The long-suffering motor industry has come up with a new payment plan in an effort to allow customers to buy new cars without feeling the pinch. Geraldine Herbert explains what PCPs are and how do they differ from other forms of car finance.
Despite a fall in the number of cars sold in the first six months, the car industry is responding with some tempting new finance offers to encourage buyers back into the showrooms.
These days few people actually buy a car with their own cash. With a myriad of options available from bank loans, leasing and finance from the dealership it is increasingly difficult for car buyers to work out who is offering the best deal.
The newest option available to prospective car buyers is Personal Contract Purchase (PCP), but what are they and how do they differ from more traditional forms of finance?
Borrowing money from a bank, building society or credit union gives you eventual ownership of a car. The best way to compare loans is on APR – the annual percentage rate as this allows you work out how much a loan will cost you over its lifetime.
Hire purchase is the simplest form of finance outside of a personal loan. With HP, you pay a deposit upfront (often 10%) and then pay the rest off in monthly instalments over an agreed period. After the last payment you own the car.
PCPs are a more affordable way to get into a new car. The contract is typically structured so you pay a deposit and monthly instalments over a fixed term. However unlike HP or a bank loan the payments are typically lower and at the end of the agreement you have the choice of whether to make that final payment or not.
A PCP comes with a guaranteed future value for the car and this is treated as the cars final payment so you know exactly what it will be worth at the end of the agreement. This final value depends on the predicted annual mileage of the driver so you can adjust the agreed amount to suit your needs.
At the end you can pay the final payment and own the car. You can also part exchange the car and use the excess or equity in the car to fund the next purchase. Many people use the equity in the car to act as a deposit for a new PCP deal and get a new car via this method every few years. So, for example, if the final payment is €9,400, but the car is actually worth €10,600 you have €1,200 in equity. This can be then used as a deposit towards a new car. Finally you can simply return the keys at the end of the payment plan with no future obligation.
So how much does it actually cost? For a Ford Focus Edge 1.6Tdci 95PS 5 Door priced at €22,525 on a 36 month deal with a 30% deposit or trade in of €7,000 you can expect to pay €257.87 per month for three years. The final payment is €8,902.
Nissan have just introduced their new finance package Nissan Go. Under this scheme a similarly priced car to the Ford Focus, the Nissan Qashqai worth €23,745 with a deposit of €8,107 over 36 months would mean a monthly payment of €249.00. The agreed future value is €9,498.
Some companies have special deals. Citroen offer the C4 HDI 90 connected with a retail price of €20,695 and a deposit of €6,209 for a monthly payment of €269. This payment also includes 3 year servicing. Also the customer will not need another deposit for the same type of car in 3 years making it a very attractive offer.
PCPs have also proved a popular option for BMW Customers and according to Brian Merrigan, Director Sales & Marketing, BMW Financial Services have an acceptance rate of over 84% of applications so far in 2013.
Customer could drive away in a BMW 316i ES for a monthly payment of €349. This is based on a deposit of €8,736 and a final payment of €16,769
For families in particular the advantage of a PCP is clear, they can avail of a new car every 3 to 4 yrs at a monthly payment they are comfortable with. In particular they benefit from all the new safety features that are not routinely found in older cars.
In the current economic climate, PCP certainly allows a small budget to stretch but there are a number of points to consider when opting for one.
One is the mileage, the average Irish motorists does in the region of 18,000 km a year so keep this in mind when agreeing the mileage with the dealer. If you exceed the agreed mileage when you return the vehicle you will be charged for it so make sure the amount you agree is reasonable.
Also consider carefully how much you can afford monthly. Deposits range from 10% to 30%. Opting for the lowest deposit means a higher monthly outlay but at the end of the agreement if you choose the same arrangement again the smaller deposit may make the transaction easier.
Before you go near a dealership find out as much as you can about the different deals available. Consider whether these include servicing or come with other additional benefits. You should also consider arrangement fees and any early exit penalties.
A version of this article, by the author, was published in the Sunday Independent 16/06/13
2nd July, 2013