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      02-20-2013, 02:25 PM   #1
Mike in Hampshire
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PCP versus bank loan

So let's suppose I'm buying a brand new 30,000 car, and have 10k cash deposit from savings. Now, I can't see why I would ever want a bank loan for the remaining 20k, assuming the PCP deal is the same APR%, and given that I'd expect to see through the full 3 year period.
My reasoning is this:
I won't exceed the agreed mileage figure on the PCP, and I keep my cars in pristine condition anyway, and would do so if I had the bank loan. So there won't be any nasty charges when (if) I hand the car back. I'd take out GAP insurance in either case.
PCP schemes are manufacturer supported so the APR% is often less than the bank loan [PCP wins].
If the GFV after, say, 36 months is below the market value of the car, I pay the GFV and have exactly the same car as I'd have with the bank loan [they are equal].
If the GFV is above the car's market value then I hand the car back, whereas with the bank loan I'm stuck with a car that has little value [PCP wins].
If I'm 50% or more through the PCP deal and I decide I hate the car, I just VT it and they take it away. With the bank loan I have the faff of selling the car [PCP wins].

So the PCP deal fixes a maximum depreciation and gives me a call option to buy the car at month 36 if I choose. With the bank loan I am exposed to excess depreciation and I don't have the option to hand back the keys.

I must have missed something, because I can't see why I'd ever choose the bank loan, yet lots of folk do. And forums are full of tales of doom about PCP's.

Mike.
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      02-20-2013, 03:08 PM   #2
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depends upon your situation.

If you know you will keep the car past the third year, add up the total cost of the bank loan and deposit. Add up the total deposit, PCP payments and the GFV. Which total is more, and by how much?

If you like you can turn it into yearly costs and discount the 2nd and 3rd years to NPV to get a more accurate comparison of the figures.

When I got mine, the bank loan rate was 7.4% and the PCP from BMW was 10.9% (of course he swore it was a highly competitive rate) and, of course, with the PCP you are paying interest on the whole of the GFV for the whole of the term which doesn't help the cost of interest.

You gave examples of plusses for the PCP but on the bank loan, your car is yours from day 1, you can do what you like with it, without third party consequences, do whatever mileage you want, and no arguing about repair charges if you were to hand the PCP back at the end of the period. And it's your deposit for your next car.
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      02-20-2013, 05:15 PM   #3
Mike in Hampshire
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Quote:
Originally Posted by AlanQS View Post
If you like you can turn it into yearly costs and discount the 2nd and 3rd years to NPV to get a more accurate comparison of the figures.
Ha! Funny you say that, that's exactly what I was doing prior to posting. Of course if the APR's are the same, and the GFV realistic then the Net Present Value of both options is zero. The difference is that the bank loan gives you a lump of metal at the end whilst PCP gives you an option of identical, or higher, value.

Agreed if the bank loan APR is 7.4 and the PCP 10.9 then the bank loan wins -I'm assuming PCP APR isn't higher.
I take the point about ownership but if I don't wish to modify the car, and am confident I'll keep it in low mileage A1 condition (a big "if").....still looks like PCP wins........in my scenario anyway.
As you say though - depends on circumstances.

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      02-20-2013, 06:00 PM   #4
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If you only want to keep a car for 3 years and you want to spend 30k or more then contract hire it.

Why tie up 10,0000 on a depreciating asset????

Say you were to buy a 330d M-Sport, it would cost you around 43k for a new one, 39k after discount.
Or go for a year old one at 30k,

10k deposit and a GFV of 10k means you have 36 months at 360 a month at 6% apr.
It will be worth around 10k at the end if now 4 years old, maybe 12k trade in.



Hire a brand new 330d M-Sport for 305+vat, so 365 a month with 2250 deposit.
5 a month more, 8000 less deposit tied up.


http://www.contracthireandleasing.co...ries/11641434/



Best loan at the moment is 60 months straight repayment if you really want to 'own' the car.
Why be in a position where you are forced to do something after 3 years?
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      02-20-2013, 06:05 PM   #5
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Depends what car you are looking at of course.

M3 for 400 a month including vat.

http://www.contracthireandleasing.co...w/m3/12450002/

M135i with media is more expensive than the m3...

http://www.contracthireandleasing.co...ries/11921716/
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      02-20-2013, 06:23 PM   #6
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I'd never put 10k down as a deposit on a 30k car on a PCP. I found that the general advice is to keep the deposit to as close to what you expect the equity in the car to be at the end of the deal as long as that keeps the monthlies to an acceptable level for you. That's usually a much smaller figure and therefor doesn't hurt nearly as much if the car is in negative equity at the end of the deal. I guess it's like any sort of gambling, don't play with what you don't want to lose.

I'm currently on my first PCP deal. I did lots and lots of reading and crunching of figures before I went for it. There are ups and down to both ways of doing it and you do read so many people on car forums giving it the "if you can't buy it cash then you can't afford it line" etc etc blah blah blah. Well, I could have bought my car cash. It would have damn well cleaned me out but here's what I found. If I bought the car cash the deal wasn't as sweet as the dealers don't get their finance kick back. The discount was roughly half. Buying with a loan is obviously the same as cash to the dealer and the best rate on a loan I could find was 6% where as the PCP is 3.9%. Over the term the interest paid on the PCP comes to less than half the value of the discount I got off the list price of the car so at the end of the deal I've still paid less than list plus my savings are still sitting where they were making interest.

Loads of people run screaming for the hills when they hear the word finance or PCP. Unless I've missed something really obvious then if you do the maths and can negotiate well enough then they are no worse than any other method of buying a depreciating asset like a brand new car. Especially if you look at your finances as a whole rather than just the car fund.
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      02-20-2013, 06:32 PM   #7
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At the end of the day, you want it to cost you the least over the period you want to be in it.
It is as simple as that.

Most PCP agreements will set the balloon to around 35% of list at 3 years old, 30% at 4 years old and 25% at 5 years old.
However, some cars are still worth 65% of list at 2 years and 50% at 3 years, which is where contract hire works.
Also, the contract hire companies get massive discounts and they get the vat back.
They also have buy backs agreed at rates we could never negotiate, it helps the marques shift some metal.

Never put down 10,000 into a car you don't want to own!!!


Buying a new car for cash is a mugs game.
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      02-20-2013, 06:40 PM   #8
Mike in Hampshire
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Gizze, the deal you link to is for 24 months, but yes I get your point.
Thing is, I was comparing bank loans to PCP, not PCP to contract hire.

Sure, if the car I want is cheaper on contract hire than any other form of finance then I'd be daft not to consider it.

Presumably contract hire can be cheaper for Joe Public if the manufacturer is offering it to the lease company for way below market value? And the monthly repayments reflect this.
But wouldn't they only do that on certain slow moving models? I've yet to see a great contract hire deal on the BMW X3, but I'll have another look, cheers.

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      02-21-2013, 01:50 AM   #9
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There don't seem to be that many attractive contract hire deals on the X3, one here:


http://www.fleetprices.co.uk/persona...-se-5dr-877390

But it would be 12k or so to lease it over a 2 year period. I like contract hire, it takes the worry about depreciation cost and future values out of the equation and generally includes VED. If you are not that fussed about options and are flexible about the car you want there are some cracking deals around, my 640 is a case in point. I agree with Gizzie, buying a brand new fast depreciating car for cash is not financially astute these days. Some of the PCP packages with very low APRs are definately worth a look though, especially when they come with dealer deposit contributions and additional discount.
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      02-21-2013, 02:49 AM   #10
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To me as a consumer there is little difference between contract hire and PCP. In both situations you are just paying the depreciation.

In a lot of cases lease can be cheaper for the reasons Gizze explained (they get better discount, no VAT etc). However, as you are seeing with the X3 it's the more popular models or models being put on special pushes from the manufacturer that come as the attractive deals with leasing.

The 330d is a good example. I would have had one of those but I can't live with a saloon and the good lease deals only appear to be on saloons. Although the touring isn't much more to buy it was coming out at roughly 200 more per month to lease. I can imagine thats purely because bmw aren't pushing them to the leasing companies or the leasing companies have only bought the saloon in bulk as most of the offers appear to be from stock.
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      02-21-2013, 03:27 AM   #11
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Lease hire you just had the car back with no asset in the car. With PCP you might have a few quid to put towards another car. Also PCP's tend to require a smaller deposit and the monthly payments are smaller because you are not paying interest on the whole amount of outstanding credit.
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      02-21-2013, 03:42 AM   #12
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Quote:
Originally Posted by peterg1965 View Post
I agree with Gizzie, buying a brand new fast depreciating car for cash is not financially astute these days. Some of the PCP packages with very low APRs are definately worth a look though, especially when they come with dealer deposit contributions and additional discount.
Peter, surely logically whether you buy for cash, contract hire, or PCP.....a "brand new fast depreciating car" is going to cost lots, agreed? In fact in a perfect market there would be no difference whatever method you use. Also, if we were were financially astute we'd drive 2 year old Kia's, and be bored witless.

BUT, the market isn't perfect, as you, Gizze and Mowflow have pointed out. In fact the key issue is less about what form of finance one chooses, it is much more about manufacturer support. How is it possible to get a BMW M3 DCT for 400 per month on contract hire? Because (I'm guessing) BMW subsidise it.

I can't see how a bank loan can ever be better than PCP; I can see how contract hire might be cheaper. But it's only because BMW (or Benz, whoever) allocate cars to finance companies at a much lower rate than you or I can get. It isn't inherently the finance method that causes this.

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      02-21-2013, 03:49 AM   #13
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Quote:
Originally Posted by Mike in Hampshire View Post
Peter, surely logically whether you buy for cash, contract hire, or PCP.....a "brand new fast depreciating car" is going to cost lots, agreed? In fact in a perfect market there would be no difference whatever method you use. Also, if we were were financially astute we'd drive 2 year old Kia's, and be bored witless.

BUT, the market isn't perfect, as you, Gizze and Mowflow have pointed out. In fact the key issue is less about what form of finance one chooses, it is much more about manufacturer support. How is it possible to get a BMW M3 DCT for 400 per month on contract hire? Because (I'm guessing) BMW subsidise it.

I can't see how a bank loan can ever be better than PCP; I can see how contract hire might be cheaper. But it's only because BMW (or Benz, whoever) allocate cars to finance companies at a much lower rate than you or I can get. It isn't inherently the finance method that causes this.

Mike.
Exactly. The Wife's SLK was PCP'd at an interest rate of 4.9% and a deposite contribution of 5k from MB. You try getting that interest rate at a high street or online lender. As in a lot of these deals an new car is cheaper than a used equivalent.
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      02-21-2013, 05:05 AM   #14
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The cheap M3s at the moment are purely down to the fact that BMW are cleaning out the cupboards as the new model will be along shortly. They have made millions of profit off of the model already so they could in effect give cars built from current parts stock away in Christmas crackers and they wouldn't really be much worse off. So yes, heavily subsidised.
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      02-21-2013, 05:14 AM   #15
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400 for the M3 is an absolutely outstanding deal!!
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      02-21-2013, 05:31 AM   #16
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Its not just "BMW cleaning out the cupboards" of the old shape E90. The F31 are now available on decent lease packages. I suspect it is more a case of BMW wanting to shift metal and not losing out to MB with market share. For years BMW (and Mini) were miserly with their car offers, PCP rates were hardly discounted at all and rare for dealer deposit contributions, unless it was a run out model. Now we see them offering PCP rates at less than 4.9%APR, and 0% in some cases, with dealer deposit contributions on just launched cars and more generally across the range. MB have always led the way on very competitive lease deals (and retail offers). BMW clearly want a piece of that action.

On the straight forward question of bank loan vs manufacturuer PCP, it is probably nearly always PCP that cheaper, especially when subsidised finance rates and Deposit Contributions are taken in account.

Although I have had a few PCP deals on cars, I am wary of them. My Merc GL and now the Mini Cooper, are/were hugely in negative equity throughout the term and the GMFV were a country mile away from the actual value at the end. If you like to change cars regularly (as I have done in the past - not any more though as I have been to rehab) you need to put down a large deposit on a PCP to avoid being in negative equity (and to be prepared to lose most of it if you change really early in the term), which is why I now lean towards a two year personal lease. In two years it is likely you only have to pay for one oil service and probably no tyres, so it is financially predictable and I know precisely where I stand at any point in the contract.

Having said that, I am getting the Audi A3 on a PCP (shoots his own logic down in flames). But that is a car we (my wife) will keep for the term and there are no decent lease deals at the moment.
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      02-21-2013, 06:02 AM   #17
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Quote:
Originally Posted by mowflow View Post
The cheap M3s at the moment are purely down to the fact that BMW are cleaning out the cupboards as the new model will be along shortly. They have made millions of profit off of the model already so they could in effect give cars built from current parts stock away in Christmas crackers and they wouldn't really be much worse off. So yes, heavily subsidised.
That's right, but that was sort of my point, until we know what car he is looking at it is difficult to say which type of purchase is best.
Some cars are so heavily subsidised (through contract hiring) that doing anything else is just plain dumb.
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      02-21-2013, 06:23 AM   #18
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It was the same with the Q5 and Q3 until recently, massive demand at first so hire prices were really high, however, you can no be in a Q5 S-line Plus Quattro with S-Tronic for around 400 including vat, where as a couple of months back it was 600.


I would say that an X3 at around 27k with the right options, auto and nav, would be better to do on a 60 month straight repayment.
This will mean you are paying around the same as doing a 3 year with a balloon, if you want out at any point the settlement will be the same, and if you do decide you want to stay in for the full 60 months you are not pushed into doing something you don't want to do.

A few years ago when you could buy a 30k car and they would give you an 18k balloon, ballon style loans made sense. However, when you buy a 30k car and get an 8k balloon they don't really, better to just do it over 60 months.
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      02-21-2013, 08:34 AM   #19
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Quote:
Originally Posted by gIzzE View Post
A few years ago when you could buy a 30k car and they would give you an 18k balloon, ballon style loans made sense. However, when you buy a 30k car and get an 8k balloon they don't really, better to just do it over 60 months.
See, now I'm confused. Peter suggests his Mini Cooper PCP has a high balloon so he's in negative equity, yet your example is with a low GFV which means you're bound to purchase the car.
Peter's post implies paying a high deposit is good to avoid negative equity, whereas Mowflow thinks a 10k deposit on a 30k car is too high?
I suppose it just depends on whatever deal they put in front of you, and whether you want to keep the car or change it at the end of the term.

Mike.
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      02-21-2013, 09:06 AM   #20
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Paying a high deposit just means you are hiding the money lost, put 10000 down and then you get out after two years and you have say 2000 sitting in your car you feel great.
If you pay only 2000 and when you come to get out BMW say "We need 8000 from you to get out." The reality hits you harder.


I would say buy the car at the right price. And that can mean don't buy a 10 plate for 27k when a 62 plate is 32k, think about that long and hard.
Then put down as small a deposit as possible and do it over 60 months.
This should mean the car is depreciating at approximately the same rate you are paying it off, any equity, positive or negative should be minor.

By year 2 you should be about right, by year 3 your deposit back, and if you do see it out for the full 5 years you will have maybe 8000-12000 to come back. Almost like saving!
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      02-21-2013, 09:08 AM   #21
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With interest rates as low as there are borrowing money doesn't really skew the depreciation as it has before.

By that I mean, if you borrow the full amount over 5 years and the monthly figure is 500 that is what that car is loosing.
It really makes you think whether it is worth that to you or not.

Bunging 10000 in and then paying 350 a month is not the same, you think it is a 350 a month car, your brain writes off the 10000 you have chucked into it.
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      02-21-2013, 09:15 AM   #22
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Looking on the BMW site at X3s, the 10 plate M-Sport Autos are 27,000.

You also have some 62 plate M-Sport Autos at 32k with xenons and prof media coming up.
Obviously you would want to stretch your 30k to 32k to be in a car that is 2.5 years newer.

In 3 years time the 10 plate will be 6 years old and around 12k maybe?
The 63 plate will be 3.5 years, still feel and look very new and be worth 22k?

So the newer car will cost less as it is at the right point of the depreciation curve.
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