Mind the Pitfalls of PCP Car Finance

This PCP cost guide helps you produce a budget to understand and plan for end to end ownership costs over the time you have PCP. We hope to help you avoid the many pitalls of PCP financed car ownership.

Costs of PCP Car Ownership: Two Things to Keep in Mind

Keep in mind these two things when examining the costs of PCP car ownership:

  • The initial purchase of the car
  • The lifetime cost of ownership including end of contract

First, let’s look at the initial cost of deposits and fees to get an idea of how much to budget for each. Bear in mind that these costs vary dealer and country and change over time so do check the exact amounts where you are.

Then we’ll look at the long-term cost of PCP car ownership and see how final payments and depreciation affect the budget.

PCP Car Ownership Cost Estimation

There are eight main types of cost involved in buying a car on PCP:

  • Trade-in value
  • Discounts
  • Deposit
  • Options
  • Fees such as dealer and delivery charges
  • Interest
  • Final Payment
  • Insurance

Trade-in Value

The trade-in value of your current vehicle is straightforward: it’s simply the price someone will pay you for it less any outstanding finance and selling costs. The value depends on the specific vehicle as well as factors affecting its saleability such as age, mileage, colour, factory fitted options and so on.

The value may vary depending on the brand of car you’re trading against since some dealers have more incentives than others are any particular time.

Looking at the price of similar cars on websites advertising used cars will help form an approximate idea of the value but remember these are asking prices and retail. Dealers are trade buyers so may offer significantly less.

The surest way to find the trade-in value of a car is to get a dealer to value it whilst also checking the current settlement of any existing finance on it.

Discounts

It’s always worth shopping around since special offers ebb and flow and some dealers may be keener to hit targets than others.

Timing is important since there are less likely to be big discounts on a popular brand-new model that’s already selling well. On the other hand, some months of year are less popular for buying cars so there may be better deals or steeper discounts available. Similarly, there are times when the whole industry pushes hard to sell and offers such as cash back are available.

Shopping around and asking for a discount may save a meaningful amount off the initial cost.

Deposit

The deposit is the money put in at the start towards the purchase of the car so that only some of the cost is financed using PCP. The size of the deposit needed varies considerably although usually somewhere between 10% and 40%.

If the deposit is smaller then the amount financed is bigger. Smaller deposits will increase the interest cost and the possibility that the car will reduce in value quicker than the monthly payments reduce the finance owed through the life of the PCP. In general, a bigger deposit is better from a financial standpoint.

Options

Remember to allow for options when initially estimating the costs and choosing a make and model of car. Some brands come fully loaded while others improve significantly by adding options.

Selecting factory options carefully and testing ‘what if’ scenarios is time well spent.

Fees

There are fees when buying a new car on PHP and these vary country to country, brand to brand and sometimes even dealer to dealer.

Remember to allow for these fees when estimating the cost. A dealer will be able to give a precise value for fees when preparing a quote.

Some examples of common fees are:

  • Delivery charge
  • Dealer charge (in some countries)
  • Documentation fee
  • Completion fee
  • Interest
  • Motor Tax / Registration Fee

Interest

Interest is the charge for using someone else’s money so clearly the longer it’s borrowed, the greater the interest cost.

Increasing the deposit and reducing the total price will reduce the amount borrowed and therefore the cost of interest. Similarly, choosing a shorter term will reduce the interest charge but will increase the monthly payments.

Purchasers with an excellent credit rating are usually offered lower interest rates because they pose a lower risk of default to the lender.

The interest rate is often subsidised by car manufacturers and it’s quite common to see dealer rates much lower than banks offer for a similar loan. These low rates are another form of discount that encourage consumers to buy.

In some cases, an extra small discount is available to those buying for cash which represents the interest subsidy not needed by cash buyers.

Final Payment

PCP contracts usually have a final payment that can be as much as about a third of the purchase price. The final payment is one of the main characteristics of PCP that keeps the monthly repayments low. It also introduces one of the main risks of PCP which is that the value of the car may be less than the outstanding finance at the end or when selling it.

It’s always a good idea to look closely at the terms and conditions attached to any guaranteed future minimum value (GFMV) which many PCP contracts have. It’s important to follow the conditions or the GFMV may be reduced or invalidated. Conditions to
consider may include:

  • Main dealer serviced
  • Maximum annual mileage
  • Keeping the car is good condition (E.g. clean and no scratches)

If you’re a high mileage driver, it’s best to mention it to the dealer to ensure PCP is still the right approach.

Insurance

The monthly cost of PCP is less than the monthly cost of buying the car outright over the same period. That’s because the final payment isn’t repaid month by month with PCP, but it is with a full purchase.

Some people use the lower monthly cost to drive a more expensive car. If that’s the intention, then remember that more expensive cars usually cost more to insure.

Depreciation

Depreciation gets a big heading all to itself because it’s often overlooked and is a very important cost. Depreciation is the reduction in value over time due to wear and tear.

The amount of depreciation varies a lot by make and model. If you look at the lowest depreciating cars, it’s clear they’re high quality cars, often very expensive and sometimes made in limited numbers. It’s unlikely that many people will finance these cars using PCP.

Current demand in the used market has a big impact on used values too.

Putting a number on it, cars often lose two-thirds to three-quarters of their value in the first three years. Some lose more and some lose less. Depreciation follows an exponential curve which means that the speed the values drops is highest at the start and the rate the value drops slows down as time goes on.

Put another way depreciation in the first year of a new car is highest, less in the second year and less still in following years.

Useful Things to Remember

If the depreciation and interest charged is more than monthly payments you’re using up your deposit to subsidise lower monthly payments. Then when you change cars you may need to add extra cash to make up the deposit.

Older cars depreciate more slowly. So, a full history, warranted, low mileage two year-old car is usually better financially than a brand new car.

A low deposit, high balloon payment or long duration loan on a car will increase the chance it’s worth less than the outstanding finance for significant parts of the term.

Consider This?

How much time would be committed to paying the PCP loan? Divide the monthly PCP payment into the take home of your payslip and multiply by 20 (on average there’s just over 20 working days in each month) to see how many days a month, every month, for 2, 3 or more years you need to work to pay for the PCP loan.

Good Luck! And I hope you save money.

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