Is the PCP Deal on Your Car Ripping You off?
PCP (Personal Contract Purchase) is a very popular car financing option. Although there are two other types of financing, many people finance it with PCP because it offers them an option of retaining the car by paying off the balloon payment at the end of the contract, return the car to the dealer, or buy or you can take up a new PCP contract.
One of the most popular reasons for financing a car with a PCP contract is it comes with smaller monthly payments. It seems a better deal because you are to make interest payments every month and at the end of the contract you have a choice to either retain or return, but if you look at the overall deal, you will find that you can be ripped off.
You may think that it is a cheaper deal than other car financing options, but you will be paying much more than that. Here is what makes the PCP contract expensive and how you can avoid paying more.
Top-ups on interest rates
When you finance your car with a personal loan or hire purchase, your every monthly payment goes toward both the principal and interest. This is because you do not have the option to return the car to the dealer, but PCP works differently.
Car dealers earn commission in the form of interest. Interest rates for PCP are usually higher, and there are top-ups if you cross the set mileage. These deals are expensive because you pay to cover the cost of depreciation over three to five years.
In other words, you are financing between the value of the car now and the salvage value at the end of the contract.
Tip: shop around to make sure that you are getting the best interest rate deal. Talk to the dealer and understand how the PCO contract will work. Ask about top-ups in detail. Do not finalise without visiting multiple showrooms.
Pushed by dealers
Most of the people have complained in surveys that they are pushed to enter into a PCP contract. They are often told about the mileage they can cover, monthly payments, and options at the end of the contract. However, after entering into a contract, they find that it was not what they had expected.
Although it can seem affordable because of smaller monthly payments, interest top-ups add up the cost and make it harder to keep up with payments. You may like to cancel a PCP agreement early, but it invites penalties that they often do not disclose. Cancelling early and returning the car may not work in your favour.
Tip: even though your car dealer is driving your attention to the most attractive features of PCP contract, you should consider other options. Auto loans and hire purchase will be more affordable than PCP in overall cost of the loan.
PCP contract offers you an option of retaining the car by paying the balloon payment. Most of the people find that they have already paid a lot of money in interest to cover the cost of depreciation and now the balloon payment is much more than the value of the car.
This is the case with ordinarily old cars. PCP deals offer a stark choice – move out or own the car by paying more than its value.
Tip: even if you are signing a PCP contract, try to arrange a larger down payment. This can help you save a lot of money in interest. Try to have made a decision of retaining or returning at the outset. If you want to own the car at the end of the term, you should consider other financing options.
Although PCP has made it far easier for people to finance their cars, there are still many aspects that can make it exorbitant. You often load your car with expensive accessories to make it safer and stylish.
When you buy a new car loaded with additional features like top-notch speakers, your car dealer will add the original cost of such features to your PCP contract instead of adding up the depreciation cost of them. It can drastically increase your monthly payments.
Tip: a great way to avoid paying more in additional features is to buy a used car and load it with your desired options. Try to know how much it will have an impact on your finances. If it still seems expensive, prefer more basic features.
A PCP deal does not need to be a rip-off if you know how exactly it works. Try to shop around to get a better deal, ask dealers about penalties and additional top-ups, avoid expensive features and, above all, know other financing options, compare PCP with others, and then choose a funding option that saves you money.