PCP VERSUS HP. A view

[6CylinderMerc]

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.

a) Because you're only financing a portion of the car.
b) If you buy the car after three years then the guaranteed residual is irrelevent other than that is the price you have to pay. If you bother with the hassle of selling then you will get more for the car than a p/ex price and you will get cold hard discount off your purchase - it's win/win.
c) Yes, that's exactly what manufacturers want you to do every three years without fail & for the majority of people that's exactly what they do. The manufacturers take it as given that they'll have a significant percentage of repeat business at a given time. HP doesn't offer them that luxury.

I'll put it another way. If you buy a car on HP & the bottom falls out of the used car market you only lose money if you actually sell. However, if you decide to keep it then you haven't lost & remember, if you're on HP then you don't have to actually do anything. If you buy a car on PCP & the bottom falls out of the used car market then you are protected - but only to a degree because although you can hand the worthless car in & walk away, you're left with nothing. You might think about getting another car on PCP but only this time the residuals & consequently the GMFV's are worthless. You don't get a choice in this because on a PCP you have to do something. The equation for working out PCP's works both ways. Higher GMFV=lower payments. Lower GMFV=higher payments. So now you've got to pay even more every month to own a car on a PCP while Mr HP is happily driving his around safe in the knowledge that he's lost nothing unless he actually sells it. Yes, PCP's protect you for future values but only the one time. If values drop really drastically then PCP's will likely disappear as they'll be little difference in monthly payments between them & HP.


That excess mileage rate is a good deal - if anyone reading this is thinking about a new MB on a PCP then tell them you only do 6k per year

 

[6CylinderMerc]

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!

Regardless of the value of the car you're driving, I find it incredible that you're happy to pay out nearly £12,500 & might have absolutely nothing to show for it after two years

 

[Will]

I'm sorry but I think I agree with Hawk's posting on this thread.

He may be biased towards the PCP deal that he mentioned (as he has taken a similar deal), but only because he has analysed the package and decided that the positive benefits outweigh the negatives.

Not all PCPs are better than HP and vice-versa. It depends entirely on the deal that is being offered. I reckon that because (as 6-cyl has pointed out) car manufacturers/dealers get a reasonable amount of repeat business through PCPs they do tend to offer 'incentives' and decent deals, hence they are sometimes better value for most people.

6cylinder - can I just make an observation on one point in your last post?

I'll put it another way. If you buy a car on HP & the bottom falls out of the used car market you only lose money if you actually sell. However, if you decide to keep it then you haven't lost & remember, if you're on HP then you don't have to actually do anything.

If you take a car on a lease or PCP, and after 3 years the value is less than expected, you could actually go out and buy a similar model for less. Negative equity isn't a good thing.

As an example, I leased an Audi A4 Cabriolet, value circa £28K, for 2 years on a personal lease.

It was a very good deal on the lease. The monthly payments wouldn't have covered the depreciation if I had bought the car for cash, then sold it after 2 years - let alone the cost of interest on the capital as well (£28K is a fair chunk)

If I really wanted to keep the car past the 2 years that I leased it, I could easily have bought one of those cars for less than £28K minus the cost of my payments.

I think their must have been some heavy discounting from Audi UK to the finance company who provided the lease (BOS leasing). I wouldn't have got such a good deal with HP, would have lost me money financially.

Will

 

[Will]

Regardless of the value of the car you're driving, I find it incredible that you're happy to pay out nearly £12,500 & might have absolutely nothing to show for it after two years

But £12.5K depreciation over 2 years on a very expensive car like the GL mentioned (£57K) is actually amazingly good.

The whole point with new cars losing money is that unless you're paying off more than the depreciation each month, you don't have anything to show for it either.

Find me an HP deal for a £57K GL, paying less than £472 a month with only £1000 deposit where you'll own a single bit of it after 2 years! All you would have to show for it would be negative equity, as the car will have depreciated more than this amount.

I think that with the example above, you would have 'something to show for it', the pile of money saved

Will

 

[del320]

...you can have a brand new car every 3 years, fully guaranteed...

And as 6CylinderMerc affirms, this is just the cynical view manufacturers take.

Hawk20 justifies PCP by inferring elsewhere that net growth on his investments is greater than the (admittedly attractive) 5.9% presently offered by MB. Really? And is that sustainable over the next three years?

The fact is, however you cut it, finance costs money and depreciation is the biggest motoring cost. However attractive the GVF and the appeal of easy disposal after three years, the whole scenario of the private motorist borrowing for a brand new car is financially unsound.

Buying a car, new or otherwise, is hardly a distress purchase. Whilst folk always appear to find monthly payments for finance, it is an alien proposition to tuck the same amount away for three years as savings. Like water in a pipe it all depends when you draw it off.

BTW, an unsecured loan of £12500 from a high street bank would be around 36 x £390 (8%, no payt protection) Unlike HP or, of course PCP, the car is entirely yours from day one to do with as you please with no binding conditions (apart from paying the loan)

I just could never consider a brand new car under any circumstances and I've never paid any form of debit interest in over 25 years.

 

[Brett]

Guys, a really thought provoking and useful debate. I will definitely be referring to this when I take out my next deal. At the moment I am on a Lombard Finance Balanced Payments Scheme. The numbers worked for me when I did the deal on the AMG - I may well do things differently next time.

That said, my four and a half year old asked me to promise to keep the car "all the time" because "I love it". We'd just been to take a quick look at the new Tiguan and I think he was a little worried I was going to get a new car...

 

[hawk20]

Buying a car, new or otherwise, is hardly a distress purchase. Whilst folk always appear to find monthly payments for finance, it is an alien proposition to tuck the same amount away for three years as savings. Like water in a pipe it all depends when you draw it off.

BTW, an unsecured loan of £12500 from a high street bank would be around 36 x £390 (8%, no payt protection) Unlike HP or, of course PCP, the car is entirely yours from day one to do with as you please with no binding conditions (apart from paying the loan)
.

First, the trouble with saving to buy is you have no car for three years while you save. Not appealing to most.

Second, yes the bank loan at that rate would be £390 per month or £4680 per year. Add £500 per year for the cost of the deposit of £1500 and the annual cost is £5,180. Fine if that is what you want and you own the car outright and take the risk on depreciation.

My PCP on the same car costs under £2,900 per year - a huge saving big enough to let you buy the car outright at the end of three years if you want to. But you do not have to. You can keep the saving and have another new one if you prefer. And you have no risk on depreciation. Looks good to me.

Less outgoings and less risk. Can't be that bad can it?

 

[Will]

Some very wise words of advice there Del, but what if you want a new car? Surely you need to take the most financially sensible method to fund it.

Just going back to my example with the Audi I had:

Buy for £28K new. Keep it for 2 years. Sell it for cash to either a trader or privately (an extra hassle/risk there FWIW)

It would have sold for less than the lease payments totalled in the deal that I got. Therefore cheaper and easier as a contract car than as a private purchase.

Sounds too good to be true, but in my case it was true - the payments were less than the depreciation.

Seems the logical way to me. I look at brand new cars as an expensive depreciating asset, and I can see why some people would pay a small percentage for peace of mind 'damage limitation' as they do with some of these PCP deals.

Different things work for different people.

Will

 

[hawk20]

Regardless of the value of the car you're driving, I find it incredible that you're happy to pay out nearly £12,500 & might have absolutely nothing to show for it after two years

That is because so few of us realise that £6,000 per year is nowadays quite a modest amount for the depreciation and interest on capital of a £57,000 car.

The joy of PCP is it shows you just what the capital cost of cars really is per year.

 

[SimonsMerc]

Regardless of the value of the car you're driving, I find it incredible that you're happy to pay out nearly £12,500 & might have absolutely nothing to show for it after two years

Nothing to show for it? He's hired a top end £57K car for two years at a total cost of around £500 per month. Try finding me a similar deal anywhere...

-simon

 

[peterg1965]

Regardless of the value of the car you're driving, I find it incredible that you're happy to pay out nearly £12,500 & might have absolutely nothing to show for it after two years

I think the term is 'horses for courses'! I am very happy to be driving around in the most luxurious car I have ever owned for £12.5K over 2 years! The last car was a Discovery 3 on the Motability contract hire car, scheme I paid £11K advance deposit and £7K in installments over 3 years, admitedly that included Insurance and maintenance. Motability is supposed to represent a good deal to disabled drivers/families - I beg to differ. The car goes back in May and I have nothing to show for it! Motability even had the audacity to offer it to me for FULL retail price of £21.5K!

 

[peterg1965]

a)

That excess mileage rate is a good deal - if anyone reading this is thinking about a new MB on a PCP then tell them you only do 6k per year

I just looked at the excess mileage rate on my PCP contract. I only asked for 8,000 miles per year, as that is all I need. The excess mileage is a flat 10p + VAT per mile. So an extra 10K miles is £1,175, but only if I hand the car back after 2 years.

 

[IanA2]

I got my M class on a PCP largely because I wasn't sure MB had turned the quality corner and liked the idea of being able to hand it back should I wish. The contract expires end May, and although I've been pretty satisfied with it I've decided to hand it back. Why? Well, last month I visited the local dealer to check out prices/values, the options I had were trade, keep, or hand back. My final payment is £18.1K. The book price the dealer came up with was £14.7K, and that didn't allow for a further two months fall. No brainer, it goes back.

 

[6CylinderMerc]

I think the term is 'horses for courses'! I am very happy to be driving around in the most luxurious car I have ever owned for £12.5K over 2 years! The last car was a Discovery 3 on the Motability contract hire car, scheme I paid £11K advance deposit and £7K in installments over 3 years, admitedly that included Insurance and maintenance. Motability is supposed to represent a good deal to disabled drivers/families - I beg to differ. The car goes back in May and I have nothing to show for it! Motability even had the audacity to offer it to me for FULL retail price of £21.5K!

Depends what you want out of Motability. I was trained in that also & on cars like Disco's, etc, you're right. It's not particularly a good deal. But Motability is designed to simply get disabled people mobile & there a plenty of nil / low deposit deals which will do just that.

Nothing to show for it? He's hired a top end £57k car for two years at a total cost of around £500 per month. Try finding me a similiar deal anywhere...

£500 per month get's you a lot of HP, particularly on a used car. I think it's an expensive hire but that's probably just the old motor trade kicking in .

Another lesson I learnt from those days is never buy new but that's another debate.

 

[6CylinderMerc]

I got my M class on a PCP largely because I wasn't sure MB had turned the quality corner and liked the idea of being able to hand it back should I wish. The contract expires end May, and although I've been pretty satisfied with it I've decided to hand it back. Why? Well, last month I visited the local dealer to check out prices/values, the options I had were trade, keep, or hand back. My final payment is £18.1K. The book price the dealer came up with was £14.7K, and that didn't allow for a further two months fall. No brainer, it goes back.

Then what? You have to find another deposit & seeing as the real value is £3400 less than the GMFV, on a new deal the GMFV will no doubt be less. This means higher monthly payments without taking into account any list price rises in the last two years.

 

[drbsheffield]

Definately no penalty on the BMW scheme, and on my mums PCP with £179 per month with no deposit on the A150 we decided that even if she just hands the car back at the end, running a new car for £179 a month is fine, if she has anything then that is a bonus plus I negotiated the first service free too so literally nothing to run!

On the BMW scheme, I got a £1000 deposit contribution for using the PCP and the APR of 8.1% which I thought was reasonable, I figured that because of the lack of penalties even if I pay it off at some point which I may do I would be £1000 up with the contribution!

I think that BMW have lowered their GFV's as a few years ago I put down £2000 on a new 116i ES and paid £150 per month for 30 months, now that was a cheap car!

 

[del320]

First, the trouble with saving to buy is you have no car for three years while you save. Not appealing to most.

Second, yes the bank loan at that rate would be £390 per month or £4680 per year. Add £500 per year for the cost of the deposit of £1500 and the annual cost is £5,180. Fine if that is what you want and you own the car outright and take the risk on depreciation.

My PCP on the same car costs under £2,900 per year - a huge saving big enough to let you buy the car outright at the end of three years if you want to. But you do not have to. You can keep the saving and have another new one if you prefer. And you have no risk on depreciation. Looks good to me.

Less outgoings and less risk. Can't be that bad can it?

Point 1: This is true if measuring from a standing start today. For most, however, buying and trading in cars is a process going back years starting with a cheap old banger in your youth. Prior to retiring at 53, I had a curious role assessing loan applications whilst preaching the gospel that borrowing and debt was a poor idea. I also hunted down defaulters and fraudsters. The fact that the UK is where we are today proves I preached in vain.

My first lesson at 17 was my need to buy a £50 suit for work. It was bought on tick from John Collier, John Collier - and was the last ever such con I fell for!

Point 2: Your argument (which is quite logical and valid - a bit like a timeshare salesman) relies on quantifying the quite nebulous concept of depreciation. Yes, you can see in isolation before your very eyes what the car is worth in three years but that takes no account of being locked in to a process in the ownership of past or future cars.

The expectation of higher earnings and aspirations makes it highly improbable that you'll not move up to a more prestigious motor with attendant higher outlays. All manufacturers rely on this and you can be sure that they have set the GMV at a level sustainable for their profits - ie they win, you lose. And that is probably the primary reason for my dislike of the concept.

Elsewhere, the only cost that matters is the cost to change, whether through trade-in or the proceeds of a private sale. Some you win, some you lose but the choices, targets and affordability are clear to see. As it happens, both my MBs have been the oldest and longest owned which has left me ample time to save up the pennies. Previous cars have been 5 - 24 months old on purchase (savings as from the SAAB 99).

IMHO your promotion of PCP as a sensible financial decision for the private motorist is quite flawed. If, like me you do 5k miles pa, the overall cost per mile would be ruinous. If you do 15k pa with no allowances or subsidy you would be mad buying a brand new car and running it into the ground on your own (borrowed) funds.

Be honest, PCP definitely has a place but at the end of the day, you are renting a commodity you'll never own. And financialy, you can't win.

 

[IanA2]

Then what? You have to find another deposit & seeing as the real value is £3400 less than the GMFV, on a new deal the GMFV will no doubt be less. This means higher monthly payments without taking into account any list price rises in the last two years.

Nope. I'll use one of my other three, all mine, all paid for.

 

[6CylinderMerc]

Second, yes the bank loan at that rate would be £390 per month or £4680 per year. Add £500 per year for the cost of the deposit of £1500 and the annual cost is £5,180. Fine if that is what you want and you own the car outright and take the risk on depreciation.

My PCP on the same car costs under £2,900 per year - a huge saving big enough to let you buy the car outright at the end of three years if you want to.

As before, you are not making a fair comparison because on PCP you are only funding part of the cost. This is exactly a trained salemans comparison designed to align the bias towards PCP.

 

[6CylinderMerc]

Nope. I'll use one of my other three, all mine, all paid for.

Bought on PCP, cash, bank loan or HP