PCP VERSUS HP. A view

[hawk20]

Did a bit of research and a quote from the man (peterg1965) himself

'List price is a whopping £56,652. The deal is that I put a £1K deposit down. The dealer/MB finance give £6250 towards the deposit. I get the VAT removed (as it will be disabled registered with an adaption). VAT amounts to £8825. (I don't pay VED) Therefore balance to finance is £40ish. The PCP deal is over 2 years (suits me because servicing costs/tyres will be minimal) and is £466/month with a Guaranteed value after two years of £33,100. APR 6%. These figures are huge but the monthly payment is the same as I am paying on my BMW (which may have to go - but needs must)'

That is excellent value by almost any standards. The simple ways to be sure the value is good are FIRST to look at the GFV as a percentage of the new price. Many deals offer 40% or less. Anything approaching 50% is excellent nowadays. You have been offered 58% (admittedly after 2 years, but still good). And SECOND, check the APR which is the FSA and govt approved best method of measuring the interest you are paying. You have been offered 6% which is terrific as you can get that saving on the High Street at the moment (6.5% on some ISAs for example). Most finance deals ask more (can always check Lombard, Direct LIne, Alliance and Leicester, AA etc and see what their APR is but it won't be as low as 6%).

If the GFV is a good percentage of retail, and the APR is good you've probably got a good deal. But try for a good discount on the price too!

 

[hawk20]

It doesn't really matter which it is, MB UK, MB Finance, Dealer etc. Why would whichever entity it is sell something for £20k when they can sell it for £21k?

The clause in the contract can easliy be dispensed with if the parties agree.

That is exactly what I wondered. And if the whole thing was MB in one hat or another I assume that would not be very difficult?

 

[hawk20]

Only if you sell it, which you do not have to do.

It is of course a myth that depreciation only occurs if you sell the car. It happens whether you sell or not but the extent of it is only revealed to you when you sell.

If you want to keep a car a long time cash purchase or HP may suit you best, but when you sell there is always that nasty surprise when you learn how much you need to find to get back to a newer car again.

With PCP you pay the depreciation as it happens. And you know in advance what that will be. Any downside risk is taken by the manufacturer.

 

[Will]

The most misleading thing I have read here is the 'you don't have to sell if you don't want to' type quote.

As Hawk has pointed out, whether you kid yourself or not, the vehicle will have depreciated, possibly to a point where you owe more on the finance than it is worth, leaving you liable for the shortfall.

I believe this is such a big problem these days with HP they even sell 'GAP' insurance to cover this exact problem, so the industry is well aware of it.

Regarding being tied into a minimum term on a PCP or other lease contract type deal, officially you are - but you're effectively tied in with the HP route as well, it might take longer than you think to get out of the negative equity.

From the moment you drive your new car away from the dealer on HP you'll have lost a fortune (not least the 'retail' vs. 'private sale' or 'trade in' value)

If you need to change your car (for financial reasons, practicality (eg need a larger/smaller car or whatever), you could be well and truly stuck!

Does anyone remember the stories in the past of people having newish cars writted off and being paid out less than the balance on the finance?

Will

 

[Rory]

That is excellent value by almost any standards.

Well, apart from the fact that the price is a complete rip-off in the first place, but that's unavoidable in the UK.

The simple ways to be sure the value is good are FIRST to look at the GFV as a percentage of the new price. Many deals offer 40% or less. Anything approaching 50% is excellent nowadays. You have been offered 58% (admittedly after 2 years, but still good).

I love the way you mix up reference points, in this case comparing 2yr percentages with 3yr values!

And SECOND, check the APR which is the FSA and govt approved best method of measuring the interest you are paying.

You have been offered 6% which is terrific as you can get that saving on the High Street at the moment (6.5% on some ISAs for example). Most finance deals ask more (can always check Lombard, Direct LIne, Alliance and Leicester, AA etc and see what their APR is but it won't be as low as 6%).

I don't believe it's valid to compare APR's across different types of finance. However PCP APR's actually appear higher than other kinds of finance because of the way a chunk of the original price is deffered and because of the extra charges.

But try for a good discount on the price too!

Bit late now - he's already driving around in the vehicle.

 

[Banjo]

I have just done a deal on a new Polo 1.4 for my sister, decided on the PCP option as it worked out at just £150 pm (15% Deposit, GFV approx 43% after 3 years & 10k miles per annum. APR 6.1%, 2.7% Flat rate through VW finance). I think the total interest over 3 years is just under £1,100.

Plus I got a reasonable discount on the price (swallowed up by the cost options!). I thought it was a good deal.

 

[6CylinderMerc]

It is of course a myth that depreciation only occurs if you sell the car. It happens whether you sell or not but the extent of it is only revealed to you when you sell.

Of course it's not a myth. In reality you only lose money when you've got the £ notes in your hand once you've disposed of the car. If you never sell the car you've lost nothing.

 

[6CylinderMerc]

The most misleading thing I have read here is the 'you don't have to sell if you don't want to' type quote.

I'm not entirely sure what is misleading about the following statement:
With PCP you have to do something at the end of the agreement, whether it's re-finance, buy the car or hand it back.
With HP you don't have to do anything at the end of the agreement including not selling it if you don't want to.
Seems pretty clear to me.

As Hawk has pointed out, whether you kid yourself or not, the vehicle will have depreciated, possibly to a point where you owe more on the finance than it is worth, leaving you liable for the shortfall.

What shortfall? If you've still got the car there isn't one.

I believe this is such a big problem these days with HP they even sell 'GAP' insurance to cover this exact problem, so the industry is well aware of it.

GAP has been around for at least a couple of decades. The only thing the industry is aware of is another product presenting an opportunity to increase profits.

Regarding being tied into a minimum term on a PCP or other lease contract type deal, officially you are - but you're effectively tied in with the HP route as well, it might take longer than you think to get out of the negative equity.

Not as tied in as you would be on a PCP. With HP you retain the right to hand the vehicle back to the finance company with nothing further to pay & no repercussions, provided that you have paid at least 1/2 of the total amount payable. This is in the T & C's of every HP agreement taken out against a vehicle in the UK. (Little known fact, that one ). Why? Because PCP's are contract deals. HP is not.

From the moment you drive your new car away from the dealer on HP you'll have lost a fortune (not least the 'retail' vs. 'private sale' or 'trade in' value)

And the difference between funding it by any other method is?

If you need to change your car (for financial reasons, practicality (eg need a larger/smaller car or whatever), you could be well and truly stuck!

Nowhere near as stuck as you would be trying to change it early on a PCP.

Does anyone remember the stories in the past of people having newish cars writted off and being paid out less than the balance on the finance?

That's what GAP does. Purchasing a car on PCP & writing it off would be no different. In fact you would likely be in a worse situation. In fact the situation would even be described as dire if you'd taken out a low deposit, high GMFV deal on a PCP .

 

[peterg1965]

Sorry, been away for a few hours and have come back to two more pages! raymont is correct the GL was free of VAT because of the disabled adpation, which was also fitted free of VAT. My PCP example is not particularly representative as the figures are distorted by having VAT removed. Bottom line is that the car listed at just short of £57K and I drove it away for £41.5K. I did have to pay 6 months of VED in the deal hence the sllightly increased monthly payment. The Motability Disco doesnt go back until May (the penalties of ending the lease early are punitive) and I can only have one disabled registered car at any one time. The GL will be registered disabled in May and I can reclaim the outstanding VED.

Back to the point of the thread though, there is no way I could drive this car for the money I am paying without the manufacturers discount, very attractive APR on the PCP and the high residual value. For the same amount of monthly payment HP could not touch this even over 4/5 years.
In my experience it is rare to find both a finance deposit contribution AND a very low finance rate from a manufacturer.The other benefit of buying new of course is, manufacturers warranty, likelihood of no outlay in two years on tyres (wear and tear) and only one service. To me it was a no brainer.

 

[Will]

I'm not entirely sure what is misleading about the following statement:
With PCP you have to do something at the end of the agreement, whether it's re-finance, buy the car or hand it back.
With HP you don't have to do anything at the end of the agreement including not selling it if you don't want to.
Seems pretty clear to me.

I'm sorry 6-cylinder, I can't be bothered and don't have time to quote you seven times in one reply? I am not wrong with what I have said, maybe I bugged you? Hence the sarcastic comments and smilies?

I'll dig out the quote that I was referring to:

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.

Do not try kidding yourself by sticking your head in the sand. Just because you don't sell something it doesn't mean it hasn't depreciated, this is common sense. If you need to liquidise you asset, you will become well aware of that. Same as if the vehicle was written off and you owed more than the balance outstanding, that is why GAP insurance exists, does it not? It might be a money-making insurance policy, but the product does exist for this very reason, NEGATIVE EQUITY!

The reason why I believe your quote of 'not having to sell the vehicle' is misleading is because it dances around the fact that you could quite very well be in negative equity and hence wouldn't be able to sell up, or change the vehicle, unless you wanted to make up this shortfall.

My point about being 'stuck' with a car on HP is just that - if you took, say, a 4 year HP deal on a car out, then decided after 6 months that you wanted to change the vehicle, I would say that you'd be almost just as stuck as you would with a vehicle on a PCP or a lease. Reason being, the amount you'd need to find to settle the negative equity, would probably be about the same as some typical PCP or lease deals would be for the remaining rental payments. This is due to the extremely high initial depreciation that almost all new cars suffer from.

Will

 

[Rory]

Do not try kidding yourself by sticking your head in the sand. Just because you don't sell something it doesn't mean it hasn't depreciated, this is common sense.l

It's no different to falling house prices though - if you've only got one house and you don't intend to sell it then falling prices are not an issue.

 

[6CylinderMerc]

I'm sorry 6-cylinder, I can't be bothered and don't have time to quote you seven times in one reply? I am not wrong with what I have said, maybe I bugged you? Hence the sarcastic comments and smilies?

Do not try kidding yourself by sticking your head in the sand. Just because you don't sell something it doesn't mean it hasn't depreciated, this is common sense. If you need to liquidise you asset, you will become well aware of that. Same as if the vehicle was written off and you owed more than the balance outstanding, that is why GAP insurance exists, does it not? It might be a money-making insurance policy, but the product does exist for this very reason, NEGATIVE EQUITY!

The reason why I believe your quote of 'not having to sell the vehicle' is misleading is because it dances around the fact that you could quite very well be in negative equity and hence wouldn't be able to sell up, or change the vehicle, unless you wanted to make up this shortfall.

My point about being 'stuck' with a car on HP is just that - if you took, say, a 4 year HP deal on a car out, then decided after 6 months that you wanted to change the vehicle, I would say that you'd be almost just as stuck as you would with a vehicle on a PCP or a lease. Reason being, the amount you'd need to find to settle the negative equity, would probably be about the same as some typical PCP or lease deals would be for the remaining rental payments. This is due to the extremely high initial depreciation that almost all new cars suffer from.

Will

Nah, not bugged. Nothing better to do but quoting you has obviously bugged you Will. I didn't think I was being sarcastic. Factual, yes.

It's also common sense that you haven't actually lost anything unless you dispose of said item. It also works both ways. for example, if I buy a car for £10k then the next day it's worth £1k have I actually lost £9k in cash - no. If I sell it for £1k the next day have I lost £9k in cash - yes. If the same car the next day is actually worth £20k, have I actually gained £10k in cash - no. If I sell the same car the next day have I gained £10k in cash - yes. If I keep & drive the same car around for until I die, have I actually lost any cash - no. It maybe the sand getting in my ears but I'm not entirely sure why you can't understand that?

You've not read my comment about "not having to sell the vehicle" in it's full context. I never mentioned "having to sell" it early, I was always talking about the end of the agreement where there is no shortfall. In the context it was written it is not misleading at all. As for disposing of early & falling into a negative equity trap, you very rarely see HP deals offering less than 10% deposit, unlike PCP's.

It's pointless going around in circles (again) as I've written plenty on the subject for all to see. I've explained that PCP's are not the great Panacea that some make them out to or would like them to be. Unlike the vast majority of car buying customers, I'm fortunate enough to have had a professional background that enables me to make an informed, impartial decision & reach that conclusion objectively instead of viewing PCP's through a consumers eyes rimmed by rose tinted glasses supplied by courtesy of the manufacturers.

But, you have to be over 18 to sign the document & some would argue that 18yrs constitutes adulthood. Adults make their own decisions in life, I am merely giving information from a very different perspective - you're now armed with the facts from both sides so each to their own & on you go...

And what's wrong with smilies?

 

[6CylinderMerc]

It's no different to falling house prices though - if you've only got one house and you don't intend to sell it then falling prices are not an issue.

Thankfully, someone who can see reason...

It's the same with rising house prices. If you've only got one house & it's worth a million pounds, does that make you a millionaire? Only if you sell it & live rough.

 

[Will]

It's no different to falling house prices though - if you've only got one house and you don't intend to sell it then falling prices are not an issue.

Yes - but - if you *do* wish to sell up, or were forced to sell up (say by rising costs of living, due to interest rate increases, unemployment or whatever), it will be a *very* real issue and you will be affected.

Will

 

[st4]

Thats why I said much earlier that with a PCP you have to virtually certain that you can a) see the agreement through financially and b) will like the car enough that you'll be able to keep it for the duration of the agreement.

If you don't think a) and b) can both be fufilled don't PCP.

 

[Will]

Nah, not bugged. Nothing better to do but quoting you has obviously bugged you Will. I didn't think I was being sarcastic. Factual, yes.

It's also common sense that you haven't actually lost anything unless you dispose of said item. It also works both ways. for example, if I buy a car for £10k then the next day it's worth £1k have I actually lost £9k in cash - no. If I sell it for £1k the next day have I lost £9k in cash - yes. If the same car the next day is actually worth £20k, have I actually gained £10k in cash - no. If I sell the same car the next day have I gained £10k in cash - yes. If I keep & drive the same car around for until I die, have I actually lost any cash - no. It maybe the sand getting in my ears but I'm not entirely sure why you can't understand that?

You've not read my comment about "not having to sell the vehicle" in it's full context. I never mentioned "having to sell" it early, I was always talking about the end of the agreement where there is no shortfall. In the context it was written it is not misleading at all. As for disposing of early & falling into a negative equity trap, you very rarely see HP deals offering less than 10% deposit, unlike PCP's.

It's pointless going around in circles (again) as I've written plenty on the subject for all to see. I've explained that PCP's are not the great Panacea that some make them out to or would like them to be. Unlike the vast majority of car buying customers, I'm fortunate enough to have had a professional background that enables me to make an informed, impartial decision & reach that conclusion objectively instead of viewing PCP's through a consumers eyes rimmed by rose tinted glasses supplied by courtesy of the manufacturers.

But, you have to be over 18 to sign the document & some would argue that 18yrs constitutes adulthood. Adults make their own decisions in life, I am merely giving information from a very different perspective - you're now armed with the facts from both sides so each to their own & on you go...

And what's wrong with smilies?

Hi again,

The sarcasm was only mentioned because of the careful selection of your quote (the wrong one) which wasn't referred to, and the sarcastic smilie (the rolleyes).

I don't think you've really demonstrated anything here that explains why NEGATIVE EQUITY is ok? This is the unofficial trap that I am very keen to point out and you seem very keen to try and hide?

Why shouldn't we talk about people either selling their car, or wanting to change their car who could well be stuck part way into a finance agreement (HP) due to this negative equity?

I have made a very valid point, and I will stand by it. No one is certain of the future. I don't care about what you think of PCPs or anything else for that matter, but if you have bought yourself a car on finance, and you needed to sell or change your vehicle (for whatever reason), you could very well be caught out by this. Don't try and argue that it's ok if you don't sell - that's not what I am talking about, and you know it.

Personally, I buy all of my cars for cash. I've never been keen on depreciating assets and try to avoid loss of my hard earned as much as possible. But that doesn't stop me from being aware of the facts.

Will

 

[Rory]

I don't think you've really demonstrated anything here that explains why NEGATIVE EQUITY is ok? This is the unofficial trap that I am very keen to point out and you seem very keen to try and hide?

Why shouldn't we talk about people either selling their car, or wanting to change their car who could well be stuck part way into a finance agreement (HP) due to this negative equity?

To be honest, I have no idea where you're coming from with this.

PCP is much more awkward (expensive) to get out of during the term than HP.

You shouldn't get into any deal you don't expect to be able to see through to the end, but you can walk away from HP if you've paid half or you can settle with just 2mths interest (note interest, not the whole payment, so it's a tiny amount) payments.

NB: Above assumes it's a regulated (under £25K) deal - be aware that many MB deals are unregulated. They can afford to be more generous upfront with those because you have much less protection in the event of wanting out.

 

[Will]

To be honest, I have no idea where you're coming from with this.

PCP is much more awkward (expensive) to get out of during the term than HP.

You shouldn't get into any deal you don't expect to be able to see through to the end, but you can walk away from HP if you've paid half or you can settle with just 2mths interest (note interest, not the whole payment, so it's a tiny amount) payments.

NB: Above assumes it's a regulated (under £25K) deal - be aware that many MB deals are unregulated. They can afford to be more generous upfront with those because you have much less protection in the event of wanting out.

Hi Rory,

Just trying to point out the risk of depreciation and negative equity.

My Audi A4 Cabriolet had a retail price of around £28K. If I had decided to take that on HP I assume it would be have been unregulated from what you've said (over £25K)?

If I decided to sell the car after, say, 6 months, how much would I have got for cash as a settlement if I were to trade in? £22K?, £21K?, maybe less - who knows?

I am under the impression that many high-value new cars depreciate quite sharply during this early period? So effectively I would have had to make up this shortfall would I not?

My comparison would be the deal I took. It was a personal contract over 2 years, the payments amounted £8K over this time which I worked out to pretty much just cover the depreciation over 2 years, quite possibly *less* than the depreciation should I have bought it on finance or otherwise, then sold it back to a dealer. Plus of course, no interest on any amount borrowed to fund a £28K car.

So, even if I did pay the full £8K to cover the entire rental period, I was in no way worse off than if I had bought it for cash, or on HP and decided to sell up early. Plus I get the car for the entire two years regardless.

Sorry if you disagree but this was my own personal experience

Will

 

[Rory]

Sorry - duplicated post.

 

[Will]

Hi Rory,

Can I use your car as an example please. Looking at an older thread on car values, I noticed your post:

That's about the same (a third) as I got 'off' my C270 Estate at 5mths / 6K miles from MB Direct. List would have been £34K and I paid £23,500.

If you had been the original owner of this car, and had bought it on HP how much would you have lost, bearing in mind the £23.5K that you paid was the selling price from MB and not what I imagine the trade price would have been? Ignoring the MB Direct margin, that's still a whopping drop of £10K+ on list in less than 6 months.

Will