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:
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.
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.
There's a maximum per year mileage restriction.
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?