Two big disadvantages.
The first is at the end of the agreement, when they remind you that you can keep "your" car for only £xxxx, or you can buy a new one if you just agree to carry on the same monthly payment.
The second is that it is an expensive way to buy. Last one I looked at would have added 25% to the car's price over the term - that put me off a bit. But cash is not always an option.
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These deals are very shrewdly marketed, which is why they sell despite being incredibly expensive. The first reply hit the nail right on the head - they like to focus your attention on the monthly payment, keeps you from realising just how expensive the credit is.
Of course, if you want to own the car at the end of the agreement then you'll probably have to pay quite a bit more than the car is actually worth at that point in time. This is because over the term of the agreement you've paid so little of the loan back and so much interest has accumulated.
The best way to buy a car is of course, cash.
But obviously not everyone can afford this. The second best way is to borrow the purchase price (or however much you need to reach it if you have some money saved) from the institution offering the lowest interest rate. This will usually be a high street bank.
Any fancy deal costs more overall. The low payments can seem attractive, but at the end of the day owning the car will cost you more with these systems.
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"...from the institution offering the lowest interest rate. This will usually be a high street bank"
you sure about that, GF1?
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uk.biz.yahoo.com/loan suggests Direct Line, but Alliance
and Leicster also offers 5.9% APR on an £11,000 loan over three years.
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Edit: the Alliance and Leicester deal also includes free GAP insurance if the loan is to purchase a vehicle.
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I don't think PCP is necessarily always a bad way to buy a car. Manufacturer's schemes sometimes offer very low interest rates. Also, lots of companies do PCP an all makes and models - quite a few advertise on this site with big discounts on list price.
The there are a few factors to consider:
1) Purchase price - a lot of companies offer good discounts. I bought a Renault Clio from Lex a couple of years ago on PCP and the discount on the purchase price was well over £2000, which was a competitive at the time.
2) The interest rate. Obviously a high interest rate is not good and means that you pay more over the term.
3) The minimum guaranteed future value (the amount you pay at the end to buy the car). If this is more than the car is worth at that point in time, you just hand it back, end of story, and buy another car. If it is less, you can either buy it for that price and keep it, or use any equity towards another car from any supplier if you do want to change - you don't have to trade in to the one you bought the car from in the first place.
4) What else in included in the deal - you will probably find that GAP insurance and road tax is included for the duration of the agreement.
As always, it is the total cost of ownership for the period you want to own the car that matters. You need to factor in initial purchase price, depreciation, any interest you will pay and any 'extras' included to work this out. When you've done this, you go for the best deal available at the time, whether its borrowing money and buying outright, PCP, on any other type of deal, such as personal lease.
Brian
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If you take them for what they are, which is essentially a tarted-up lease agreement then there are some good deals to be had, especially if you use some of the Internet brokers for a good discount on the initial purchase price.
If you look at PCP costs and leasing costs for private individuals the PCP is often cheaper or a very similar price. Bear in mind if you are after a PCP most finance houses do them these days so its important to shop around - a lot of the manuafacturer schemes are well above double figure interest rates unless they've a deal on. The rate of interest on these deals is often overlooked, but its very important as you hold back a fair chunk of money until the end of the agreement.
The MGFV's given these days are very carefully calculated and in most cases the car will always be worth more than this at the end of the agreement, which is handy as it can give a reasonable deposit you can use for your next vehicle - this is the big advantage over personal leasing/contract hire as with this you either buy the car or give it back.
The key is with these type of deals is to watch the deposit you put down, ie not too much. The people who really get screwed over with these is where dealers take something worth a decent amount in p/x, sell the customer a PCP and at the end of the deal when they come back they find their deposit has dwindled to a couple of grand for the next car and the payments shoot up - I'm sure given the proliferation of expensive metal on the roads these days driven by those on modest incomes must be funded using PCP schemes. I visited a Lotus dealership with a friend a while ago when he was looking for an Elise and the salesman asked me if I fancied one - when I replied I didn't have £25k to spend on a toy he scoffed and said he could do me one for about £350 a month and that most of his sales were on PCP agreements these days.
For people who like swapping cars every 2 or 3 yrs, aren't bothered about owning them and the check out the deposit amounts and interest rates they can be a cheap way to run a car if you're not endowed with large amounts of capital.
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I would agree with BrianM and Quinny100's comments.
Some of the deals are for short periods - e.g. 12 or 18 months. These are sometimes Hire, sometimes Purchase. When Purchase, they buy the car at a heavily discounted rate, slap a large interest figure on for (albeit short) period.
The one that I'm looking at has a £16500 diesel car (OK, so you can buy it outright for £14000 elsewhere), and it's £400 down, £200 per month (10k miles per year). End of term, hand it back.
The only downsides that I see are:
I am responsible for any scratches / damage (may be costly)
If the Servicing light comes on, I pay for servicing
Other than that, no worries for £200 a month - brand new car that fits my current situation well (this model is still too new to pick up at a reasonable price second hand).
Take into consideration how much you would pay on a loan over the period, then depreciation and there's not much difference - but I can just hand it back (or pay 11K at the end and keep it).
Have I missed anything here?
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Yes
In reality there is now so much competition out there that the actual real prices do not vary much, provided of course that you get a good deal. Or rather remarkably similar deals are commonly available.
Whether it is an HP agreement or a more sophosticated deal such as PCP the only real costs are the depreciation on the car and secondly the cost of the capital borrowed.
Whatever way you cut the cake the manufacturer, dealer and financier will all want a profit and provided you minimise the size of the cake then you will get a good deal.
PCP works best on lowish mileage with careful drivers, who like new cars on a regular basis.
Traditional HP or loans work best for higher mileages and drivers that are happy to keep their cars for longer.
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>>>"...from the institution offering the lowest interest rate. >>>This will usually be a high street bank"
>>>you sure about that, GF1?
Ok, not necessarily a high street bank, but usually a large well-known financial institution.
Places which specialise in lending money for the purposes of purchasing cars have to charge more than mainstream non-specific money lending - otherwise they wouldn't make any money!
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My own view is that if you can afford to purchase a car via a normal low-rate loan then do it - you're the owner from day one, will almost certainly get a better interest rate & definitely won't get stung when otherwise your final PCP payment would be due - no such thing as "guaranteed future value" !!!
IMHO PCP is a way of encouraging people who can't really afford the car to buy it
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On PCP deals, there is such a thing as a guaranteed future value (also called a 'balloon' payment). This doesn't mean that the car will be worth precisely that amount at the end of the agreement - obviously the exact value would be impossible to predict. It is the amount, set when you take out the deal, that you need to pay at the end if you want to own the car outright.
If the car is worth less, you hand it back and don't pay anything more. If you want to own the car, you pay the GVF and keep it. If you want to change the car and its value is higher than the GFV, you trade it in somewhere and use the equity as a deposit on your next car.
The fact is though that companies set a low GFV to limit their chances of losing out if you just hand the car back, so the car will almost always be worth more.
Brian
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The one that I'm looking at has a £16500 diesel car (OK, so you can buy it outright for £14000 elsewhere), and it's £400 down, £200 per month (10k miles per year). End of term, hand it back.
I assume the prices you quote are inclusive of VAT?
Is this the Citroen C4 by any chance? If not then please let me know who / where this deal is....
Cheers
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This quote dates from 2005, so not much use to you now I'm afraid.
Edited by Avant on 30/11/2011 at 20:30
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