you are charged on a PCP or on HP is less than you could earn after tax on your own cash, then the finance deal pays. Simple as that.

Now less simple. That assumes same discount on the car whichever way you buy. If not must allow for this.

If you are buying a 4x4 you shoul;d consider the huige benfit of having the residual guaranteed in a PCP deal so long as you get a good price, a good APR and a good GFV.

Have a look at the MB offer on MLs.

BTW the S320cdi offer is a PCP on £55k. Shows the sort of figures involved and it is over the two years you want.

 

[hawk20]

Where is the evidence that makes PCP anything worth having compared to HP or a cash buy?

!

It is clearly set out pound for pound in my postings above. Especially the 1.52pm posting. All in there. Using figures from your example. Number 82.

 

[GeorgeA]

....And even if you pay cash, the car doesn’t just cost £15k as you assume, because you lose the interest you could have earned on the £15k.

What seems to be forgotten is that most people will not be financing the entire cost of a car as they are either trading in or have just sold their previous car. Unless of course you have just walked away yourself from the PCP deal you were in. This is the situation I would not want to find myself in. I do not want to spend years paying towards a car that may release no equity. I am not knocking this means of financing a car, it may suit many, but not me

 

[scumbag]

. Don’t confuse yourself by planning the next three years as well. Buy it; own it for three; sell it.

This bit. How do you do that with a PCP where the car GFV is either the amount the car is worth, or more than the car is worth without acutally paying for the car? And if you pay for the car by the PCP method and then giving them the GFV, it will have cost you more over the term.

If the GFV is less than the cars value, they will deduct the GFV first and give you the difference back.


I must be struggling with the concept of monetary value and ownership as I plainly cannot see where any cost savings have occured by PCP.

 

[mw_C32]

hawk20, thank you.

That's all well and good but you have to buy the car they want you to.

What if you wanted a car not offered at their deal prices or with a dealer contribution, that would not be as good....?!!

What I am buying is a C63 ( no other car involved ie. part ex)

As you say for you it was the best way (PCP) to purchase at that time, given your financial circumstance and requirements. Great!

The deal I have with MB PCP has the interest rate at an APR of 10%, that is the best I could wrangle out of them for this car, even on Saturday I went in to try and better the deal saying I will buy outright if they cant offer a better interest rate, they told me rates had gone up!!!

When the time comes we all try and get the best deal one way or another its just fun/hard trying to work out what that is!!
Cheers
Mark.

 

[hawk20]

What seems to be forgotten is that most people will not be financing the entire cost of a car as they are either trading in or have just sold their previous car. Unless of course you have just walked away yourself from the PCP deal you were in. This is the situation I would not want to find myself in. I do not want to spend years paying towards a car that may release no equity. I am not knocking this means of financing a car, it may suit many, but not me

If you put the money you save by not doing HP into interest earning savings you will be better off with the MB PCP. It has a lower APR than any HP deal.

If you want to part ex a car that is worth more than the deposit, simply invest the balance. You gain.

 

[hawk20]

hawk20, thank you.


What if you wanted a car not offered at their deal prices or with a dealer contribution, that would not be as good....?!!

Mark.

If no deal offered then yes there is no deal, clearly.

 

[hawk20]

This bit. How do you do that with a PCP where the car GFV is either the amount the car is worth, or more than the car is worth without acutally paying for the car? And if you pay for the car by the PCP method and then giving them the GFV, it will have cost you more over the term.

If the GFV is less than the cars value, they will deduct the GFV first and give you the difference back.


I must be struggling with the concept of monetary value and ownership as I plainly cannot see where any cost savings have occured by PCP.

The cost saving is that you pay far less than you would with HP and that is true for the MB deals under discussion whether you want to keep the car for three years or longer.

If you want for three years, then after the PCP you just give it back and go and buy something else. You have gained by paying less.

If on HP then after 3 years you own a car worth say £7,500 (if lucky) but you have paid more than £7,500 in extra payments in order to own it.

And after HP you now have the cost and hassle of selling your car. And it may not be worth the GFV value you hoped for. With PCP there is no depreciation risk. hence my suggestion that it is a good way to buy a gas guzzler at low risk.

If you want longer than 3 years ownership, with HP you just carry on and have no more payments to make.

With PCP you need to pay cash to buy the car at GFV or you can refinance and pay over another 1,2 or 3 years. If you really want to own for more than 3 years you can take the money saved by not doing HP and invest it and you will have more than enough to buy the car at GFV after 3 years. (subject to qualifications given earlier).

For comparison with buying for cash see earlier posting.

 

[GeorgeA]

If you put the money you save by not doing HP into interest earning savings you will be better off with the MB PCP. It has a lower APR than any HP deal.

If you want to part ex a car that is worth more than the deposit, simply invest the balance. You gain.

Yes I would always encourage people to invest wisely. Any sums not used in a car deal could work better for you in a high interest account. Problem is there are plenty of other calls to spend our money and before you know it the PCP GFV has to be met.

I know two people who were in PCP deals and both of them have a bitter taste having left these deals. Sorry, can't remember the specific details.

It depends on your own mindset. For me, I still believe cash is king and being on a finance contract which either leaves me with nothing or taking out another contract is not a good idea.