Buying a car on finance: is PCP still a good idea?
Paying monthly to own a car has become a familiar part of life. But does it still offer value for money?
Pay as you go
You can see why it is so tempting: the rise of the PCP (Personal Contract Plan), leasing, hire purchase and even subscription, has made premium and luxury brands more affordable to buyers who want to spend £50,000-£100,000 on a new BMW, Audi, Mercedes or Land Rover.
It’s also a familiar way for households to run their finances: we are all used to paying for our lives on a monthly basis now, whether it’s Netflix, Spotify, rent, mortgage or the gym. Adding a monthly payment for the car suits the vast majority of household budgets, as well as giving them access to the latest cars every three years, when their deal is up.
How does PCP work?
The most popular of these contracts to date in the UK has been PCP. You pay a deposit up front to lower your monthly payments (normally about 10 per cent of the car’s value), and then have either 36 months or 42 months of regular payments. At the end of your deal, you can either pay the balloon payment (the worth of the car that is left after the deposit and monthly payments) to own it outright, or swap it for a new model at the dealership.
Rising interest rates
However, like all borrowed money or assets, finance deals offered by car brands and their banks come with monthly interest payments included. Over the last decade, interest rates have been low, making this a palatable option. Ever since interest rates started rising, and hit six per cent this year, PCP has looked way less favourable, with many rates of eight per cent. Complaints about finance deals have more than doubled in a year, as drivers struggle to make their repayments, according to the Financial Ombudsman, with drivers turning to debt charities for advice in increasing numbers.
Is PCP worth it?
The broad answer is that, as long as interest rates stay high, PCP deals will be more expensive than a year or so ago. Those deals are essentially managed debt, so you should always know what you’re getting into before you sign on the dotted line.
Any other options?
There are two other options on the table which many drivers don’t know about. The first is leasing (also known as PCH - Personal Contract Hire). If you’re not bothered about owning the car outright at the end of your finance agreement (and most of us aren’t, preferring to hand the keys back rather than pay the balloon payment on a PCP), then leasing is a great way to go. You never own the car, but instead rent it from the leasing/finance company. You’ll still make an initial down payment, but this tends to be fairly low, and it gives you access to brand new cars at relatively affordable monthly payments, which also include road tax (VED) and warranty, with no MOT needed, as most cars are brand new.
The other fairly new way to access a car is a monthly subscription plan. You are not committed to the car beyond the first couple of months, meaning that you can swap in and out of different models with ease, allowing you to try out an electric car, or swap to an estate for a big family trip, or maybe a convertible in the summer. The downside here is that there is a built-in price for that flexibility and no commitment, so the monthly payments can be pretty steep, although they do normally include everything apart from fuel, so it’s worth getting your calculator out. Not every brand offers it, but Volvo, Jaguar, Land Rover, Hyundai and Kia are among those who do.
Do your research
Different drivers with different car requirements mean that all finance agreements are with us for a while longer yet, with households choosing what’s best for their budgets, especially as some dealers will offer more palatable deals on one type of finance package in order to shift the car off its forecourt. However, with no sign of a return to sub-two per cent interest rates, PCP is starting to look like a redundant option, especially if you have no interest in paying the balloon sum at the end to own the car.
As ever, the advice is to do your finance research before you test drive, and don’t be afraid to quiz the salesperson and make him or her ditch the jargon so you’re comfortable with the conversation. Above all, remember the golden rule of car buying: no question is too stupid!
