PCP VERSUS HP. A view

[MBManInKen]

Not really ridiculous, quite common in Japan, until recently. Rather high risk, high reward..... Known a carry trade

Yes, it's trade creating added value or an investment. That's not what we were talking about here. PCP is not an investment - it's buying a car with borrowed money. It's trade alright - for the salesman flogging cars to the gullible (and it does create a nice added value for the trader and the banks ).

 

[Subyland]

As of this morning the overall car market is 28.32% down and the retail carmarket is 30.52% down compared to Sep 2007. No wonder there are some good deals around.

With regards to the depreciation, Glass's Guide calculates depreciation from the list price so when it says a car looses 40% the first year this is in relation to the list price. But since no-one is paying list price the actual depreciation is less than that, if still quite considerable.

 

[hawk20]

For any who are interested in why MBManinKen comes to a different conclusion from my analysis, there are several reasons. It helps to go back and read the first posting.

• As in the title of the thread, I was comparing buying a car with a PCP deal versus buying with HP. Whereas ManinKen has used figures he gets from comparing a PCP with buying for cash. Clearly not a fair comparison.
• Secondly, he has assumed that the cash buyer not only buys the car for cash, but also invests all the payments for the PCP as well. A real double wammy. By investing £329 per month at 8.4% and investing the cost of the car as well, not surprisingly he ends up with quite a lot of money. No surprise there then.
• However, if we do want to compare a PCP with buying for cash this is simply done. For most people the rate of interest they can get in widely available, low risk, savings accounts, and so on, is around 6% (and not the 8.4% in MB ManinKen’s example). Secondly they don’t get all the 6%. The Chancellor takes 20% from some and 40% from others. That leaves the return on cash for most at between 3.6% and 4.8%.
• Some may have a mortgage they can pay off if they buy the car on PCP instead of using their cash and that can save around 7% for some. And that is from after tax income. Each must choose the appropriate rate for their situation.
• The fair comparison for cash versus PCP is to assume that you either spend your, say, £20k, on the car or you invest the £20k elsewhere (less any deposit required by the PCP deal.), and buy the car on a PCP. Provided that is accepted, certain things follow.
• It is intuitively obvious, or can simply be shown on a spreadsheet or even with a calculator, that if you can invest after tax elsewhere at a better rate of return than you are being charged on the PCP, then the PCP may be beneficial for you.
• Provided that you want to hold the car for three years at least, (if not see exit conditions etc).
• Provided that you think the Guaranteed Future Value is set at a reasonable or even generous level.
• And provided that the discount on the PCP is as good as you would get on a cash deal.
• If you can borrow at a lower rate than you can invest, only fools will laugh at you if you say that that looks like potentially good business. After all virtually all businesses, usurers and moneylenders make money by borrowing at one rate and investing at a higher one.
• Businesses often lease cars if their finance people think they can invest elsewhere at a better rate of return. Similarly, private people can find a PCP beneficial if they can invest at a better return elsewhere. Just remember you want to look at the after tax return if it is taxable.
• PCP’s can be beneficial for other reasons. You may want the safety of a guaranteed residual especially in these uncertain times. Or you may value the reduced outgoings over the next few years and want to keep your cash for other things.
• We know that most people buy on PCPs or on HP, so that is why I looked at that in the first posting. But cash v PCP is of interest to some too and the conditions in 6-9 above help to get the answer.
• It is, of course, perfectly fair to also ask the MBManinKen question noting that it is a different question. If I have enough cash to buy the car outright and can, and want, to invest the same amount each month as the payments on the PCP deal, what will my relative financial position after 3 years be? I’ve never had anyone posing that particular question, but if I did, I would say to them that they would make even more if they did the PCP as well as investing their cash at 8.4% and as well as investing the £329 per month. So long as the conditions I have mentioned above are all met.
• Simple checks: - pop into an MB dealer. Get the E220cdi saloon PCP deal on paper (or from the website) and see if you can get a better discount on an HP deal than they you can get on the PCP deal. Then see if you can get more off for cash. Then ask if you can have a better APR than the 4.2% they charge on the PCP if you do HP. I am confident that the answers you get will back up what I have been saying on this thread. There are some great PCP deals out there at the moment. Sadly not on estates!

 

[hawk20]

IMPORTANT : - More Info: -

I have waded through the T’s and C’s on my old A class PCP. It may interest some that it is headed:
“Hire Purchase Agreement Regulated By the Consumer Credit Act 1974” so legally that is what this PCP deal was.

It also says: -

TERMINATION: Your Rights
You have a right to end this agreement. To do so, you should write to the person you make payments to. We will then be entitled to the return of the goods and to half the total amount payable under this agreement. If you have already paid at least this amount plus any overdue instalments and have taken reasonable care of the goods, you will not have to pay any more.