PCP VERSUS HP. A view

[hawk20]

I cannot see the point in doing PCPs unless you get a good guaranteed residual. So Option 2 and 3 are probably out for me (unless- to be pedantic- you need or want HP and these are cheaper than the alternative HP deal)

Why should you pay £185 option to purchase fee. Mercedes is £75 -plenty IMO.

It is hard to earn over 6% APR after tax from savings. BUT it all depends where he is taking the money from. Does he have a mortgage, and at what APR? Because that is paid from after tax income. So if he is paying 7.5% APR as many are, then it might pay to finance the car but pay off some of the mortgage. Does he owe money on Credit cards and at what APR? Pay it off. Everyone should. ETC. If he can get 6% APR and use the cash he would otherwise have spent on the car, to pay off debt, then the PCP might make sense.

BUT if he has cash in a bank or building society earning 5/6 per cent then paying cash may be beneficial. I am trying to get at the 'opportunity cost' of the money he could buy the car with i.e what it would earn after tax.

Small cars like the Polo tend to have good residuals and so that may not be so much of a worry to him, but try to find out when any new model may come. If it comes during -or even at the end- of your 3 years the depreciation may go up and then he might like the certainty of a guaranteed residual.

I would check DrivetheDeal as VW have been offering some large discounts lately. We were offered £3k off a new Golf without even asking. 'Just looking'!

Just checked. £1100 off list on the 1.4 Match SE

 

[Piff]

I cannot see the point in doing PCPs unless you get a good guaranteed residual. So Option 2 and 3 are probably out for me (unless- to be pedantic- you need or want HP and these are cheaper than the alternative HP deal)

Why should you pay £185 option to purchase fee. Mercedes is £75 -plenty IMO.

It is hard to earn over 6% APR after tax from savings. BUT it all depends where he is taking the money from. Does he have a mortgage, and at what APR? Because that is paid from after tax income. So if he is paying 7.5% APR as many are, then it might pay to finance the car but pay off some of the mortgage. Does he owe money on Credit cards and at what APR? Pay it off. Everyone should. ETC. If he can get 6% APR and use the cash he would otherwise have spent on the car, to pay off debt, then the PCP might make sense.

BUT if he has cash in a bank or building society earning 5/6 per cent then paying cash may be beneficial. I am trying to get at the 'opportunity cost' of the money he could buy the car with i.e what it would earn after tax.

Small cars like the Polo tend to have good residuals and so that may not be so much of a worry to him, but try to find out when any new model may come. If it comes during -or even at the end- of your 3 years the depreciation may go up and then he might like the certainty of a guaranteed residual.

I would check DrivetheDeal as VW have been offering some large discounts lately. We were offered £3k off a new Golf without even asking. 'Just looking'!

Just checked. £1100 off list on the 1.4 Match SE

Too late for other deals - signed up earlier today and with better discount than listed in "target prices" in "Top Gear", "What Car" & "Broadspeed.com".

This with the desire to buy at a local garage and dispose of his old car at the same time sealed the deal.

The bottom line is whether any of the finance deals are worth considering?

He has no debts - no mortgage - no special savings account paying a particularly high rate.

Option to purchase fee not discussed at VW garage - just stated at £185.

It seems to me that the first option is the only one worth considering if
1) He particularly wants to keep his own money in the bank and can earn 6% (less tax) on it
2) He particularly wants a guaranteed residual value after 3 years of about 46% of the cars cost

Otherwise it's pay cash!

 

[renmure]

For the amount of money involved I would go for the cash deal. Even if he were to take the finance and if he got a little bit more by investing the money at a better rate than the finance rate (and this is a decent sized IF), then I recon the benefit would be fairly minimal. All things being fairly equal (and I do appreciate that offers of 0% interest do appear and that it is also possible to get high returns on investmet money) if there is a choice between paying cash or financing then I would go pay cash. IMHO

 

[hawk20]

The bottom line is whether any of the finance deals are worth considering?

He has no debts - no mortgage - no special savings account paying a particularly high rate.

Option to purchase fee not discussed at VW garage - just stated at £185.

It seems to me that the first option is the only one worth considering if
1) He particularly wants to keep his own money in the bank and can earn 6% (less tax) on it
2) He particularly wants a guaranteed residual value after 3 years of about 46% of the cars cost

Otherwise it's pay cash!

We clearly agree it is the first one or cash. And I agree totally with your two conditions.

Do you know when a new model is due?

 

[Piff]

We clearly agree it is the first one or cash. And I agree totally with your two conditions.

Do you know when a new model is due?[/QUOTE

No, but I read somewhere that one of the other models in the VW group (ibiza or fabia is running on a new chassis that will find it's way onto other models in the group in time.

 

[hawk20]

Just returned from the VW garage - making sure my father does not get stitched up on the price of his new transport - a Polo Match. Basically after a few added options & a bit of discount amount to "finance" is £10400.

Option 1
deposit £1560.00
balance £8840.00
interest £1054.64
35 payments £145.65
purchase fee with final rental payment £185.00
Guaranteed final value £4796.87 (but it's bound to be worth more than that sir and you will have some equity to put towards your next new car!!!)
Total amount payable if purchasing £11639.62
APR 6.1%

.

Piff, what interests me here, and might interest you too, is that the higher APR with VW, and the lower residual mean that for an approx £10k car, you are paying a bigger deposit and not a lot smaller monthly payments than those on the A150 Classic SE 5 door I put up as the original posting. (£1500 deposit and £199 per month.).

AND THAT IS BEFORE you haggle discount from the dealer on the A class, which would significantly reduce the monthly payments.

For example, a modest £1000 off would cut the payments to £169 per month. A 160cdi would be similar money if he wants 55mpg! My brother gets over 60 on a run. Useful at £5 per gallon.

 

[Piff]

Piff, what interests me here, and might interest you too, is that the higher APR with VW, and the lower residual mean that for an approx £10k car, you are paying a bigger deposit and not a lot smaller monthly payments than those on the A150 Classic SE 5 door I put up as the original posting. (£1500 deposit and £199 per month.).

AND THAT IS BEFORE you haggle discount from the dealer on the A class, which would significantly reduce the monthly payments.

For example, a modest £1000 off would cut the payments to £169 per month. A 160cdi would be similar money if he wants 55mpg! My brother gets over 60 on a run. Useful at £5 per gallon.

I agree.
But - I tried to get him to visit other dealerships to compare vehicles.
Prepared him a list of vehicles to view with their dimensions to compare to Fabia (it has to fit in the garage).
Most dealerships (with the exception of Nissan, VW, Citroen/Peugeot & Saab) have moved to the industrial estate the other side of town (approx 10 miles)

Bottom line was that he was happy with his skoda and in the end wanted to consider VW polo, seat ibiza & skoda fabia.
VW dealership within 3 miles of home
Skoda dealership he last used now closed, next nearest approx 20 miles
Local Seat dealership closed, next nearest approx 25 miles.
Decision made!!!!

By the way, he has decided to take the cash option.

 

[hawk20]

I agree.
But - I tried to get him to visit other dealerships to compare vehicles.
Prepared him a list of vehicles to view with their dimensions to compare to Fabia (it has to fit in the garage).
Most dealerships (with the exception of Nissan, VW, Citroen/Peugeot & Saab) have moved to the industrial estate the other side of town (approx 10 miles)

Bottom line was that he was happy with his skoda and in the end wanted to consider VW polo, seat ibiza & skoda fabia.
VW dealership within 3 miles of home
Skoda dealership he last used now closed, next nearest approx 20 miles
Local Seat dealership closed, next nearest approx 25 miles.
Decision made!!!!

By the way, he has decided to take the cash option.

Probably right on both counts. Having a good main dealer nearby is very nice IMO. And with cash available and nothing that special about the PCP, I'd choose cash too on that particular car as I would expect excellent residuals on reputation, economy and taxation grounds.

On the A class, the case was different as the PCP deal was terrific by any standards, I think.

 

[Piff]

I think we all get more "stubborn" with age - I am different to how I was 10 years ago - I would have been checking out the different deals available and the A-Class deal looks good.
However, the 73 year old's perspective is different and he is happy with his choice.

 

[Dryce]

You've stated that you could have bought the A Class's outright. I bought my car for cash - the interesting thing is that once I'd told the dealer that, he absolutely threw finance deals at me. It ended up where they were cheaper than using my own cash. I was set in mind to pay cash and I went ahead and did that and they were really *not* happy. You have to wonder what's going on behind the scenes.

Similar experience here. At the end of the day I took the finance and with the straddle on interest rates against my offset mortgage made another small % on the car.

The finance company called about 10 days after the paperwork went through to try and sell insurance on the loan. I guess that's where they make their money - they convert a % of customers to higher margin deals that include insurance.

 

[hawk20]

Just to complete the picture, you can end a PCP and pay it off. You can get a settlement figure and pay it off. Or the dealer can buy it from you and he can settle the balance.

 

[Storm]

Yes...with a HP arrangement you can walk away and hand back the car after 50% of payments have been made....no affect on your credit rating etc...I did it once when the value of the car was less than the amount of finance outstanding......not a lot of people realise this...

Is this specific to HP, or does this also count if you've bought your car using a car loan (over 3 years with a lump sum which equates to an estimated value of the car payable at the end of the third year) which is secured against the vehicle?

 

[Rory]

At 18 months into a 36 month deal (half way is the crucial point) you can just hand the car back and stop payments. No effect on your credit rating. Same as HP as subject to the same law.

That is not correct, and it's (one of) the big problems with PCP. The "half" is that you have to have paid half the amount borrowed. As you also need to add in the GFV (which you borrow for the length of the PCP) on top of the monthly depreciation payments, then the halfway point is very near the end of the 3yr period.

 

[hawk20]

That is not correct, and it's (one of) the big problems with PCP. The "half" is that you have to have paid half the amount borrowed. As you also need to add in the GFV (which you borrow for the length of the PCP) on top of the monthly depreciation payments, then the halfway point is very near the end of the 3yr period.

Well you had better tell MB Finance because they told me what I have posted above. i.e. that you can hand it back when you have made half the total number of payments (18 out of 36 in my case). In any case you can always get the settlement figure and pay that by selling the car or getting a dealer to take it in part exchange as I am doing. Obvoiusly the ideal is to run the full 3 years as I had planned to do, but as someone once said: "Life is what happens while we were planning to do something else." And that is probably the best argument against PCPs unless they are pitched at a good discount, with a good APR and a high GFV -as some of the MB ones have been during the last year.

 

[hawk20]

Rory and others:- have talked to someone else at MB Finance who says the earlier advice I was given is wrong. They say you cannot walk away after the half way point is reached. You have to get a settlement figure.
I am confused and only know that getting a settlement figure has been easy and straightforward and the dealer from whom I'm buying the next car will settle it and give me a credit or debit depending on whether the part ex price is above or below the settlement figure.

The agreement is regulated and the relevant Act is Consumer Credit Act (Early Settlement) Regulations 2004; also the Consumer Credit Act 1974.

 

[st4]

Rory and others:- have talked to someone else at MB Finance who says the earlier advice I was given is wrong. They say you cannot walk away after the half way point is reached. You have to get a settlement figure.
I am confused and only know that getting a settlement figure has been easy and straightforward and the dealer from whom I'm buying the next car will settle it and give me a credit or debit depending on whether the part ex price is above or below the settlement figure.

The agreement is regulated and the relevant Act is Consumer Credit Act (Early Settlement) Regulations 2004; also the Consumer Credit Act 1974.

The settlement figure will therefore be the GMFV + however many monthly payments you have left. if the car is worth more then you're fine, if it isn't then its 1990's mortgage time....

 

[gIzzE]

PCP deals are only ever any good if.....

a) You are definitely going to see the whole term out.
b) If the manufacturer is throwing money at a model and wants it out of the door.


A PCP is a rental agreement based on mileage and length of rental and will have a flat percentage rate, with an APR equivalent.
That is very important, by its very nature and its name a flat rate is exactly that, so if you are offered 5% flat over 48 months on say £40k you are paying 5% on the total whether you are in month one or month 47.

Why is this important? Well it isn't really as long as you don't want/need to get out after say 12 months.

Examples, £44k car with £4k deposit leaving £40k to fund.....

PCP 5% (most are around 7.5% or higher at the mo, but trying to keep it looking better for the PCP)

£40k over 48 months = a total repayable of £48000.
Say you have a balloon of £20k that will be 47 x £596 and £20k on the 48th month.

So if you want a change after 12 months you will have paid £596 x 12 = £7152 from the £48k you owe, MB give a discount of 10% for settling in year one, plus 2 months interest.
So it is £48k less £7152 leaving £40848 - 10% = £36763 + 2 months interest which is £166x2 leaving a settlement of...
£37095.


Now comapare that with a balanced lease purchase scheme.

Most of these are at 2% above base so 7.25% apr, because it is apr you pay off your pre arranged monthly amount and then the interest is added on to the outstanding balance, so it works in the same was as your mortgage, yeah you are paying more interest at the start, but it is not front loaded.

£40k over 48 months with a 20k balloon at 7.25% apr....

47 x £596 with £20k to be paid on the 48th month.

So the same monthly figure. The difference is when you want out after 12 months.

After 12 months you would only a smidge over £35k.

Now £2k doesn't sound much, but when your car has depreciated by £10k as well and is only worth £34k it can make all the difference.



If we were to look at the real PCP percentage figures that are being given at the moment with apr equivalents of nearer 12% apr it starts to look even worse with a settlement figure of more than your borrowed, it takes about 14 months to get to less than the original borrowed figure!! OUCH!


There are exceptions of course. With run out models manufacturers throw money at them so a PCP can make sense.

Example.

S320cdi Cost £60k, looses £40k over 36 months and Mercedes offering a PCP of £599 a month for 12k miles a year. How??
It looses £40k over 36 months which without interest is £1,111.00 a month.
So how?

Well an S320cdi at £60k costs Mercedes UK £48k, Mercedes AG offer a discount for PCP deals bringing the cost down to £44k.
Mercedes will also get a bonus of £3k per car for selling them bringing it down to £41k. They also know that even though the trade in value is only £20k after 3 years and 36k miles that they can retail that car for £29950 and get that for it too.

So they have only got to finance £11k really, it gets these big cars out there on the road.

£11k over 36 months is £305 a month.
Charge the customer £599 and you have made £10500 off that car over 36 months. If the customer decides to change cars halfway through the term that will be more like £8k over 18 months.


So PCP can work, but it is the exception rather than the rule.

 

[Deleted member 6183]

The settlement figure will therefore be the GMFV + however many monthly payments you have left. if the car is worth more then you're fine, if it isn't then its 1990's mortgage time....

Don't forget the deposit, I have a recollection that when talking half or two-thirds it's the full cost of the car that's relevant and that is deposit plus interest as well as the amount of the loan.

 

[Rory]

Rory and others:- have talked to someone else at MB Finance who says the earlier advice I was given is wrong. They say you cannot walk away after the half way point is reached. You have to get a settlement figure.
I am confused ....

Now will you believe what I've been saying?

No wonder the car industry loves PCPs. If even someone with your financial background can get confused by PCP T's & C's, then what hope is there for the averagely dippy person?

 

[Rory]

The settlement figure will therefore be the GMFV + however many monthly payments you have left.

NO. There are now reports of people being offered settlement figures which value the car at less than the GFV - in other words the industry isn't interested in taking the car back early and wants people to serve out the full term and keep making their monthly payments.