What to do at the end of a PCP car finance plan?


This is the question I have been asking myself over the past couple of weeks. I bought a new car on finance nearly 3 years ago, and it has suited me very well. The car is lovely, and a marked contrast to the niggles I’d been getting with the old car I’d been driving up until that point (electric window not working, leaking boot, slightly damp smell because of leaking boot, ever-expanding rust, etc. etc.). Also the monthly payments have been low, mostly because the new car is small, but also (I flatter myself) a little bit due to the good deal I got at the outset. However, my finance agreement is now coming to its term, and I need to decide what to do next.

I could easily jump into a similar deal again, as my dealer has been encouraging me to do. In fact, I think he’s offered me a good deal. However, I’m doing this blog because I want to make financially sound judgements, so I’ve been doing a bit of research online to see what people who know a lot more about cars than me (not difficult) say on the subject. I have the cash currently to buy my existing car, and have concluded that I should resist the lure of the new car and a new finance deal, and will explain my reasoning below. Firstly, a quick overview of how my finance agreement works.

What is a PCP deal?

There’s a good overview of the different types of car finance on the What Car website, and I bought my car under a PCP deal (Personal Contract Purchase / Personal Contract Plan). These deals are a bit like leasing a car where you pay a monthly payment over the course of the agreement, but unlike leasing they also give you the option to pay a final ‘balloon’ payment, at which point you own the car outright. The dealer specifies at the start of the agreement the guaranteed minimum future value (GMFV) of the car, which is the minimum value it will be worth at the end of the term. If the value of the car drops you know you’ll get this amount for the car, though if it rises you’ll get any extra.

I’m now at the end of my agreement, so have three basic options:

  1. Hand the car back and start afresh – being car-less isn’t really an option, so this would mean buying a car elsewhere
  2. Pay the final balloon payment – in my case about £5,500
  3. Part exchange it for a newer shinier model, starting a new finance agreement

I’d already discounted option 1. One of the reasons I decided to buy the new car before was that I know absolutely nothing about cars and find the whole process of shopping for a new one quite stressful. I don’t know what I’m looking for, and was worried about saddling myself with a mechanical nightmare that would let me down and cost me a fortune in repairs. My old car, while annoying because of its niggles, had been mechanically sound (until the day it broke…), and I couldn’t face the prospect of replacing it for another older car, with its own as-yet-unknown niggles, that might this time be a dud. I still feel the same way, and have no wish to replace my nice 3-year old car, that I know everything about, with a dud.

1 March registrations and reading number plates

So it’s a choice between options 2 and 3. Option 3 is where my dealer enters the scene, and where I discover why he’s suddenly been in touch with a new deal “only available for this month”. It’s March you see, and this is relevant because 1 March is the start of the 2016/2017 car registrations. I’ve had to look up how our UK car registrations system works, and there are 2 new car registration dates each year, 1 March and 1 September.  I started looking around at other cars on the road to see how old they were and found I had no idea how to ‘read’ the number plates. This AA guide explains the format of newer number plates, it seems that the first 2 letters relate to the area of registration, the first 2 numbers the age of the car, the final 3 letters are random. Cars registered in March show the year of registration – I knew from my car that the ‘xx13’ at the start meant it was registered in 2013 – while those registered in September add fifty to this number. So cars registered this year from 1 March – 30 August will have ‘xx16’ at the start, while those registered from 1 September 2016 – 28 February 2017 will have ‘xx66’ at the start. Anyway, because of the time of year (you can check this Money Advice Service website which explains the seasonal trends in car buying), my dealer is keen to offer me a deal to buy a new ‘16’ plate car.

The lure of a shiny new car

And very nice the new car is too. It has a slightly different design, but one that I think improves the overall look of the car. It has a few extra features, a different interior, but is essentially the same car with a face-lift. The dealer has offered me a good deal, my monthly payments stay almost the same (I think I could possibly negotiate to get them the same if I pushed), and to boot they tell me that because of the new model change, if I were to keep my existing car I’d face greater depreciation in value. I’d no longer have the warranty either, so I’d have to pay for any repairs. However, my current car is in good condition, and has very low mileage. It has caused me no problems, so there’s no reason to think it should need repairs any time soon. It has a couple of blemishes, but minor and very superficial – I’m being picky. However, I confess I’m tempted by the offer, and am thinking that if monthly payments are similar I can basically just defer making a decision on purchasing the car outright to three years from now.

I’m a little bit surprised that I’m drawn as much as I am to trading in for a newer model, because I’m really not that interested in cars. Last time, the difference between my old car and the new one was huge. This time around, there’s nothing wrong with my existing car, so why am I tempted by option 3, the lure of a brand new shiny car, when I have a nearly new shiny car sat outside already? I’d struggle to name the cars that any of my friends or family drive and, other than someone turning up in a luxury sports car, I think most cars look the same! I really am that cliché of, when asked what car someone drives, answers ‘it’s a big one’ or ‘it’s a black one’. I genuinely don’t pay that much attention. I’d rather drive a nice car than a rust bucket, but seeing how little I use the car, can only assume I’ve fallen victim to successful marketing and my own consumerism!

Depreciation and net wealth

So what has made me decide (well 95% decide!) to stick with the one I’ve got? Firstly, it’s depreciation. It’s a US site, but moneyunder30.com reckons that cars depreciate 10-15% driving off the forecourt, 20%-30% in total after 1 year, 40%-50% after 3 years, and 60% to 70% after 5 years. This is in line with my personal situation, where my car has depreciated over £6,000 over the course of 3 years, a total of 52% of its initial list price. I checked out the current price of a 6 year old version of my car with similar mileage, and it’s only about £700 cheaper, which would total about 60% depreciation in 6 years. I’ve already taken the bulk of the depreciation hit, so if I sold now someone else would get the benefit of buying a good value car that is unlikely to depreciate a great deal more. If I buy the new car, I’d start all over again.

Secondly, it’s the concept of net wealth. This is not something I’ve considered before, as I’ve focused on affordability of the monthly payments, and have been struggling to fit the final payment into the picture. However, it seems to involve looking at the total cost of the car over the 3 year period, including the interest and final payment, and at the residual value of the car you own at the end. In my case, the total cost will have been around £12,500, with the residual value approximately £5,500. So in 3 years, my net wealth has dropped £7,000. If I re-finance on a new car for a similar 3 year term, assuming a similar drop in net wealth of £7,000, and adding the extra 3 years of monthly payments, I’d have a total drop in net wealth of approximately £11,500. Compare this to buying my current car, where I’d have no monthly payments over the next 3 years, but would see maybe another £1,000 of depreciation, I’d have a total drop in net wealth of about £8,000. My calculations are a bit woolly, but it does seem that I’d be roughly £3,000 better off in 3 years’ time if I buy my current car now compared to taking out the new deal. Under both scenarios one thing is clear though – I’m financially £8,000-£11,500 worse-off  in terms of net wealth from having bought a brand new car!

If I didn’t have the cash currently to buy my existing car, I’d probably be more tempted to go for the new deal and try and save up the cash to give myself more options in 3 years’ time. Or I’d look into the price of 3 year loans to purchase my current car. I’d see a similar drop in net wealth compared to the new car deal above, as I’d have similar (possibly higher) monthly payments for the next 3 years. However, I’d then own the car so the longer I held it from then on the better off I’d be financially.

It’s no surprise that so many of us opt for similar car finance agreements – cars are expensive! You can enjoy driving around in new cars, trading in for a new model every few years, so long as you can afford the payments and are not bothered by never owning the car. The key points I’ve taken away from the past couple of weeks:

  1. Cars depreciate in value, so it makes better financial sense to buy a slightly older car that has already done most of its depreciation.
  2. If you can pay cash for a car, rather than borrowing, this is the cheapest option.
  3. Think about what you borrow money for – try to avoid borrowing for assets such as cars that depreciate in value, only borrow to invest in assets that appreciate in value.

I started this blog because I was worried about my retirement, and financial security, not because I was lying awake worrying about what car I drove. I’m not sure how much of a difference it makes long-term, but it seems to me that owning my current car, and hanging on to it for as long as I can, fits more closely into my mission to take control of my finances than going for the bling of a new shiny version. I’d be interested to know what others think!

Image: Pixabay – hostsh

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2 Responses

  1. weenie says:

    The car I own is the fourth one I’ve purchased on PCP and it’s the first one where I put money aside to pay for the balloon at the end in cash. All previous occasions (during my dark days of debt), I paid the balloon by credit card and then invariably struggled to pay it off…ouch!

    Anyway, what was great about paying off the car was that my previous monthly car payments just went straight into my investment accounts instead!

    I hope to keep my current one for as long as possible too!

    • Sarah says:

      That’s great news that you’ve managed to save to pay the balloon payment! I have just paid my balloon payment, so am about to enter my first month without the usual monthly payments. I too plan to save it, and also plan to keep the car it as long as I can – they’re too big an expense to keep going through the same cycle! Thanks for your comments!

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