Is PCP a good way to finance a car?

[Blackrock1]

If you ask me this whole think looks and smells like a pyramid scheme.

I think that the example in the Telegraph of the dealer ringing up the woman early on to get another new car sounds uncannily like what happened to Blackrock. I'd love to know what percentage of people break their PCP before the 3 years.

what happened to me?

explain to me what happened to me again please?

 

[Blackrock1]

Hi Blackrock1,

I hope you don't mind me using your own case, but I am trying to show how falling car values in the 2nd hand market would adversely affect the above deal. I think (and I mean think) that the issue will occur when you try to renew on your 3rd car. If you go again and get something similar to what you are currently driving, the GMFV on that 3rd car will be much lower or the repayments would be much higher. You can of course shop elsewhere but I think the other dealers will be in the same position - 2nd hand values will have fallen to such a level that the GMFV promised will be a lot lower. When selling this car, the dealer may only offer the GMFV and you may have little choice if the market is flooded. You bought the car for 50k too so you are looking at a near 30k loss. Of course you have the funds so you're fine, but for many others it could be a different story.

what has PCP got to do with the depreciation of value of the car, if i bought it for cash id be in the same position

 

[Blackrock1]

A post in boards.ie on the topic

I work in advertising. It's all below and above the line, digital and traditional.

Two of the advertisers I work with are the most popular motoring brands in Ireland. The push for PCP is very focused, they're targeting young social climbing men that are brand and year-reg obsessed diesel drivers whom are gearing for a new car to show off to contemporaries and family. And it's working very very well.

Making normally unaffordable purchases all of a sudden affordable along with the typical Irish hankering for the newest 162/171 latest reg to impress the neighbours is the new black.

If you're buying a 60k car. You will pay 60k for that car. One way or another. You will pay for it, now, then, three years down the line, fifteen years down the line. You Will pay the top price for these cars. These deals have been very well thought out with the best minds in finance. Don't for a minute think you're cleverer than them. You're not. It's absurd to think that you're getting a deal.


http://www.boards.ie/vbulletin/showpost.php?p=101710453&postcount=84

quoting some random poster from boards doesnt make it any more factual

you will pay top price for these cars...

sounds far more dramatic than you will pay the rrp less whatever you manage to negotiate off for these cars.

 

[Gerry Canning]

PCP .

In a lot of cases.
To catch the financially stupid.
To catch the social climbers.
To catch those who fall for alluring advertising.
To catch those whose view of future value stretches to next weeks wages !
To gain sales of new cars .
Sometimes to catch the few it would suit !

 

[Firefly]

what has PCP got to do with the depreciation of value of the car, if i bought it for cash id be in the same position

The point I am repeatedly trying to make is that PCPs are luring people to buy new cars which they otherwise wouldn't do.

 

[Firefly]

quoting some random poster from boards doesnt make it any more factual

you will pay top price for these cars...

sounds far more dramatic than you will pay the rrp less whatever you manage to negotiate off for these cars.

Another point I am trying to make is that for a lot of people they think once the initial deposit is paid they can drive new cars forever and a day with low monthly repayments which won't be the case.

 

[Ceist Beag]

The point I am repeatedly trying to make is that PCPs are luring people to buy new cars which they otherwise wouldn't do.

I think most are in agreement on that point Firefly, I don't think we need another 15 pages arguing it. PCPs are designed to give them impression of affordability which, for some people, may blur the fact that you are still paying the full cost of a new car. However as the examples in Leos post show, overall it is a cheaper alternative to traditional car loans.

Another point I am trying to make is that for a lot of people they think once the initial deposit is paid they can drive new cars forever and a day with low monthly repayments which won't be the case.

I really don't think this is the case. Maybe some people are fooled by these deals but I think any punter with half a brain is aware of the fact there is a balance owing at the end of the term. You make it sound like it is always easy to roll over to another new car but I don't think it is quite as easy as you suggest. If there is not enough equity built up (i.e. the difference between the GMFV and the market value at that time) then the customer needs to put their hand in their pocket again to top up the deposit required on the next new car. Time will tell but I would suggest that with so many of these deals being taken up, there won't be a massive difference between the GMFV and the market value so the equity built up will rarely come close to a deposit on the next new car. If people are as naive and as strapped for cash as you suggest then it's much more likely they will be handing the car back than rolling over onto a new deal. Obviously that's a concern too as some people may not imagine this can happen to them but I don't see the pyramid scheme doomsday scenario being a real concern with this offer.

 

[Firefly]

You make it sound like it is always easy to roll over to another new car but I don't think it is quite as easy as you suggest. If there is not enough equity built up (i.e. the difference between the GMFV and the market value at that time) then the customer needs to put their hand in their pocket again to top up the deposit required on the next new car. Time will tell but I would suggest that with so many of these deals being taken up, there won't be a massive difference between the GMFV and the market value so the equity built up will rarely come close to a deposit on the next new car. If people are as naive and as strapped for cash as you suggest then it's much more likely they will be handing the car back than rolling over onto a new deal.

I agree 100% on this. I am not saying it will always be easy to roll over to another car, in fact I am arguing the opposite.

 

[Firefly]

Obviously that's a concern too as some people may not imagine this can happen to them but I don't see the pyramid scheme doomsday scenario being a real concern with this offer.

I think there is a big risk here. Currently the garages are happy to not even bother selling 2nd hand cars (with presumably less margin that new cars). That's all fine as long the new car sales keep increasing. Should they fall however, 2nd hand cars will have to be sold and to do so prices will fall. Falling prices will mean lower GFMV for anyone trying to roll over leaving them with either higher deposits required or higher monthly payments. I would suggest that for a lot of people this would result in their cars being taken back further depressing the market.

 

[Blackrock1]

which will mean they can go and pick up a second hand car for almost nothing if you follow your logic through

You would be surprised at how little margin there is on new cars, and do you think garages are sitting on second hand cars and happy not to sell them ?

 

[Firefly]

which will mean they can go and pick up a second hand car for almost nothing if you follow your logic through

If they have any money left

You would be surprised at how little margin there is on new cars

It would be interesting to know for sure. We have no idea of what bonuses car manufactures are giving garages to shift new cars. In VWs case, the timing was remarkable - it was around the same time as the emissions scandal. VW could not afford their cars not to sell given their massive production business - the whole thing could grind to a halt. Better to offer 0% and keep the lines going..

Do you think garages are sitting on second hand cars and happy not to sell them ?

I'm not saying that. I am saying that a number of people are suggesting that the price of 2nd hand cars in garages are being kept artificially high to make buying a new car more attractive.

 

[Blackrock1]

I'm not saying that. I am saying that a number of people are suggesting that the price of 2nd hand cars in garages are being kept artificially high to make buying a new car more attractive.

well they have to sell them so something has to give

 

[Leo]

I've been doing some reading on the UK market, where PCPs have been in existence for longer, with volumes really ramping up from 2012 on. In 2013, 80% of private new car purchases were financed via PCPs (793k cars), and that rate has remained around the same since. Now, around 50% of the new car market in the UK is fleet/business purchases, so that share may have a stabilising effect on the second hand market. I haven't found a breakdown for Ireland.

This 2014 used car market report flags a concern over the potential impact on the second hand market, but I haven't seen any real evidence to suggest that any significant drop has taken place. Some anecdotal reports suggest that certain very popular models have seen a most significant fall off due to over-supply, but mainly low-spec models that tends to depreciate more quickly anyway. If the UK had suffered a crash in the value of second hand cars I would have expected to see a lot more UK imports before the ~20% drop in the value of Sterling after the Brexit vote.

Some reports suggest the rise in PCP deals on second hand cars since 2015 there has stabilised the second hand market. I see these are already available in Ireland.

 

[demoivre]

It's clearly stated the two year term chosen was to give a fair representation of total cost of credit financing over a 5 year term for PCPs and straight financing.

Which is fine in theory. In practice there are people who may not be able to stump up the extra cash to pay off the balloon in 2 years. Bear in mind that one of the attractions of the PCP are the low repayments.

Those who choose not to renew their car and pay off the GMFV can finance this however they choose.

Exactly and those who chose to finance the balloon over 5 years will end up paying more.

 

[demoivre]

However as the examples in Leos post show, overall it is a cheaper alternative to traditional car loans.

Leo's key post is fine in theory but it assumes the borrower can increase their repayments to pay off the balloon over two years. That's a big " if " .

 

[Leo]

Which is fine in theory. In practice there are people who may not be able to stump up the extra cash to pay off the balloon in 2 years. Bear in mind that one of the attractions of the PCP are the low repayments.

So finance it over 2.5 years with the same repayments. Or 3 years with repayments 15% lower than you were used to.

Exactly and those who chose to finance the balloon over 5 years will end up paying more.

I would really hope anyone reading this at this point understands the very fundamental point that financing over longer periods will cost you more.

 

[Leo]

Leo's key post is fine in theory but it assumes the borrower can increase their repayments to pay off the balloon over two years. That's a big " if " .

Again as stated, take the option of maintaining the same repayments as the PCP deal and even with the 6 months longer term you still save over €5k opting for the PCP deal over straight finance.

 

[gnf_ireland]

I am coming in a bit late into this discussion. I think the whole thing has been discussed to death, but I would like to point out three things

1. Some people will never buy new cars - they will always buy second hand cards. A 3 year old second hand car with low mileage will always be attractive for this group. PCP allows a steady stream of these cars to the market and should keep the prices 'reasonable'. I don't believe the second hand car market will tank, although there may be some value in certain make/models. I can imagine if VW had another scandal in 2 years time, the value of a second hand VW might drop as an example. I don't see there to be 'bargain' 2nd hand Audi's or BMW's out there, as these will always have a 'floor' price.

2. Some people will always buy a new car where they can. They are willing to take the hit financially to have the new car, whether its PCP or not. For these people, PCP is just another form of lending, or in the case of 0% finance, a means of managing cash flow. This group will be buying the car - PCP available or not.

3. The 3rd group are the ones who will fall for the PCP deals, and potentially get caught by then. They have 10-15k to spend on a car, so instead of buying a second hand one, they are attracted by the PCP offer and buy a new one. In 3 years time, things may not work out the way they expected, and end up without a car or struggling to work out how to keep the car they have. They don't realise that the new 40k car has to be paid for some way, and the 15k deposit and 10k repayments still leaves a balance to be paid. These are the ones who have changed their behaviour because of the PCP deal.


Most people will fall into group 1 & 2 - but a few will fall into group 3. This is the group being referred to in the above posts where people are nervous about the scheme, not the likes of Blackrock1 who will buy the new car no matter what.

 

[Firefly]

1. Some people will never buy new cars - they will always buy second hand cards. A 3 year old second hand car with low mileage will always be attractive for this group. PCP allows a steady stream of these cars to the market and should keep the prices 'reasonable'.

Hi gnf_ireland,

There were 50% more car sold in 2016 that in 2014 and lots of cars imported from the UK too. I think it will be a glut rather than a steady stream, which sounds like a "soft landing to me!!

Most people will fall into group 1 & 2 - but a few will fall into group 3.

Again, there were 50% more car sold in 2016 that in 2014. I hope you're right but my aging hunch tells me a lot of people are driving on the never-never.

 

[gnf_ireland]

There were 50% more car sold in 2016 that in 2014 and lots of cars imported from the UK too.

Sounds like 2018-2019 will be a good time to pick up a second hand car !

I hope you're right but my aging hunch tells me a lot of people are driving on the never-never.

Maybe, but is that because it suits them and they would have bought the car anyway, or is it that they have both a car they would never have dreamed of because 'easy' finance was available ?

PCP is only an issue, in theory, when it changes customer behaviour and they buy a car they cannot afford, or would never have bought otherwise, because of it.