PCP or not to PCP: What are the pros and cons of financing?
Contracts are an attractive option but you need to do your research
Over a third of all new cars in Ireland are now bought on a Personal Contract Plan (PCP). These contracts offer lower monthly repayments by virtue of the simple fact that you're not actually paying off the full value of the car, so if you are on a tight budget a PCP could be a more affordable way to buy a new car.
According to Ciarán McMahon, chairman and managing director of Ford Ireland; "Currently, our rate of PCP take up on new cars is in the region of 15pc and growing, plus we are hearing from our dealers that in a quite a few instances customers who were intending on buying a second hand model, switched to buying new when they saw how affordable a PCP deal can be".
For other companies the take up is even higher; "three out of every four financed Audi cars in Ireland are sold via a Personal Contract Plan (PCP)," says Richard Molloy of Audi Ireland. "In 2015 Audi Finance has loaned €31m to new car customers," he said.
But what is a PCP?
When you buy a car on a PCP you are essentially paying to use it for a fixed number of years, with the option of buying it at the end of your contract or giving it back to the dealer. In terms of monthly repayments, it works out cheaper than hire purchase because it lets you defer part of the total cost of the car - a sum known as the guaranteed future value, or GFV, which is set at the start of the agreement. The GFV represents what the car will be worth at the end of the contract. The future value, plus any deposit you choose to put down, usually between 10 and 30 percent, is taken away from the total cost of the car, and you pay monthly payments (plus interest) on the remaining balance for the term of the contract.
At the end of the contract you have one of three options; to return the car to the dealer, pay the final payment and keep the car or trade the car in against a replacement.
For many it is a useful way to stretch a small budget. For €17,140, for example, you would be able to 'buy' a Nissan Qashqai costing €24,695 by putting down a €7,555 deposit and paying €269 a month for three years. If you were to borrow from a bank and wanted to keep your monthly payments the same, at €269, you would only be able to borrow €7,500 over three years, which even with a deposit of €7,555 wouldn't buy you a brand new car.
Niall Duggan, an IT manager from Cork, commutes long hours on motorways but couldn't realistically afford a suitable car for his needs.
"I did consider a personal loan combined with savings but it seemed a waste of money as cars depreciate heavily and a personal loan increased the monthly payments significantly because of the lack of a balloon payment," says Niall "I found a PCP really flexible as it allows you to get a car with some really good and useful extras at an affordable price that fits in with your monthly budget".
Similarly Andrew Slattery, an automotive professional, considered other finance options but a PCP was far more attractive. "I like the idea that at the end of the contract I can get another new car and have the same monthly repayments"
For families the advantage of a PCP is clear, they can avail of a new car every three to four years and benefit from all the new safety features that are not routinely found in older car.
Martin Hewitt and his wife Dorothy bought a Skoda Octavia Elegance 1.2 TSI. Attracted by the 0pc Finance offer from Skoda and the reduced monthly payments the PCP worked out cheaper than an existing car loan they had from the Credit Union.
In addition servicing was also included for the three year duration, therefore making it even more economical.
"With two small children the peace of mind afforded by a new car is a huge plus" says Martin.
"Other benefits include a quick decision with loan approval and the possibility to buy another new car at the end of the plan"
For others, like Carli Smith who wanted something small and reliable, the option of not having to pay the final balloon payment was the main attraction of a PCP.
"It gave me the chance to have a new car," says Carli
"There is no obligation to pay the final price at the end so I can simply hand the keys back."