28 January 2020 Concept Car
PCPs have grabbed a lot of headlines. Over the past decade, they have completely turned the car industry around. Back in 2010, when it came to car finance, you basically had two choices:
Today, the private loan has been overtaken by PCP deals. According to some reports, PCPs make up about 80% of new car registrations today.
In many ways, the rise of PCPs explains the ongoing boom of the car market as a whole. This makes it one of the most successful finance instruments of the new century.
Interestingly, PCPs don’t seem to have hurt the used car market. To the contrary, for many years, both new and used car registrations kept growing. The main impact of PCPs has been that they allow drivers with a limited budget to buy better cars. This is because monthly payments are considerably lower with a PCP compared to a private loan.
Strictly speaking, you’re not buying a car with a PCP. Nor are you leasing it. Rather, it’s something in between. The cost of a PCP is based on the estimated depreciation of the car. This means monthly payments are a lot smaller than with a private loan for a new vehicle, which is based on the purchase price.
At least in absolute terms, however, used cars are generally still cheaper. And so, both financing options continue to co-exist.
That actually makes a lot of sense. After all, PCPs, despite all their flaws, have really enriched the car finance market. They are not just a new spin on the private loan. They are something genuinely new.
Here are the main differences between a PCP and a used car loan:
With this in mind, let’s now take a look at how PCPs and used cars compare to each other.
To many, one of the main benefits of both leasing and PCPs is that you’re always driving a new car. If you decide not to buy the car at the end of your contract, the dealer takes it back and instead offers you a new one. Clearly, this has quite a few benefits:
This is something you just don’t get if you stick to used vehicles. Certainly, over the past few years, safety standards have gone up considerably. If you buy a ten year old car, you will probably feel a lot less safe than if you drive around in a factory new one.
Here are a few reasons why that new feeling is often blown way out of proportion:
If you really can’t live without a new car every three years, there’s no way around PCPs and leasing. If you can, read on to find out more pros and cons of PCPs versus used cars.
You would expect a new car to be better than a used one in every respect. Especially when it comes to the sensation of driving, a new car, surely, must be superior to a second hand one which has been on the road for many years, right? It has new wheels, a new motor, unused brakes and is just waiting to be taken on a drive.
Ironically, this is not always the case. Many drivers tend to be disappointed when taking their new property on its virgin ride.
In comparison, used cars can be a pure joy to drive.
This is because many components of a car simply work better after they’ve been used for some time. Sometimes, after a few weeks, the system needs to be adjusted as well. In some respects, you and your car need to get acquainted and this takes some time.
Although new cars may indeed offer a little bit more excitement once they’re properly attuned, there’s no reason to reject a second hand vehicle merely because you suspect it won’t be any fun.
Imagine walking into a dealership. How many new cars can you choose from? Let’s say ten different models, which is already quite a sizable number. How many used ones, on the other hand, are available to you? There could literally be dozens and dozens of them. And that’s without counting the hundreds of models you can find online.
The second hand market is all about finding the perfect car for you. Not only can you choose from many, many different models, some of which may no longer even be in production. You can also go back in time and take a pick from different model generations.
Last but not least, you can buy a cheap used car and then add a plethora of extras to it to customise it to your liking. You can do the same when buying a new car on a private loan. PCP deals, however, do not allow this. Only after you’ve made that final balloon payment does the car really belong to you and are you free to do with it as you like.
This need not be a deal breaker. Especially since many cars come with an impressive list of extras. But it can be quite disappointing not to be able to adjust the car you’re driving each day to your personal taste and requirements.
In practise, however, this isn’t always the case.
The reason is that every new model generation comes with a number of issues which need to get ironed out first. Even some of the most popular cars of our times had significant quality problems during the early phase of their introduction. This includes the current Dacia Duster and the second generation of the Ford Focus, just to name two.
Thanks to the Internet, you can now research different model generations with regards to their track record. With a new car, this may also be possible, but there simply will be a lot less data. It doesn’t mean that you will definitely run into trouble with a new car. But it also means that a new car does not by default equal more reliability and safety.
For most people, however, what really matters when they’re looking for a car, are the costs. To make this as transparent as possible, we’ve divided them up into four groups. For each one, we’ll take a look which is the better deal: Opting for a PCP or deciding on a used car loan.
First, let’s take at the monthly payments and the overall purchase costs.
If you’re merely looking at the latter, we can stop right here. Of all the options at your disposal, PCPs and leasing tend to be most expensive if you want to become the legal owner of the car at the end of the term. Vice versa, buying used is cheapest. This is so obvious that it requires very little explaining.
Things only become a little more complicated if we start to look at the monthly instalments. In this regard, PCPs can be spectacularly attractive. Especially to those who value that new sensation above all, driving around in a brand new car may be worth the few extra Pounds this incurs.
Indeed, the monthly rates for PCPs and used cars can be quite close together. We explained the reasons for this in the opening section.
Unless you buy a car on a PCP deal, you are stuck with paying monthly rates for the future. With a used car, however, once you’ve paid back your loan, you no longer have any payments at all. This makes a huge difference in costs in favour of a second hand vehicle.
So, let’s say your used car loan runs for six years. Then, for the first two terms of your PCP, the difference between these two forms of car finance may not be that big. Once you renew the PCP contract for a second time, however, it is suddenly a lot less attractive. After all, if you had actually bought the used car, you would now no longer paying any rates on it!
This is an essential point which you need to take into consideration. We’ll get to the long term perspective again in a few paragraphs.
Monthly payments are not the only recurring costs of a car finance deal. Unfortunately, even the best vehicles can run into problems or get caught up in an accident. In these cases, you will need to take them in for repair.
In this regard, PCPs are a great deal. For one, they are usually always in warranty. This means a large part of all potential repairs is going to be for free with them. You can expect new cars to require less repairs in general anyway.
In some cases, there are even special repair provisions in the contract by the dealer. Since dealers have a vested interested in keeping their PCP cars in great shape, they will often do everything in their power to assist you with this.
That said, although there is a certain risk attached to buying used, it is by no means as big as some make it out to be:
When it comes to car finance, many buyers habitually forget to take the running costs of the vehicle into consideration. This is a grave mistake. Especially if you’re using your car every day, they can make up a significant portion of your expenses. If you can just about pay back your monthly car loan rate, how are you going to afford the petrol to actually drive it?
Next to petrol, car insurance and car taxes are the main running costs. In terms of a comparison between PCPs and used cars, the picture is quite confusing:
What this boils down to, very simply, is that you will have to do the math and crunch some numbers. Only by making a concrete head to head cost comparison can you determine whether a PCP deal or used car finance will be better for you.
When we’re buying a car, we usually don’t think many years ahead. That’s a mistake. It is really only after a few years of use that the costs of a car really become apparent. And in this regard, used cars have a clear edge over any kind of alternative finance deal.
For one, as we already mentioned, you will eventually have paid off your loan. Once that’s accomplished, you no longer have any monthly finance costs.
To add to that, you can still resell many used cars at a more than decent price. This is impossible on a PCP contract. Depending on how well you’ve maintained the car, the resale profit can make up for the higher repair costs. They can also contribute to buying your next vehicle. Either way, it’s cash that belongs to you and that you can put to good use.
All in all, it seems as though used cars take the overall lead compared to PCPs. Then again, there’s a new trend towards a fusion:
The latest trend in the world of car finance is to offer PCPs on used cars. The idea is straight-forward: By combining these two worlds, some of their respective disadvantages could be offset. Most importantly, monthly payments could drop even lower, since depreciation for a used car is a lot less than with a new one.
So are used car PCPs the best thing since sliced bread?
Not really. In fact, they don’t seem like a particularly great idea upon closer inspection:
If you’re interested in a used car, drop by our Manchester showroom or simply take a look at what’s for sale in our digital showroom. We add new cars all the time, so you can get great deals every single day!
28 January 2020 Concept Car