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Pcp Financing Coming To The Used Car Market

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http://www.telegraph.co.uk/finance/newsbysector/industry/12165749/Used-car-market-to-be-turned-upside-down-by-financing-deals.html

The used car market could be revolutionised by personal contract plans, the financing deals that have driven sales of new vehicles to record levels, according to the boss of Britain’s biggest car dealer.

Trevor Finn, chief executive of Pendragon, says the way motorists buy second-hand cars is being turned upside down by so-called “PCP” deals.

These require a small deposit and then a fixed monthly payment, rather than the full price, making the cars appear more affordable. At the end of the term, the finance provider guarantees the value of the vehicle, meaning buyers are effectively only paying for the depreciation of a car.

At the end of the deal’s term, buyers can hand back the keys and walk away or use equity built up in the car as a deposit to purchase another vehicle.

Mr Finn said: “Three-quarters of new cars bought on finance are with PCPs and that’s spreading to used cars, especially as younger buyers have got used to the small monthly payment concept from the way they buy mobile phones.”

Now it appears you will be able to rent a second hand car just like a new car. Nobody will soon be able to afford to buy anything only rent.

We are lucky lucky people to exist in such a time, its like there is no economic recovery and finance is the only profitable business!

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Glad this thread come up ,i have read about the concerns over the auto loan market in the U.S.A

I was watching fox sport last night and one of the add`s was for ford pickup trucks 60 months @0% interest no cash down and $1800 cash back ....they have a right to be worried

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I suspect it's too much to ask the general public to work out that finance of any description just makes everything more expensive.

I look forward to HTBC where the taxpayer stumps up 20% of the cost of Barry's Nissan Dogturd (40% for pointless Range Rovers in London), only to be 'written off' when the keys are handed back.

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At the end of the term, the finance provider guarantees the value of the vehicle, meaning buyers are effectively only paying for the depreciation of a car.

At the end of the deal’s term, buyers can hand back the keys and walk away or use equity built up in the car as a deposit to purchase another vehicle.

Does that compute? One seems to imply the value of the car is going down but the other up?

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It's really distorting the market if you have the capital available, because in today's ZIRP world, for people with cash, the cost of capital is near zero.

I'm looking for a new car at the moment, as my current one is a bit of a banger, albeit a nice one. So, I was looking for something fancy, so have been pricing up new and relatively new cars (< 3 years old).

2 typical examples which I were looking at show depreciation cost of around 6k in the first year, and 4k in years 2-5. Yet you can buy these same cars brand new on PCP with incentives of £2.5k, with one dealer even suggesting they could stretch to £5k. If you redeem the PCP after 2 months, you keep the incentive. So, the effective depreciation becomes 4k per year, in other words, there is no advantage to buying a slightly used car.

Presumably, this is so that the manufacturers can keep the list prices high, and make money on the financing, and are willing to take the loss for the small number of customers who can pay cash.

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At the end of the term, the finance provider guarantees the value of the vehicle, meaning buyers are effectively only paying for the depreciation of a car.

At the end of the deal’s term, buyers can hand back the keys and walk away or use equity built up in the car as a deposit to purchase another vehicle.

Does that compute? One seems to imply the value of the car is going down but the other up?

It means that the finance provider computes a very pessimistic depreciation rate. Let's say you buy a £30k car. Let's say that a good example at 4 years might get a trade price of £16k. The finance might be based on a future value of £14k. So, the finance is computed so that you pay the interest but only repay the £16k of capital (£30k - 14k estimated residual).

In this way, you are only repaying the depreciation component of the loan. The rest is interest only.

However, because the repayment scheme is based on a pessimistic estimate of depreciation, there is likely to be equity remaining at the end. In the above example, there may be £2k of equity in the car.

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Already happening. Went to look for a replacement car recently, despite wanting to spend around 5k tops the conclusion we drew was that a pre-registered, delivery mileage new car paid for in cash was the best value we could find for what we were after. I genuinely never saw myself buying a new car but couldn't ignore the new prices (from Motorpoint).

New Focus (outgoing 65 plate) for under 11 grand(price has dropped 500 quid since we bought in the past few weeks):

http://www.motorpoint.co.uk/used-cars/ford/focus/1.0%20ecoboost%20style%205dr%20[99g-km]%20[rps]

Used prices seem absurd by comparison.

Edited by The Knimbies who say No

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Haha, what an idiotic way to run an economy. The trouble is it can carry on because of ultra low rates.

Can't help thinking a lot of people are going to be starving in the future.

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It means that the finance provider computes a very pessimistic depreciation rate. Let's say you buy a £30k car. Let's say that a good example at 4 years might get a trade price of £16k. The finance might be based on a future value of £14k. So, the finance is computed so that you pay the interest but only repay the £16k of capital (£30k - 14k estimated residual).

In this way, you are only repaying the depreciation component of the loan. The rest is interest only.

However, because the repayment scheme is based on a pessimistic estimate of depreciation, there is likely to be equity remaining at the end. In the above example, there may be £2k of equity in the car.

So they charge you £2k extra depreciation at £4k a year instead of £3.5k, then allow you the same £2k back, but only as a deposit on another car (probably marked up £2k!)

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So they charge you £2k extra depreciation at £4k a year instead of £3.5k, then allow you the same £2k back, but only as a deposit on another car (probably marked up £2k!)

Basically. They guarantee the depreciation, so that if the resale value is less than the balance, they write off the negative equity. But you pay for that by allowing the equity only to be withdrawn for a new vehicle.

In practice, the estimate is quite pessimistic, and there are mileage limits and vehicle condition requirements at the end of the contract as well, similar to leasing.

Basically, as people have said it's designed to maximize "affordability" so that manufacturers can keep prices high; and now in the 2nd hand market, so they can keep 2nd hand prices high.

Because finance is now so prevalent in the used car market, especially the higher value (£30-40k new), this is distorting 2nd hand prices leading to this strange phenomenon where depreciation on a brand new car might be lower than an older one.

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They are using it to mask the price of the car, an interesting example is the new FIAT 500X and the JEEP Renegade, these are effectively the same vehicle in different clothes. The FIAT is pushed as a PCH with first rental at £4750 then £275/month for 24 months which equates to £11350 over 2 years with no option to purchase. The JEEP is a PCP at £5095 plus £199/month for 24 months equating to £9871 with the option to buy for £9905.

So why would anyone go for the FIAT, buyers are obviously seen as fashion conscious financially illiterate sheep.

Now if you have a little google with the phrase GM FIAT Small Platform you also fiat out that they have the same underpinnings as the Doblo Van, Vauxhall Meriva, Vauxhall Adam, FIAT Qubo, Vauxhall Corsa and FIAT Punto.

You pay your money but in reality its a fake 4x4.

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Hello all.

I have to admit, I don't like PCP.

Even though I wok in the industry, I've never been acquainted with the financial side at the dealers. When I heard about PCP, even though I didn't grasp it fully, I could tell something was off. I have long suspected that the great run the industry has had after 2008 was due to the low I.R set by the BOE.

But things are changing quickly, staff is being laid off. I suspect lower sales, but they don't tell me that.

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As has been said, I'm sure the main reason is lending availability and low interest rates.

However, I do wonder if, in part, there has been some sort of culture and technological shift. The technology in modern cars is very complex, not just in the drivetrain, but the rest of the car: LCD monitors for the instrument cluster operated by a complex computer, sophisticated sensor systems for driver aid, very complex emissions control systems for the engines, entertainment and navigation systems with complex online functions, etc.

Even my 11 year old car has been challenging for independent garages to fix; and that was just an emissions problem, which should be standard fare. If there had been a problem with more proprietary electronics, like the sat nav, or something related to the stability control, then it would likely not be economically repairable. For a low-cost car, after 4-5 years, even relatively minor faults could easily be beyond economic repair, and with the complex interconnection of different systems, could mean that faults are not isolated, but affect multiple systems so that they cannot be ignored.

I haven't looked under the bonnet of a brand new car, but even on my current one, minor maintenance like changing the spark plugs was more challenging than I expected, and I'm not particularly shy mechanically.

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Sounds a lot like Motorpoint's "Boomerang" finance. I couldn't find out much about it when I was buying, but what I found said it was to be avoided. High APR's, unfavorable valuations and the like.


Some of those 'nearly new' deals on Motorpoint's website look incredibly good value though, especially compared to older 2nd hand cars.


I recently bought and found 2nd hand car prices to be a lot higher than when I last bought in 2011.


I wouldn've happily bought an older car, but I was surprised to find very little difference in the expected yearly depreciation between 3 year old cars and 8 year old cars. Low IRs distorting used car market too.




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A few factors at play.

Old and new cars - checap financing elevating new and seconda hand pricing, also elevating expected residuals - which will be fantasy figures in a proper recession again.

Back in 2010 / 2011 and earlier - any large second hand cars - high yearly car tax costs and high petrol prices made them very unwanted purchases.

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At the end of the term, the finance provider guarantees the value of the vehicle, meaning buyers are effectively only paying for the depreciation of a car.

At the end of the deal’s term, buyers can hand back the keys and walk away or use equity built up in the car as a deposit to purchase another vehicle.

Does that compute? One seems to imply the value of the car is going down but the other up?

You are effectively paying interest on the excess depreciation element which he is euphemistically calling a "deposit" on the next car.

Ofc, since 2nd hand cars are less reliable than new, dont (usually) come with a manufacturers warranty and the finance is likely to be more expensive (no 0% new offers) it is almost certainly likely to be a suckers bet compared to PCP on a new car.

Moreover if pcp on used cars increases used car values, by definition it reduces depreciation on new cars thus making it even more of a no-brainer to buy new.

Edited by R K

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The last car dealer I spoke to said something along the lines of...."in 10 years no one will own a car", when we were discussing leases/pcp.

I thought it was a bit of an odd thing to say at the time, but I guess this is their goal.

The asking prices for cars dont reflect the reality of what you can actually buy them for and hence their actual value.

It's just like the housing bubble.

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The last car dealer I spoke to said something along the lines of...."in 10 years no one will own a car", when we were discussing leases/pcp.

I thought it was a bit of an odd thing to say at the time, but I guess this is their goal.

The asking prices for cars dont reflect the reality of what you can actually buy them for and hence their actual value.

It's just like the housing bubble.

Evidence?

What is the cost of production and profit margin on a new car?

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Evidence?

What is the cost of production and profit margin on a new car?

Last 3 cars i've bought have been pre-registered, brand new. The cost of each car was, starting with the folderst one first.

£6000 cheaper

£6000 cheaper

£9000 cheaper.

Have a look on autotrader there are no end of such discounts. That's about the only proof I can give you on line, but I'm not making it up.

The discount is just paper work, these are new cars. These are remarkable discounts given the car were brand new, sold by the same dealer, on the same forecourt, with the same warranty etc, We're not talking +/0 £500 it was 9K in one case. Would I have paid the full £9K more...not a hope in hell.

As I said, the asking prices for cars is not what cars are really worth. A cars only worth what someone will pay for it :lol:

it's exactly like the BTL new build market.

Edited by TheCountOfNowhere

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