Thinking ahead: Here's what you need to know to get the best deal in PCP balancing act
You know what they say about reading the small print - that we never do.
We get away with it most of the time, but it is absolutely vital when it comes to committing to a large sum of money - such as with a Personal Contract Plan (PCP) for a new car.
We get lots of questions about PCPs here on a weekly basis. And the flow has increased recently as more people are beginning to sift through their options for getting a new car next year. There is still a lot of misunderstanding.
The basic principle is easy to grasp - you effectively lease a car for three years. But there is still potential for confusion and disappointment under certain circumstances.
So I thought I'd revisit it, because of demand and emerging trends, while there is still plenty of time for you to think it through - and to shop around for the better deals.
I think a lot of people are considering getting in on the PCP act for the first time. But a substantial number have reached, or, are coming to, the point where they need to decide to go for another three years with a fresh new-car deal or try some other way of getting into the latest model. We can learn from their experiences.
The one area I would appeal to you to consider most closely in advance is the amount of money your prospective purchase is going to be worth at the end of your agreement.
That sum - the Guaranteed Minimum Value (GMV) or Future Value - call it what you will - is critical.
I will explain why in a moment but first, it might be good to recap.
There is no doubt PCPs have revolutionised the market. Without them, it is fair to say, the number of new cars registered this year, or last for that matter, would not have reached such levels.
But there are downsides too and you need to read the small print - remember that? And be absolutely certain of what you are signing up for.
As you probably know - but it is never any harm to re-state - a PCP is effectively a lease plan.
The deal is usually sold to you by a bank, normally through its agent, to your local dealer. Some marques such as the Volkswagen Group or, BMW etc, have their own bank.
Here are the main ingredients of the PCP process:
* You pay a deposit.
* You agree to a mileage limit.
* Normal levels of wear and tear apply.
* You agree a monthly repayment - usually over three years.
π You agree a minimum, repeat minimum, future value - with deprecation taken into account. In other words the dealer (but in some cases the marque's own bank such as BMW, Volkswagen Group) guarantees the minimum value of your car at a pre-arranged price - so long as you don't exceed your mileage and keep the car in good condition.
When you've shaken hands on all that, you can drive the car away. Just remember it is not yours.
At the end of the three years you have choices to make.
1. You hand back the car and that's that. It is no longer your mode of transport.
2. You buy the car outright. This is where, before you take out your first three-year PCP especially, you need to take a longer term view.
3. You take the equity that is in the car and use it as, or as part of, a deposit towards your next three-year deal.
Now we are at the heart of the matter.
First time round, you trade in your old car or have some savings, or a credit union loan. You scrape enough together to get your minimum 10pc deposit, or maybe 20pc. Some deals accept 30pc, but generally speaking too high a deposit first time round will mean having to stump up a lot more money the second time.
Either that, or the level of your monthly repayments will be severely affected.
Second time around is where the mechanics of the whole PCP deal come into sharper focus.
That's because you don't have a trade-in (i.e a car that you own); you only have whatever equity is left in the car that you are leasing and what savings/loans you can access.
That equity is the difference between the minimum future value you agreed with the dealer and what the car is worth on the market at that stage after depreciation, wear-and-tear, etc.
This is why it is so important that the future minimum value is realistically conservative to give you a bit of leeway.
You might think a deal that says your car will be worth 38pc of its current purchase price represents massive depreciation in three years. The opposite is the case. It is giving you a chance to get more than that for the car and so have a little profit/equity in it towards the deposit for the next one.
If the dealer promises you a high value, you may think you are getting a great deal. But when you come to the end of your three years you'll find there is not much difference between the GMV and the market price.
That would mean having to dig into your own resources or getting a loan from your bank or credit union to flesh out the deposit all over again.
So, the lower the GMV on your car the more equity you are likely to have to contribute to your next one. The higher, the less.
It isn't so black and white, however. It never is. That's because your monthly repayments factor in elements such as future worth too, as well as the size of your initial deposit, mileage limit and so on. Everything costs something in this game and will be reflected in some way or other in either higher or lower repayments.
Either way, you are the one paying, It's just a matter of how and how much.
The interest rate is vital too, with some distributors sub-venting the rate to make deals more attractive.
It is all a balancing act and you need to be sure you are not outweighed in any area. Everyone is learning still - and that includes the sellers - so be aware in advance. Your first PCP experience may be great but are you prepared for the second?
It is not my intention to make this sound negative; but forewarned is forearmed. And I'm re-emphasising that the devil is in the detail. And that can be so easily overlooked.
Don't forget either that at the end of three years you are entitled to shop around to get the best market value for the car you have had under PCP.
You are not stuck with the dealer you have it from. Some people think they are.
You can do a deal with another dealer if you get a better price than with the original. But - and this is important - you have to pay off the remaining 'balloon payment' with your existing dealer so you own the car. It belongs to someone else until you buy it (obvious but important). Whatever you have after that is yours to do with what you like.
Assume you agreed €10,000 with the dealer with whom you have the PCP. Say another one is prepared to give you €13,000 but your existing dealer sticks on €10,000. You can pay off the €10,000 to the first dealer and walk away with €3,000 in your pocket. Or use it towards another PCP with a different dealer.
So you see how important minimum future value can be? The danger for you is if the dealer is overly zealous to get a 'sale' and hikes up the future value or vastly underestimates it. You are more likely to lose on the higher value and he/she is going to be well out of pocket if they underestimate it.
It is all about tailoring the deal so that you can manage to budget for a certain fugure each month.
You can also agree servicing plans and have them included in your repayments. That can be a big help overall in you knowing what it is costing to keep a car on the road.
Finally, a more general point.
The vast majority of people will, most likely, not be able to revert to the more traditional method of buying a car when they take up a PCP.
Be sure you are okay with the fact you may 'lease' all your cars from now on. Or you may prefer to fund your purchase along more historical lines.
PCPs are attractive because, apart from the monthly commitment, there is little else to worry about; like phones you pay so much and you get a new one every so often.
The thing is therefore to get the new way off to as good a start as possible. Think of the next stage now. Think of how you will come up with the equivalent of a deposit next time around. And the time after that. Otherwise you may just be deferring problems.
It is easy to say, and we all have the best of intentions, but please do shop around - and remember - read the small print.