Finance options

[PaulB]

Another option is to borrow from your bank (3-3.9% apr). Pay cash afterwards and then you have the security to bail out if you ever need to. The car also becomes "yours" so after the loan is paid back you have the value of the car to fall back on.
Also, personal loans for say £30k can be spread over 6 or 7 years if need be, meaning you can keep your monthly fairly low still.

[Rab J]

There are no rights or wrongs here and you need to factor in how hard your money is working for you if it's invested (assuming you have money invested).

I think the biggest issue with PCP is that you are always paying interest on the balloon (GMFV) and consequently your capital repayments are less than you might think. Also repayments are made on a reducing balance basis so interest is front end loaded on a PCP. There is no doubt that it works for some people but is nevertheless an expensive way to finance a car.

The argument of not sinking cash into a depreciating asset kind of works if you need the security of a GMFV. However, assuming you have the cash why not lend yourself the money? OK so you need £50k for the car and you intend to keep the car for 4 years - lend yourself the £50k at, say 4% interest and make repayments into an account you hold of £1,125 per month. For me this makes an awful lot more sense than paying 6.2% over to a finance company as you are effectively supplying your own HP product.

Maybe a bit simplistic and obviously doesn't work if you don't have the capital to do it.

My thinking exactly

[Juve]

PCPs are only useful to those who 1. Cannot afford to buy outright 2. Cannot afford monthly repayments on a low interest personal loan + cash funded deal 3. Think they can achieve a better return on the money being pumped into a car elsewhere via investments 4. Total PCP cost is less than depreciation and you intend to hand car back

PCP is by far the worse way though to own a car in terms of your total loss at the end of the deal. Most cars will depreciate. If you really are savvy with money then the ultimate key is how ‘little’ can you lose over the period of ownership.

The only time PCP makes sense is when you can beat your total depreciation. So if the car is going to be worth a lot less than the GFV or the car selling price in say 3 years if you could see into the future. PCPs are set up for the dealer to win though and the only time the previous example works is say something like the Alfa 4C deals. Car was worth thousands less than the total paid on PCP or a 2 year lease.

‘Monthly amount’ tells you nothing. You could get a a figure of £500 a month where the interest part is £200. When you go to trade in you’ve hardly paid any of the capital off so have a huge settlement or you hand keys back at end and get nothing out of it. Where as if you were paying off mostly capital with a low interest loan etc then out of that £500 a month say only £50 is interest. You have more equity, less money wasted to interest.

[kmacuk]

PCPs are only useful to those who 1. Cannot afford to buy outright 2. Cannot afford monthly repayments on a low interest personal loan + cash funded deal 3. Think they can achieve a better return on the money being pumped into a car elsewhere via investments 4. Total PCP cost is less than depreciation and you intend to hand car back

PCP is by far the worse way though to own a car in terms of your total loss at the end of the deal. Most cars will depreciate. If you really are savvy with money then the ultimate key is how ‘little’ can you lose over the period of ownership.

The only time PCP makes sense is when you can beat your total depreciation. So if the car is going to be worth a lot less than the GFV or the car selling price in say 3 years if you could see into the future. PCPs are set up for the dealer to win though and the only time the previous example works is say something like the Alfa 4C deals. Car was worth thousands less than the total paid on PCP or a 2 year lease.

‘Monthly amount’ tells you nothing. You could get a a figure of £500 a month where the interest part is £200. When you go to trade in you’ve hardly paid any of the capital off so have a huge settlement or you hand keys back at end and get nothing out of it. Where as if you were paying off mostly capital with a low interest loan etc then out of that £500 a month say only £50 is interest. You have more equity, less money wasted to interest.

Agree 100% and how I approach car purchases. Summed up perfectly as:

"Most cars will depreciate." - "ultimate key is how ‘little’ can you lose over the period of ownership"

I would add:

Years 1 & 2 are the highest years of depreciation - just look at the GFV year 2 vs year 4. Dealer & Tax man win on year 2 changes.
The more options you add the more interest you pay and the less money you will get back.
If you want a lot of options keep the car for a long time. 5+ years ideal
In built options optimise GFV (GTS) as they carry the GFV %age

[pmg]

The cynic in me says why every time I try to buy a car in the last 15 years do salesman spend hours trying to persuade me to do it via PCP? I conclude it is more in their interest than mine.

[Wing Commander]

The cynic in me says why every time I try to buy a car in the last 15 years do salesman spend hours trying to persuade me to do it via PCP? I conclude it is more in their interest than mine.

This is a very fair point.

In a previous post, someone said their dealership claimed that 85% of people buy their Porsche using PCP. I’m a little sceptical that this is true, but if it is, I would say the reason is either that the client has so much money/income, they don’t really care that the dealer is making a packet out of them, or maybe more likely, they don’t have the cash just sitting around to buy a premium car outright and they’d rather have the car now, as opposed to saving up for x years for their dream car. For better or worse, we’re in an ‘enjoy now and pay back later’ world, although many of my older clients still quote ‘I’ve never borrowed in my life (apart from mortgage maybe) and if I can’t pay cash, I don’t have it’.

[Pivot]

When one lives in a high-interest-rate environment, buying car for cash is the most sensible option and older folk do remember high-interest-rate times. However, in a low-interest-rate environment one can finance assets. So, how does one justify having a house mortgage at say 1.5% and car at say 6.5%?

I hear people say that car is higher risk, but the risk is on us and insurance firms. The bank does not carry the risk, as you cannot have a car on the road without insurance, by law! And we are liable for any shortfall anyway. So, the bank carries the risk of us gong completely insolvent, which is equally possible ito house and a car, as one cannot declare insolvency just for car, but not the house. So the risk is a BS story.

Which brings me to the conclusion that PCP is for people who are under financial pressure and need a vehicle at lower monthly rate. With PHP you can ride a Porsche, when for the same money with HP you could ride a Nissan. Everybody wins, especially the lenders and dealers.

[VanB]

Personally I would still hold that everyone’s circumstances are different and there really is no right or wrong answer to this conundrum.

Please don’t think this applies to me as it is only an illustration

You have £100k in investment that returns, on average, 8% pa so, after 3 years would be worth £126k

You sink £120k into a car ( At 5.9% (current Porsche finance %) and your deposit is £20k with a £50k balloon.

You will pay c £4,425 interest on the amount repaid and £8,850 on the balloon total £13,270. In this situation it’s a no-brainer to do PCP. Most people will ask if 8% on investments is realistic and the answer is yes and I have consistently achieved that over the years with an actively managed investment fund.

However, I doubt that most people buying a Porsche are doing so on finance. I also doubt that most people buying on finance couldn’t pay outright.

There really are no easy answers to this question unless you simply keep your cash in the bank and it isn’t working for you. In which case, buying cash is the obvious answer.

[kmacuk]

So £13270 is the interest would you not also add the £20k depostit to the total costs?