PCP VERSUS HP. A view

[hawk20]

PERSONAL CONTRACT PLANS PCP versus HP
Here is a comparison of PCP and HP on the same basis. Real numbers– no simplification.

The current MB PCP deal (see current offers on website) on the A150 Classic SE 5 door listed at £15,282 is a dealer contribution (discount) of £1,304 and a customer deposit of £1,499. The final value of the car is guaranteed at £6,750 (GFV). With this and an APR of 5.9% the payments work out at £199 per month.

At the end of 3 years you can give the car back and owe nothing –and own nothing.
Or you can buy it for £6,750 for cash or by refinancing.
Or you can put it in for part-ex against another car and if it is worth more than the Guaranteed Final Value of £6,750 you get the benefit. If it is worth less that is MB’s bad luck.

So the approx cost of the car PER YEAR is one third of the deposit plus twelve monthly payments (£500 plus £2,400 = £2,900 per year). That covers all depreciation plus interest on capital. For that you get a brand new car for three years, fully guaranteed, and no need to find the £14/15k purchase price.

The alternative that many favour is HP where you buy the car outright. No smokes or mirrors. Take the same price, the same discount, the same APR, the same customer deposit, and so on –to get a really fair comparison.

On HP under these conditions the payments would be £373.44p per month with a deposit of £1,499.

Which is best? The PCP deal costs:-
Deposit £1499 Admin fee £150, option to purchase £75 and monthly payments of £199 times 36. If you decide to buy at the GFV of £6,750 the grand total cost including interest etc is £15,638. If you decide not to buy, total outgoings have been £8,813

If you go the HP route and we keep the deposit and fees the same, the payments are £373.44 times 36 making £13,444 of payments and a grand total inc deposit and fees of £15,168.

So for full ownership, the HP deal is about £470 cheaper. But you have paid out well over £6,000 more in the first 3 years than are required on the PCP deal and that is what has given full ownership. And you are committed to full ownership.

So what is good about PCP? First, the payments are much lower, which may suit some. And those savings add up to well over £6,000 over 3 years which is almost enough to buy the car outright if you wish (£470 short). But you do not need to take full ownership unless you wish to. After 3 years you have the choice to give the car back, or part-ex it (maybe at a small profit?), or buy it. Having that choice is worth something.

But most of all, you have passed all risk on depreciation to MB and got a guaranteed residual. In these uncertain times that is worth having IMO.

IF the value after 3 years is only a few hundred less than the GFV, you have gained. And no hassle selling either.

personal view, figures subject to checking etc.

 

[Piff]

Thank you.
I am taking my father shopping next week for a new car.
I'm sure he wants a Citroen C3 or a Nissan Note (dealerships are close to his home). This may help convince him that a better quality car is within his price range.

 

[6CylinderMerc]

Which is best? The PCP deal costs:-
Deposit £1499 Admin fee £150, option to purchase £75 and monthly payments of £199 times 36. If you decide to buy at the GFV of £6,750 the grand total cost including interest etc is £15,638. If you decide not to buy, total outgoings have been £8,813

If you go the HP route and we keep the deposit and fees the same, the payments are £373.44 times 36 making £13,444 of payments and a grand total inc deposit and fees of £15,168.

So for full ownership, the HP deal is about £470 cheaper. But you have paid out well over £6,000 more in the first 3 years than are required on the PCP deal and that is what has given full ownership. And you are committed to full ownership.

So what is good about PCP? First, the payments are much lower, which may suit some. And those savings add up to well over £6,000 over 3 years which is almost enough to buy the car outright if you wish (£470 short). But you do not need to take full ownership unless you wish to. After 3 years you have the choice to give the car back, or part-ex it (maybe at a small profit?), or buy it. Having that choice is worth something.

Ok, I'll outline it another way to give a fairer comparison because (and I apologise if this causes offence) your post above sounds exactly like the point of sale literature (virtually word for word) that I used to hand out.

There is not usually an Option to Purchase Fee at the end of HP so this amount has to be removed to give a fair comparison. This gives a total HP cost of £15,095 using identical rates, etc. At the end of the 3 years you own the car outright - nothing further to pay.

The total cost on PCP is £15,638 should you wish to purchase the car at the end of the agreement, which equates to £543 more expensive. You are not comitted to full ownership but the alternative is that you are committed to walking away without a penny.

Should you decide to walk away at the end of a PCP because the car has only just made the minimal value then you have paid out £8814 & you walk away with nothing to show for it. If you had purchased it on HP then at least you would own a car outright that is worth £6750. Take the total cost of HP, subtract what the car is worth if you sold it @ HP end & you're left with £8345 total real outlay. That also works out cheaper.

Another major disadvantage which has not been touched on in this post or the other one is the fact the PCP's are notoriously expensive to terminate early. HP agreements will still give you that flexibility. Should you see that the 2nd hand car market is starting to collapse in the 2nd year of ownership or your personal circumstances change, you can simply pay the settlement fee (which with only 12 months to go on the agreement would be minimal compared to the overall finance cost) & terminate the agreement thus owning the car outright to do with what you will. It's a different story with PCP's though as the equation for early settlement is not the same. You still have to pay your GMFV plus outstanding payments & sometimes even penalty fees for breaking the agreement. After all, a PCP is just that - a Personal Contract Plan & vehicle contract plans are always horrendous to terminate early. Ask any Fleet Manager & he'll tell you the same.

The reality with PCP's are that you are simply not paying the money up front but potentially paying it later. You're, in effect, financing a portion of the car & putting off a decision about what to do with the other portion until later. But, you are paying for that privelige. You are also financially "locked in" to the full term. You might argue that you are gaining flexibility & potentially postponing a significant proportion outlay. I would rather pay less overall, pay it up front & retain maximum flexibility should I need to dispose of the vehicle & terminate the agreement early.

 

[6CylinderMerc]

Thank you.
I am taking my father shopping next week for a new car.
I'm sure he wants a Citroen C3 or a Nissan Note (dealerships are close to his home). This may help convince him that a better quality car is within his price range.

Be careful. PCP's are not suitable for everyone...

 

[Ade B]

On a deal I had on a bike 5 years ago, I was offered a final value subject to a mileage restriction which had quite a punitive rate per mile for every mile over the agreed restriction. I terminated early which cost me, but the finance deal did get me into bike ownership at a time when the capital cost (+kit) would have been too great.

Do PCP deals have a basis for the GFV, ie. presumably you must have it services by MB, clean it occassionally, not smoke cuban cigars or have 8 German Shepherds moulting all over it?


Ade

 

[st4]

I believe with PCP you really have to know that you will be able to keep the car for the duration of the agreement, and also set the milliage to what you would really do.

I was told this by a salesman who tried to punt me a PCP, that if I was uncertain about my miles and unsure that I would keep the car for the duration it was not for me. He also admitted that it was "the slightly more expensive way to do things"

 

[st13phil]

Just another little snippet to add to 6CylinderMerc's informative post. PCP's are normally structured so that the GMV is lower (sometimes significantly lower) than a realistic value for the vehicle at the end of the PCP period. This is to encourage the user to "roll into" the next PCP. The finance guy at the MINI dealership we bought my wife's car from freely admitted that the GMV on a £20k new MINI was normally £1500 to £2500 below a realistic value for the vehicle after 3 years. The only way the driver could release that money would be to either buy the vehicle outright at that stage (unlikely), or to part-ex it against another MINI (most likely). We didn't use any of the dealer finance products to fund the purchase, BTW.

PCP's can be helpful for some people but it's rare that they represent the cheapest way to buy, mainly because of the requirement to fund the "balloon" element for the entire period of the contract. What often makes them look attractive are low interest rates and "dealer contributions" which really just represent what the Americans call "factory support".

 

[peterg1965]

Buying the GL320, PCP was the ONLY way to go. I got a Guaranteed future value of £33,100 after two years on a car with a list price of £57K, an APR of 5.9% and a £7K dealer deposit contribution. I also didn't pay VAT, as the car had a wheelchair hoist fitted. So I paid £41,000 on the road. To my mind, as has already been mentioned, the financial risk is all MB's. With the current anti 4x4 climate I would be gobsmacked if I have any equity in two years time. If I do, it's a huge bonus, if the car is only worth £25K (which is a figure most internet brokers quoted after 2 years on a PCP) then I give it back and walk away, MB pick up the tab. I cannot believe I am driving around in a £57K car, having only paid a £1K deposit and £478/month!

 

[hawk20]

PCP's can be helpful for some people but it's rare that they represent the cheapest way to buy, mainly because of the requirement to fund the "balloon" element for the entire period of the contract. What often makes them look attractive are low interest rates and "dealer contributions" which really just represent what the Americans call "factory support".

And are we supposed to object to being offered low interest rates and good dealer contributions. No, of course not. My two A's are at 5.7% APR , a rate no HP deal would offer me and the Guaranteed residual after 3 years is 50% of the price I paid. Can't beat that deal IMO.

 

[hawk20]

The reality with PCP's are that you are simply not paying the money up front but potentially paying it later. You're, in effect, financing a portion of the car & putting off a decision about what to do with the other portion until later. But, you are paying for that privelige. You are also financially "locked in" to the full term. You might argue that you are gaining flexibility & potentially postponing a significant proportion outlay. I would rather pay less overall, pay it up front & retain maximum flexibility should I need to dispose of the vehicle & terminate the agreement early.

Then for you HP or cash up front is probably the way to go. I would rather pay a lot less each year, and know that that is the real cost of owning the car for depreciation and interest on capital. And at the end of the three years I can walk away, owing nothing, and have no worries about depreciation or about having to sell the car. It is effectively pay £x per year and you can have a new car every three years if you want one. No worries. No hassle.

But if you want to keep the car longer you can. Costs a bit more than buying the car outright on HP but you don't have the risk on depreciation (the biggest cost of car ownership today on new cars). Yes you are tied in for three years and that should be borne in mind, but even that is not as hard to end early as some are saying.

As for the penalty for doing extra miles, with the MB deal it is insignificant (6p per mile so 1000 extra miles only cost £60. Small beer in the total order of things.)

 

[peterg1965]

Even if I was a cash millionaire I would not buy high value cars for cash. Particularly in todays fickle used car market and the uncertainty created by the tax regime. An incentivised PCP scheme is the way to go for me every time.

 

[hawk20]

Even if I was a cash millionaire I would not buy high value cars for cash. Particularly in todays fickle used car market and the uncertainty created by the tax regime. An incentivised PCP scheme is the way to go for me every time.

I think that is very sound. I could have bought the A's outright but given what I felt about the state of the economy and what the govt was likely to do to us all, I preferred a guaranteed residual.

Haven't we all seen threads for example, where someone paid £35k for a C320cdi and under 2 years later was offered £18k in part ex because a new model had come out. Would have been far better off with a PCP.

 

[st13phil]

And are we supposed to object to being offered low interest rates and good dealer contributions. No, of course not.

I agree. I was just making the point that there's no magic about the PCP itself that makes it a good deal, it's generally only when it's wrapped up as part of a package of other incentives (low rate finance, "dealer" contributions and suchlike) that it makes sense. As always, you have to look at the whole picture.

 

[drbsheffield]

I have used PCP's for a number of years and found them pretty good, bought my most recent BMW with one, and my mum got a great deal on a new A150 Classic SE 2 years ago, £179 per month with no deposit!

Certainly with the BMW's I have never seen one to the end and infact have ended some within 6 months with no penalties, the reason I went for the PCP again was with the 3'500k discount and the 1K deposit contribution from BMW it was the most financially sensible way to finance the new car!

 

[hawk20]

I agree. I was just making the point that there's no magic about the PCP itself that makes it a good deal, it's generally only when it's wrapped up as part of a package of other incentives (low rate finance, "dealer" contributions and suchlike) that it makes sense. As always, you have to look at the whole picture.

Absolutely right IMO. You need the right price, a good GFV, and most important of all check that it is a sensible APR. Some lease companies and car makers charge outrageous APRs.

 

[hawk20]

I have used PCP's for a number of years and found them pretty good, bought my most recent BMW with one, and my mum got a great deal on a new A150 Classic SE 2 years ago, £179 per month with no deposit!

Certainly with the BMW's I have never seen one to the end and infact have ended some within 6 months with no penalties, the reason I went for the PCP again was with the 3'500k discount and the 1K deposit contribution from BMW it was the most financially sensible way to finance the new car!

What sort of penalty when you ended early? Must be some surely?

 

[6CylinderMerc]

Then for you HP or cash up front is probably the way to go. I would rather pay a lot less each year, and know that that is the real cost of owning the car for depreciation and interest on capital. And at the end of the three years I can walk away, owing nothing, and have no worries about depreciation or about having to sell the car. It is effectively pay £x per year and you can have a new car every three years if you want one. No worries. No hassle.

But if you want to keep the car longer you can. Costs a bit more than buying the car outright on HP but you don't have the risk on depreciation (the biggest cost of car ownership today on new cars). Yes you are tied in for three years and that should be borne in mind, but even that is not as hard to end early as some are saying.

As for the penalty for doing extra miles, with the MB deal it is insignificant (6p per mile so 1000 extra miles only cost £60. Small beer in the total order of things.)​

But if you're concerned about paying £x per year then a 3 year PCP does not compare to a 3 year HP agreement because you are not financing the whole balance. During my training I was always trained to compare 2 year PCP to 2 year HP (which is inaccurate as it favours the PCP). A fairer comparison on monthly cost alone would be 2 year PCP to 4 year HP. After a 2 year PCP you can p/ex the car minus the GMFV. After 2 years on a 4 year HP agreement you can p/ex the car minus the settlement figure. Only difference is that your value is guaranteed. Might be inaccurate but it's guaranteed. The whole original perception was to increase the frequency of change cycles, nothing more. That is why the manufacturers offer favourable terms over PCP's than they do over HP. Added to which it makes a great advertisement in a magazine with maximum impact - "Only £1500 deposit & £199 per month at (LOW) APR". <Small print - T & C's apply. GMFV payable. Mileage restrictions apply.> But the human mind doesn't want to see that. It wants to see a picture of the car & the big writing telling you that it is affordable. At the end of the day, on a PCP you never actually own the car outright unless you pay more for it. You only own a portion of it & simply put off paying the rest until later or never at all.

If you intend to keep the car for an indefinite period after the agreement has ended then you might as well go HP & save money overall. That way you additionally retain the option of disposal early at the first sign of trouble in the used car market IMO.

I'm not saying either is right or wrong & each to their own if after examining all the facts they think it's right for them. I am saying however, that given my inside knowledge as an ex car salesman into the manufacturers financial products, I wouldn't touch PCP's as I personally don't like to be surreptitiously manipulated even if it is on a subconcious level. I know for a fact that the whole ethos behind PCP's was exactly that & not to introduce a fantastic & innovative product solely for the benefit of the car buying masses.

I don't know about MB Finance specifically, but it was always the case that the first 1k miles or so per year of excess mileage was charged at peanuts. The charge per mile increased significantly after that.

 

[6CylinderMerc]

I have used PCP's for a number of years and found them pretty good, bought my most recent BMW with one, and my mum got a great deal on a new A150 Classic SE 2 years ago, £179 per month with no deposit!

Certainly with the BMW's I have never seen one to the end and infact have ended some within 6 months with no penalties, the reason I went for the PCP again was with the 3'500k discount and the 1K deposit contribution from BMW it was the most financially sensible way to finance the new car!

£179 per month with no deposit. There's always a deposit paid by someone. If not your mum then by the dealer or manufacturer. I'd be interested to know the GMFV of that one. Remember, higher GMFV=lower monthly payments=nothing left at the end.

Ended within 6 months of the start & no penalties? There must have been some charges buried somewhere, probably in a p/ex over allowance or something?

 

[hawk20]

If you intend to keep the car for an indefinite period after the agreement has ended then you might as well go HP & save money overall.


I don't know about MB Finance specifically, but it was always the case that the first 1k miles or so per year of excess mileage was charged at peanuts. The charge per mile increased significantly after that.

As I have shown the extra cost of PCP is not very great and in my opinion it is well worth it because
a) you pay much less over the first 3 years
b) you pay a bit more if you buy the car to keep it after 3 years BUT in exchange for that you get a guaranteed residual, and you get the freedom to walk away and buy something else with no hassle of having to sell
c) you can have a brand new car every 3 years, fully guaranteed, and your payments cover completely the capital costs of doing that and the interest on the capital. Or you can keep the car if you prefer.

BTW with MB the charge for extra miles is cheap and is flat rate regardless of how many extra miles you do. A great deal IMO.

 

[Mudster]

I lease (contract hire) all my vehicles (apart from the SEC of course), I wouldn't dream of tying up capital in a depreciating asset, but that's purely a business decision.

I like the fact I can walk away from these deals with no vehicle disposal problems at the end of them. The days of buying cars outright have gone, financing is the way to go simply because of the eye watering depreciation we suffer from in the UK.

I often thing depreciation is misrepresented because it includes VAT, which is nothing to do with the manufacturer and is not in any way part of the value of the vehicle.