One of the biggest success stories for car dealerships in recent years has been fixed-term financing plans.
By far, the most popular method for drivers at present is Personal Contract Purchase (PCP).
It’s not difficult to see the appeal – drivers get to hit the road in a brand-new (or perhaps nearly-new) vehicle with an initial payment and generally more affordable monthly payments than if they were hire purchasing.
And car salespeople are happy to sell finance deals to motorists, safe in the knowledge that they will more than likely get repeat business a few years down the line. They basically sell you a loan to lease the car and, more often than not, will get it back when the customer moves on – to a new deal with them.
Little wonder, then, that more than more than eight in 10 of road users getting their hands on a new set of wheels have bought into a PCP arrangement.
Everyone’s a winner then – but is a PCP deal the right move for you?
The first thing to bear in mind is that entering into a PCP arrangement means you aren’t paying off the car’s full value. You’re paying the difference between the cash price and the car’s likely value when your contract is up, which goes some way to explaining why the monthly payments are lower.
Also, unless and until you make a final ‘balloon payment’, you won’t own the vehicle at the end of the fixed term (usually two, three or four years).
At the end of the fixed term four out of five PCP customers don’t want to pay the hefty lump sum – also called the Minimum Guaranteed Future Value (MGFV) – for a less-than-new car that they’ve been driving around in for years.
Instead, they simply hand the keys back at the end of the term and start afresh with a brand-new car, which makes far more sense than paying a substantial balloon payment for what is by now a well-worn car.
One of the plus points of a PCP arrangement is a small degree of flexibility it gives customers, though this only relates to the initial payment, the length of the repayment term and the decision at the end of that term.
The majority don’t know at the outset whether they will look to keep the car by settling up and paying that balloon payment at the end of the term. Their other options are to walk away with nothing further to pay or – if the car’s value is more than the minimum guaranteed future value (a predicted amount set at the start of the PCP deal) – use the difference and put it towards a new PCP deal.
Let’s look at other options for getting hold of a new vehicle.
Paying up front in cash – by far the most desirable, but realistically the average Joe won’t have the savings available to be able to buy a new car and not put themselves in debt. Those that do have that kind of cash to hand might not want to tie it up in a car either.
Also worth bearing in mind is that, as soon as you drive your new pride and joy out of the forecourt, it’s depreciating at an alarming rate. You can expect a 10% drop as soon as you exit the dealership, a further 10 to 30 by the end of the first year and a whopping 60% by the time the car has three years’ use on the clock.
Buying on a 0% APR credit card – the big plus point here is the zero-interest. This option could be best for you if a) the car dealer accepts credit card payments (not all do), b) you can get a new card with enough credit to cover the car, and c) you can pay off the purchase before the zero-interest period ends, as the interest rate will shoot up thereafter.
Car lease/hire agreement – the main attraction here is the low monthly payments, but it’s basically renting a car on a long-term basis. You won’t own the vehicle, or have the option to do so. You pay a deposit at the outset and a set monthly amount for a fixed term. There are restrictions, though. You will be subject to a mileage allowance and exceeding it comes with hefty penalties.
Personal loan – another way of owning the car outright, and doing so from the off, this could give you greater spending power than the credit card option, and you’ll have a structured repayment plan. Interest on the loan has to be factored in, however.
Hire purchase – if your credit rating isn’t perfect and you’re unable to get a personal loan, HP could be your recommended option. You’ll need to lay down a deposit, usually 10% of the car’s value, and pay off the full cost over time. The finance company has ownership of the car until the full amount has been paid off and so missed payments could lead to the vehicle being repossessed.
PCP v HP – which is right for you?
PCP is better for you if:
- Keeping your monthly payments to a minimum is your most important factor
- You won’t want to keep the car, or you’re not sure what you’ll do, once the term ends
- You can get a lower interest rate than with the HP deal you’re looking at
- There is a big deposit contribution offered by the manufacturer
HP is better for you if:
- You’ll want to hold on to the vehicle at the end of the finance term
- You’re not keen on making the ‘balloon payment’ to finally own the vehicle
- You’re OK with higher monthly payments as you’ll own the car when the term ends
- You don’t want your mileage to be limited
- After comparing the PCP and HP deals offered the total cost is lower with HP.
Whatever option you plump for to get your new car, you don’t need us to tell you that you need to know every aspect of the deal you are taking on. And your salesperson has a duty to give you all the details, in order to avoid creating an unfair relationship.
If you suspect you have been mis-sold your PCP package, whether that is because you were not given the full and complete details, you weren’t told about your dealer’s fees and commissions or, for any reason, you weren’t able to make a fully-informed decision on what you were signing up to, then get in touch with Barings Law.
If you were misled or given advice that wasn’t in your best interests, or your salesperson failed to ensure you could afford the finance package, you need to look at claiming compensation.
Speak to one of our advisors on 0161 200 9960 to see what we can do to help. There’s no obligation and we should be able to tell you where you stand within just a few minutes. If you’d prefer to use our webchat facility, simply click on the icon on the bottom right of this page.