PCP or Bank Loan for Car Purchase?

Question

I'm trying to figure out the best way to pay for a car we're about to purchase. I had a figure in mind of between £6-7k when looking at cars, so I also knew I wanted to pay around £200-£240 per month over 3 years.

We've found the car we want and need to raise £6640 to pay the balance. The garage has quoted us a PCP deal as follows:

£136.56 for 35 months with a balloon amount left of £2,970. =£7,749.60

However using the loan calculator at tescobank.com:

£208.07 over 3 years =£7,491

Tesco do say that the APR (8.3%) might change once I actually apply depending upon my circumstances, but on the face of it it seems like the loan will cost about £260 less than the PCP.

If I went for the PCP deal, I would put the monthly difference into an ISA, so I would at least be close to the balloon when the 3 years were up.

Is it as simple as it seems? The only benefit I can see from the PCP deal under my circumstances, is that we can hand the car back after 3 years if it's depreciated significantly and have a guaranteed figure in our ISA. Is this worth the £260 figure in your opinion?

I'd just like to hear some opinions really and find out if I've missed anything or if there's anything else I should take into consideration.

Thanks, Anthony

Answer 1

Ok, now that I know what a PCP deal is (thanks @Timo Geusch), I gotta say, I don't see the benefit.

The thing about loans with a balloon payment is, you set up with a risk point in the future. That is, on that date 3 years from now, you need to fork over 2,970K or lose the car. There are all sorts of things that can happen at that point, or in between, that can put you in a tight spot.

To my mind, they worst case situation is where you don't have the money, and, you're not able to get a loan for another car. Then you're suddenly broke and walking.

That can easily happen if you lose your job at the wrong time - and not having a car would make it even harder to find a job.

Now, that doesn't mean that a balloon loan can't be useful; but it's only useful if you can get some benefit that's worth more than that risk point of the balloon payment. For instance, if you can get a much lower interest rate, or if you can get a cheaper price on the car.

But from my read of your question, not only is there not any benefit, you'll actually end up paying a little more. The only benefit is that your monthly payments in the mean time will be less. But, if that makes the difference between being able to afford the car or not, then I would argue you simply can't afford the car.

One more, and completely different, point for your analysis:
I'd take the car's reputation for reliability and depreciation into account if you're still on the fence. If it's a solid car that keeps it's value (always my preference), that's a check in the regular loan column - you want to take less risk of losing a higher value, useful asset. On the other hand, if it's a piece of junk that no one wants, well, maybe do the PCP, save the money and plan on walking away from the heap in 3 years.

On the balance, though, I'd say totally not worth it. Not unless they'll come down at least 500-700 on the price if you'll do their PCP.

Answer 2

At that price point I would just buy the car with a loan. One of the issues with a PCP is that you'll end up with similar discussions as with a lease return over mileage etc. With the loan (I assume it's a personal loan) you also have the added benefit of being able to sell the car before the loan is paid off in case your circumstances change.