Car finance deals have been in the press recently and for all the wrong reasons. What is car finance and does it give drivers a good deal? The traditional way of financing your car was to either take out a car loan or take out a hire purchase agreement. In both cases you would repay the car loan over a number of years.
Last year 82% of car deals were organised under a finance arrangement called Personal Contract Purchase or PCP.
The way that PCP works is to allow you to effectively rent a car over a three year period. You normally have to put a deposit down which is around 10% of the cars price. It normally works that the larger the deposit then the less you borrow.
The monthly payments you make finances the depreciation in the cars value over those years. At the end of the three year period you have three choices. You can either buy the car for its residual value, hand the car back or roll over the residual value of the car into a new PCP on a new vehicle.
There are two types of charges when you hand the car back. One is over mileage, the second is damage to the car. Mileage works in the following way. At the beginning of your PCP deal you will be asked how far you will drive the car each year. This helps to set the value of the car at the end of the deal. This is the point when you really need to be accurate, as if you go over this mileage target you can be charged 7p-10p for every mile you are over.
When the deal has come to an end your car will be assessed for any damage that is over normal ‘wear and tear’. The onus is on you to really look after the car and be clear in the contract what the company defines as normal wear and tear as some drivers can get caught out here.
For many people PCP gives them the chance to drive a brand new car every three years which they would not otherwise be able to afford. The monthly payments are also often more manageable than having to pay a huge amount of money up front. The monthly payments are also usually cheaper than HP payments and many people also use PCP to try out a car they may have always admired from afar. In addition some dealers offering this will also throw in service and maintenance packages, warranties and insurance.
It isn’t all plain sailing however. There are annual mileage limits and many customers say that PCP’s are very hard to get out of. This is particularly true if you want to get out of the plan in the early stages. Some PCP set ups have demanded people, who want to get out of the contract early, pay the full outstanding amount due on the car which in practice many people cannot afford to do.
A further concern is that you get charged for anything that is not considered fair wear and tear. The costs that finance companies put on any repairs can also be very expensive. Many drivers find it cheaper to pay for any repairs prior to the assessment.
There are really two ways to get PCP, one is with a car dealer direct, the second is with an online broker. As far as the latter is concerned some of these brokers can just find the finance for you others can also source vehicles for you. For car dealers PCP has become hugely popular. For car dealers the same customer could be coming back to them every time a contract comes to an end, in many cases they get a car they can easily resell and they sell another new contract to the same customer.
There is no doubting that PCP is now a very popular way to finance a new car. The key issue is to be clear about your mileage, the small print of what a company views as ‘wear and tear’ and beware big penalties if you need to hand the car back early. Always check comparison sites, look at all finance options and ensure that you can keep up with monthly payments.