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Up to now I've bought every car I've owned outright.

Due to changes in my family situation I need a bigger car. I'm looking at a used (albeit low mileage) car which is priced at £11,300. I could sell my existing car for between £2,500 - £3,000 so have assumed £2,500 to be on the safe side.

I understand the difference between HP (Hire Purchase) and PCP (Personal Contract Purchase). The HP option offered by the dealer seemed poor value, since it's possible to get a bank loan with a lower interest rate than their HP finance agreement. The interest on the bank loan in this case was about half that on their HP finance.

Several of my friends have PCP car deals. They are all telling me this is the way forward and what "everyone" does. Even the stats back this up - about 90% of people with new cars in the UK finance them, and 80% of those do that with PCP: source.

Am I correct in thinking the following: The only advantage of a PCP deal is that the monthly payment is lower than any other way of buying a car using finance? However, this comes with a significant number of downsides including:

  1. You don't own the car (the finance company does) until you pay it off in full. This includes an optional "Balloon payment" at the end of the agreement, which is often thousands. You only own the car if you choose to pay this. If not, you give the car back, and have nothing.

  2. You're restricted with where the car is serviced. You can end up paying penalties if any work is done on the car outside a set of agreed terms (e.g. unauthorised garages can't do work on the car). Therefore you can't shop around and get the best value from garages as you have limited options.

  3. There's a maximum per year mileage restriction.

  4. You can't easily sell the car during the PCP cycle (because you don't own it). You therefore can't really change cars or get out of the agreement early without significant financial penalties.

Point 1 is the one I can't understand, in terms of why anyone would want to do this. At the end of the agreement - after months of payments - you don't own the car and therefore have no asset. The only way around this is to make the balloon payment (see figures below).

The sums in my case are as follows:

Option 1 - buy outright

  • Total cost: £11,300.
  • Own the car. Can do anything - sell it any time, do any mileage, use any garage for work/servicing etc.

Option 2 - use a bank loan

  • Assume I've got £2,500 from sale of my existing car
  • Need £8,800 loan.
  • HSBC will loan £8,800 over 4 years with a total cost of £9,396.49 (i.e. the loan + interest).
  • Monthly repayment on loan is £195.76
  • This only adds £569 to the cost of the car and means I don't have to use a lot of my own money upfront. I also own the car and therefore have the advantages of that.

Option 3 - PCP

  • Deposit £2,500. From sale of existing car.
  • Monthly repayments are £158.21 for 4 years (48 months).
  • Optional final payment is £4,145 which is inline with GFV - Guaranteed Future Value.
  • Restricted to 12k miles/year. I don't own the car, with all the downsides listed above, unless I make the £4,145 payment at the end of the PCP agreement.

With the PCP option I would have paid 2500 + (158.21 * 48) = £10,094.08 ... to not own the car. If I want to own it I have to pay an additional £4,145 meaning it would cost £14,239.08 in total.

The difference between Option 2 versus Option 3 monthly repayment is a mere £37.55. Yet if I pay that I own the car and can do anything I want with it - any mileage, get it serviced anywhere etc. I have an asset at all points during those 4 years, and also have an asset to sell at the end of that time (or at any time during the 4 years if I wanted).

I understand many people give the car back and never make the final balloon payment. But in that case they have no asset and have made monthly payments to do nothing effectively other than drive a car, for a fixed time. Is that literally the only point of PCP, or am I missing something?

  • I can't answer your question, but surely there are cars in the £4k-£5k range that will fit your requirement. That way you can sell your current car and only spend a fraction of what you would on the financed one, with all the bonuses of owning it outright. – pyro Nov 9 '20 at 12:46
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    @pyro the question isn't about me finding a car. It's asking about whether PCP has any advantages beyond a relatively lower monthly payment. – Andy Nov 9 '20 at 12:59
  • Be sure to factor into your calculations how much the car will be worth after 4 years (ie how much you will have paid in depreciation costs) – AakashM Nov 9 '20 at 13:23
  • @Andy I presume you do actually plan to do this though, or you wouldn't have asked this question in the first place? Considering you said you're "looking at a used car". – pyro Nov 9 '20 at 13:44
  • @pyro No, I don't plan to do it. Because on the face of it, it's a terrible idea. I'm asking whether my assumptions in getting to that conclusion are correct. For example if I've completely missed something then maybe it's much better than I think and possibly something worth me doing. At the moment it doesn't seem it. That's what I'm here to find out. – Andy Nov 9 '20 at 14:27
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Pls note that this applies to normal leases (or PCP, which is financially identical) on new cars.

Are there any advantages to PCP car deals beyond a low monthly payment - even though you don't own the car?

Couldn't be simpler:

IF you will be getting rid of the car after three years (that's IF) it's usually/often cheaper to lease/pcp.

It's that simple.

Say you buy a car for 40,000. With depreciation, after 3 years it's worth nothing, if you can get 7,000 hard cash you're lucky. PCP/lease simply prices in this loss that most people pretend doesn't happen.


A note on the "balloon payment" at the end.

Note that I am (of course) assuming that one leases the new car for (say) three years, and at the end of course obviously returns it, lease finished. With leases, in theory it's possible to at the end pay a balloon payment, and keep the car. That's financially nuts and nobody does that. If the question was asking "Is it sensible to use a lease including executing the balloon payment at the end" obviously the answer would be "no, it's completely nuts to do that".


Used cars?

OP has explained to me that apparently in some countries folks now get a lease on a used car. As the OP suggests in the question, this is unbelievably ridiculous.


FTR I recommend that folks only ever buy cheap used cars. Never spend more than about $2,000 cash on any car. A $2,000 used car is totally identical in function to a $200,000 Bentley. New cars are clean, but a huge waste of money.

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    It is not that simple. While you can treat the PCP as a lease and walk away, and if you do this lease & PCP are similar, your answer is incomplete because you assume that the final payment on the PCP is greater than the part-exchange value of the car. This might or might not be the case. If the PX value is greater, then you can use the difference towards a new car at that time. I am not sure what you mean about spending 1% of post-tax income. That would mean a higher-rate tax payer spends less than £500 on a car, which is not sensible for most people. – thelawnet Nov 10 '20 at 5:36
  • This is the correct answer. The key is IF you intend on keeping or getting rid of the car. It depends heavily on whether the car is new or used. With a new car - even after 1 year - the value will be much lower. Therefore if you take out PCP on a brand new car you can drive a car worth a significant amount for a relatively low monthly cost, but you'll never own it. You don't make the final payment and start over each time. My question was about a used car where PCP was available. In that case it's not a good deal because buying it then selling the asset I own after 4 years costs me less. – Andy Nov 10 '20 at 9:24
  • @thelawnet - there may be some confusion. Of course nobody makes the bizarre optional balloon payment which is sometimes theoretically offered on a lease, and takes the car. That would be insane. The question is about the normal ordinary leasing process. (You pay say 5000 up front fee, then 500 a month, you get a new car for 36 months, and then you drop it off at a dealer on the last day.) (Typically then starting another lease.) – Fattie Nov 10 '20 at 15:26
  • @Andy just one point, leasing a USED car is almost unheard of in most places. I have not lived in the UK for some years, so, I'm surprised to hear if it is now common there?? FTR in this entire QA I just naturally assumed leasing a New vehicle. – Fattie Nov 10 '20 at 15:27
  • @Fattie it is not a lease. It is a form of a hire purchase. As a matter of fact as you say most people will take out a new contract at the end of the PCP period. In this case what happens is that the car has final payment of say £5k, the PX value is say £6k, which means that the new PCP contract starts with the £1000 of equity removed from the price. In the case where PX value is £4k then the new PCP starts with zero contribution. Since PCP is a loan product, it's not really different to buying a used car with a personal loan. – thelawnet Nov 10 '20 at 15:53
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The PCP sounds like leasing in the USA. All your listed points are the same: lower monthly payments, maximum yearly allowed mileage, buyout/balloon payment at the end of lease if you want to own the car.

My family finances our cars to own them. We currently have 2 cars over 10 years old.

A friend leases and has done so with a succession of cars over the last 10 years or so. I've asked him why. He responded that he doesn't want to deal with the time or cost of repairs and just likes having a new/almost new car. His budget is designed to include the lease cost.

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This is not really accurate.

I think your example is not perhaps ideal. In particular, understand car finance as a part of the model which means that millions of new cars are sold annually, whereas in other countries where car finance is weaker, old cars are more expensive and new cars less affordable. Without the finance the cars aren't sold.

If you look at a more typical example:

https://www.bristolstreet.co.uk/new-car-deals/ford/fiesta/titanium/227647/ford-fiesta-1.0-ecoboost-125-titanium-5dr-petrol-hatchback/

then the cost is £17,271 in cash.

Real APR for a 4 year term is maybe 3.5%

https://bank.marksandspencer.com/personal-loans/car-loan/

However this is likely not to be available to all borrowers, and the personal loan is not secured against the asset, so in reality a lot of people will have to pay much more. For a 49 month term at 3.5%, the cost would be £378.77 x 49 = £18,559.68

Comparing the PCP the cost is:

  • £1000 manufacturer's incentive
  • 49 x £225 = £11,025
  • £5749 optional final payment
  • = £16,774

equivalent to 1.2% APR, except that because of the incentive you are paying less than the cash cost.

So the PCP is better than the loan in every respect (and it's also much better than cash because you get £1000 which the manufacturer is incentivising the sale with without eroding their (inflated) selling prices):

  • it's cheaper, because the manufacturer wants to sell cars, and they know that most people want a monthly payment, so they put the incentives into making this attractive, not for the oddballs with £18k cash to borrow
  • the loan rate is cheaper
  • the credit is more readily available
  • since you are borrowing only part of the cost, the payments are more affordable.

The fact that you do not own the car is not a drawback, because you have the right to buy it if you want.

The mileage restriction isn't an issue. This only applies if you want to return the vehicle without paying.

In reality, looking on Autotrader a 4-year old low mileage Ecoboost Titanium Fiesta retails around £9k. So you in fact are in a better position than someone who bought their car outright, in that you can return your car if somehow it plummets in value, without risk, but in the likely event it is worth more, then you have 'equity' in your vehicle, which you can use for a trade-in.

The mileage restriction only comes in if your car turns out to be worth less than the conservative future value. Otherwise it doesn't exist, and even then if the mileage fee is excessive you can just ignore it by buying your car at the end of the contract.

This is very obviously better than a car purchased with a loan where the future value is not underwritten (albeit at a conservative price).

Your three examples are not good because you have not provided any interest figures. You are referring to a USED car, and here probably you will not find the most attractive deals.

One important point you have ignored is that how expensive the credit is essentially solely dependent on the interest rate. On a used car it looks like you will pay around 8.9%, whether you go HP or PCP:

https://www.cazoo.co.uk/used-car/ddad3e0b-2940-5251-8372-846367f10627/

However it's critically important to understand that in that case with HP you are repaying £22,000 over 4 years at 8.9%, whereas with PCP you are repaying only £17,000 over 4 years at 8.9%, with a promise to repay a final £5k at the end, on which you are paying 8.9% interest over the four years. This is similar to a credit card, in that the relatively expensive loan (8.9% vs. the 1.2% in the new car above) and smaller payments means you end up paying much more.

Car salesmen are slippery creatures and like to talk about monthly payments, but the interest rates REALLY MATTER. If the interest rate is 9%, and remembering that by only repaying part of the value of the car, you pay more interest, then PCP will be very expensie.

But if the interest rate is only 1%, then it's not costing you much or anything in real terms, and the advantage of having £100 extra per month (or whatever the difference is by not repaying the full value) might well be much more advantageous to you than the small amount of savings you'd get with the same interest rate and a full repayment.

You are wrong about the financial penalties for selling the car. In fact when buying a new car in many cases the best thing for a person with vast amounts of cash in the bank would be to buy the car on PCP and then settle it. In the new Fiesta example above, you take the PCP because you'd be crazy not to, and then settle it. This saves you the remaining interest (which in the example above admittedly not much), and your costs are only the admin fees (one month's payment) and interest (almost nothing) to date, when compared to buying in cash. And you took the £1000 incentive, so you are better off.

In addition, when on PCP, while in the initial part of the contract your car is likely to be worth less than your remaining payments, this doesn't stop you trading in - if you consider the dealer wants to sell new cars, and often, then he might allow you to trade in your car for a shiny new model with the benefit of some incentive. This will be done by considering the current value of your car versus your remaining payments and then the new car, so it might well involve you paying some cash towards the swap.

Fundamentally if you consider

(a) incentives

(b) interest rates

where (a) is high, and (b) is low, then PCP is going to be the best way to buy a new car (leasing can be cheaper, but with leasing you have no right to buy the car). For a used car this is less likely, since the manufacturer incentives won't be there. However PCP at high interest rates can still be attractive for many people who are focused on low monthly payments (because they aren't repaying the total principal) and don't consider the total cost.

Edit: should add that it is illegal in the UK to force car users to service with the manufacturer, so this is not correct. However in some cases it is possible that NOT servicing there will mean they can value your car at less than the guaranteed value (noting that you are in this case in the same position as any other car owner in that your car is likely worth a little more if it has main dealer service history).

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    You've answered my question - PCP deals are absolutely terrible. Everything you've said about them being better value however, is incorrect. In your example with the Fiesta the balloon payment is £5749 which essentially means the car which you thought was worth £18k would only be worth around £5749 after 4 years. Given that cars typically lose 60% of their value after 3 years (theaa.com/car-buying/depreciation) buying a brand new car - when the price is as high as it will ever be - is a terrible idea - and an idea which PCP simply attempts to mask with low monthly payments. – Andy Nov 9 '20 at 19:43
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    I'm not sure why you asked the question when you already had your conclusions in advance. You are totally wrong about the balloon payment. As I explained in my answer, it's just a loan. The car still costs £17271, minus the incentive, and plus the finance cost. The balloon is no more or less than the final payment on the loan. It is NOT the value of the car. The future value of the car at this point is unknown, and as I already explained in my answer the future value is likely to be higher than the final payment. – thelawnet Nov 9 '20 at 20:09
  • Whether or not buying a new car is terrible is impossible for us to answer without full context and irrelevant to the question. A new car will depreciate regardless of how you finance it. PCP is fundamentally a loan with a final payment, so you are wrong to say it is 'terrible' because it's just a loan, and loans aren't necessarily terrible. If people make inappropriate purchases because of easy credit (including PCP) that's a faulty purchasing decision by them, due to a failure of analysis, it doesnt mean the credit product is inherently bad. It is not – thelawnet Nov 9 '20 at 20:19
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    I don't know you keep saying things that make no sense. The lower the final payment, the lower the risk for the dealer. If you buy a car that costs £30k, and it's projected to be worth £12k after 4 years according to actuaries, then if the guaranteed future value is £5k, then the future value risk to the dealer is close to zero. OTOH, if the future value is £11,500, then clearly there's a real chance the dealer loses out. 'If' is not a conclusion, it's a conditional statement. In this case IF the GFV is well below the actual value of the car, then you are wrong to hand it over at end of PCP. – thelawnet Nov 10 '20 at 9:37
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    Your comments continue not to make sense. Firstly nobody is going out of business because list price of the car does not represent the marginal cost of production. Secondly these are in structured financial products such as this dbrsmorningstar.com/research/336571/… , so the risk is not to the seller. Thirdly, if what you said was accurate (it's not, because the manufacturer may subsidise the GFV out of its profit margin to shift product), then GFV is always < than PX value, in which case surrender is bad, the opposite of what you claim. – thelawnet Nov 10 '20 at 10:10

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