[Closed] Idiots Guide to PCP

If say my current vehicle is valued at £20K, but there deposit limit is set at £8K, how does a trade in work? Would they simply take my car, put £8K towards the finance deposit and give me the balance of £16K?

Two possibilities. 1/ your maths indicates you really should have someone check over your PCP docs for you

2/ You're right, in which case what dealer and can I get there before you......

If say my current vehicle is valued at £20K, but there deposit limit is set at £8K, how does a trade in work? Would they simply take my car, put £8K towards the finance deposit and give me the balance of £16K?

If you can get that deal, I'd definitely take it 😉

PCP gives you a guaranteed minimum value at the end of the term. If it's worth more than the final payment, then you pay it, and can sell, pocketing the difference (or directly use that difference towards the deposit on the next one). If it's not, you walk away with nothing to show for your payments.

I've also always paid cash for cars, but looked very hard at PCP last time around. At a high level, you're still borrowing and paying interest, and you're also paying someone else to take the risk on the car's future value. So it shouldn't work.

At a low level, some places have perverse finance incentives that might make it worthwhile. A VW I looked at would contribute over £1k towards the deposit for taking finance, and permitted unlimited overpayments from day one. In other words, although there was a limit on the initial deposit, you could pay off almost the entire loan the next day, thereby getting the finance incentives without paying the interest.

With regards to a deposit, on the manufacturers finance calculators there seems to be a limit set on the amount (assuming so they make money in interest on the repayments). If say my current vehicle is valued at £20K, but there deposit limit is set at £8K, how does a trade in work? Would they simply take my car, put £8K towards the finance deposit and give me the balance of £16K?

If you have that much value in your current vehicle I'd just go for a straight HP deal. Or sell it privately/WeBuyAnyCar bank the difference and put the 8k deposit into the new car.

If you were to just hand it back and walk, what happens to the money you have in the equity of the vehicle?

IME you would get nothing back. Just handing back is the worst option with PCPs.

If you trade-in you would get current market value. PCPs are usually designed so there is just enough value left so you can go again. It doesn't make sense for them to put high final payments in a deal. They wan't you to spend again!

You can part-ex your vehicle for any other make to, you aren't stuck with the make/dealer you buy from.

Now for a more helpful answer.

1/ depends how attractive your car is - they might take your car as PX, and repay the balance to you but that's bad cash flow so if it's worth £20K you might not get an £8K deposit and £12K back. You might have to sell privately to get full value, or accept a lower value but get that bargained back on other stuff on the deal (which you might not want.....)

2/ options at the end. i/ pay the final payment and the car's yours. ii/ hand it back and walk away, as long as you haven't trashed it and overdone the mileage then you should balance that final payment, and in effect you'll have rented a car for 3 years. iii/ use the value of the car to start all over again. Whatever it's worth above the final payment you can use towards the next deposit (but the numbers won't give you another £8K excess to use as deposit from that, the final value will be close to book value)

The question most have for ii/ and iii/ is what stops the dealer ripping you off; the answer is competition. If they say the car's not worth the final payment, or (IYHO) understate the value and hence the excess for you to take towards next deposit, you can take it to another dealer or sell it privately and get what it's really worth by doing that. The original dealer knows this and has to therefore be 'honest' with you. Of course depends how badly the need PX's or to get people to start another PCP. You aren't stuck with the same dealer, even the same marque, if you want to change another brand's dealer will still take it as PX and organise the remaining finance for you, you just need the agreement with the GFV / balloon payment on it and they'll sort it.

https://www.thecarexpert.co.uk/options-the-end-of-your-pcp/

also i plays into ii and iii a bit; suppose car is worth £8K at the end, and you have £6K to pay to own it. If you hand it back (ii) you've 'lost' £2K. If you take it to a new dealer, they might offer you the £8K. But they might only offer £7.5K say. Hence you can shop around to get someone else to offer that £8K*, or buy it yourself for £6K and then sell it privately for £8K and get the £2K like that.

* But it gets even more complex because while they might not want to go to £8K on the PX, they might instead give you £7.5K and then 'find' some extra deposit contribution in a hidden away deposit scheme - I've been a dealer's 'friends and family' before, another time I joined British Cycling for £24 to then get a BC partner deposit worth several hundred....amazing what they can conjure up when they need to.

A VW I looked at would contribute over £1k towards the deposit for taking finance, and permitted unlimited overpayments from day one. In other words, although there was a limit on the initial deposit, you could pay off almost the entire loan the next day, thereby getting the finance incentives without paying the interest.

There's nothing to stop you calling their finance people the next day and settling the whole thing, you still keep the discount, service plan, fluffy dice or whatever incentives they threw in.

Ah PCP is also a kind of car finance, I was about to suggest not taking PCP so lightly, there is no ‘idiots guide’

As you were...

Edit: Just seen @pdw mentioned a similar thing with bonus/discounts.

Another slighty different take on it.... I have just purchased a Golf R (used). i have the money from the sale of a previous car and a small loan. I told dealers i am a cash buyer and most didnt give me the time of day. After some research on a helpful VW forum, many suggested i take out PCP and pay it off immediately.

This had a two fold benefit. 1) the sales person was interested in me, as they get a little bonus for selling finance and 2) part of the PCP deal was two free services (worth around £5-600).

So i bargained hard, got a car within budget, with a bonus of the free services. I was upfront with the sales person too, so they knew my budget couldnt go any higher, even if it was 'only' a few quid extra per month on the PCP.

So a PCP deal worked for me in this instance.

The other thing to consider is the awful APR you will likely pay on a PCP deal. VW have it set at something like 8.9%. Whereas the bank loan i got is at 2.8%.

Hope that helps a bit.

There’s nothing to stop you calling their finance people the next day and settling the whole thing, you still keep the discount, service plan, fluffy dice or whatever incentives they threw in.

I’ve done just that. As with most financial agreements you’ve a 14 day cooling off period. Last car was looking to buy outright but dealer mentioned they had a “deposit contribution scheme”. Was a decent amount which was more than the difference in straight trade in and cash price. Trade in was worth more than max deposit, they paid the difference in a bank transfer. Signed the paperwork on pick up day, phoned finance company after the weekend and paid off the amount in full with no penalties or “admin fees”. Saved 3 grand.

Like any credit you have legally built in certain points at which you can exit in certain ways without penalty. I've never done pcp but seem to recall reading something about half way point (total value) and 2/3rds point.

As above, there's the take the deal, drive home, call the finance and pay off instantly option, it's not uncommon to do. I've seen manufacturers getting around that by using the inventive of, 'first 3 monthly payments are made by us'

I recommend a light Googling of Pistonheads threads for the definitive answers on this topic.

In short, PCP is a deferred payment plan. You are incurring interest on the total debt from day one, while paying it off in small increments towards a final larger payment. Because that final payment is made only at the end of the agreement, the interest charges are higher than if you paid back the total debt in larger increments over the same time period.

So, for example, a 2.9% APR PCP will incur a lot more interest than a straight payment profile bank loan at 2.9% APR for the same amount. Add in the general trend for manufacturer interest rates to be higher and you can see the issues.

If you follow through a PCP to the end, it is more expensive than other ways of paying back the same debt. The main advantage is lower monthly payments and some manufacturer discounts / incentives.

All the other stuff - guaranteed values, voluntary termination, various other benefits - are not benefits of a magnitude significant enough to outweigh the interest charges of a PCP when compared to lower cost borrowing.

If you understand PCP for what it is, then you can benefit from it - e.g. attain a discount and settle immediately. In my humble opinion, its main benefit is to those who value convenience higher than the value of a fair deal.

I told dealers i am a cash buyer and most didnt give me the time of day.

Not many are interested in cash these days- as mentioned above there are incentives to sell finance, the hassle of having cash on the premises that then needs banking and money laundering regs.

PCP is a mechanism to enable you to afford a car you otherwise wouldn't be able to afford. It's not an interest efficient method of car ownership. If you're looking to minimise interest payments then its not for you, however if, like me, I don't give a shit, then it is different. I have a monthly allowance for a car so my aim is to get the nicest car I can for the monthly budget so PCP is great. instead of buying a 5 year old car with a loan, paying for all the servicing, MOT, breakdown cover, depreciation on top of my monthly allowance I get to drive around a far more expensive car and not pay servicing, MOT or breakdown cover as its all covered by a combination of warranty, dealer offers on new cars and the fact the car is brand new. The only thing I got stung with was the additional tax for a premium car which I wouldn't have paid before.

Also the other benefit is it takes away the hassle of changing the car. When you own a car I find it a proper ball ache selling it, or trying to PX it or however I want to dispose of the car...it costs money to advertise, it takes time, you have to suffer tyre kicking idiots coming round. Whereas PCP you just jump into a new car with zero more to pay, or hand it back and you might get some cash back if the cars value is more Han the Guaranteed Future Value.

I got 2.5% interest on my PCP last year. A mate of mine got 0% so the APR the year before, so the offers change alot so check month by month to see what you can get.

I didn't bother paying a deposit for mine. I was going to - I had upto £6k to put down and my initial instinct was to put the whole lot down, but when I worked out how much it would reduce my monthly's by it wasn't worth it...better for me to go for zero deposit and use the £6k to fund the additional monthly's. Was unbelievable really. Walked into a dealership. Did a deal on a brand new specs'd up to the eyeballs prestige car, picked it up a month later and didn't pay a penny for 2 months! its bonkers but as long as the dealers are happy, and they must be as they are always pushing PCP's these days so much be lucrative business for them, then I'm happy.

Though I did have a wobble last year. I picked the car up in January, COVID hit and I was at risk with my job in October and I think handing the car back so early in the PCP deal would have been costly. I think out of my 4 year PCP deal it will have covered its costs after about 2 years and that is when the salesman said he'd be calling me to tempt me to upgrade! I wont. This is my last hurrah for a nice car. Its Bangernomics for me after this one.

Would they simply take my car, put £8K towards the finance deposit and give me the balance of £16K?

Whoops! Fair play on the sarcasm! Now you understand why i need the help!!

 

it's worth having a think about what your plan to do at the end of the PCP term as it may well be worth considering personal contract hire (PCH) depending on your intentions

unless you are pretty certain you are going to buy the car and then sell it to release the equity, or want to exchange for another vehicle form the same brand / group of brands, PCH works out cheaper per month as not building equity in the vehicle and you just hand it back at the end of the term.

like PCP, it's not the most efficient way owning a car, but works well if you get a car allowance for example and change vehicles every 3-4 years. no hassle with selling at the end and not trapped into one brand group of brands. as it's not HP you don't get the ability to hand it back half way through via the rule of halves and third, but i've terminated PCH with minimal additional cost. nearly all of them come with 3 or 4 years guarantee, roadside assist and you can normally get a decent enough price on a service plan. it's an easy fixed cost way of owning a car that you might not stretch to normally

if you have a look at the big online aggregators like national contract leasing there's normally some good deals to be had. equally, nearly all main dealerships will do it, they just don't proactively offer it normally as they prefer PCP