New car deals: PCH vs PCP and HP
If you’re looking at getting a new car, you're more than likely to get it on some form of finance. Former car salesman Sean Cooper offers his views on why leasing should always be in your calculations.
Don't get me wrong, I've sold plenty of cars to people over the years on Personal Contract Purchase (PCP) and Hire Purchase (HP) agreements without any need to lose any sleep over it.
We're not talking payment protection here, although there are rumblings about some selling of PCPs being looked into in future. PCPs are fine in the right circumstances, and HP is the simplest form of buying a vehicle outright.
Both are better value than they used to be, especially after the rules governing the calculation of interest and early settlement were revised a number of years ago, but there are much better and less expensive ways of financing a vehicle these days.
The ins and outs of PCP and HP
Car finance terms
PCH – Personal Contract Hire
PCP – Personal Contract Purchase
HP – Hire Purchase
PCPs were originally designed to be used by people who put down relatively small deposits, with the monthly payments kept lower than they would be under a simple HP agreement through a proportion of the outstanding balance being set aside until the end of the agreement.
The sum that is set aside is determined by the finance company and is based on what the estimated value of the vehicle is at the end of the agreement. This takes into account the amount of mileage you state you are going to do over that period, which you have to agree before a quote is compiled.
When you reach the end of the agreement the offset sum, referred to as the ‘balloon payment’ or Guaranteed Minimum Future Value (GMFV), becomes due. You are then provided with a few options – you can pay off the amount in one go, you can re-finance the amount in some way, or you can trade the vehicle in for something else.
The third option is obviously the one the dealer hopes you will go for, and if the vehicle is worth more than the GMFV, the extra is yours to use as a deposit on your next vehicle, or for anything else for that matter.
All sounds pretty good, right? Well, it can actually get even better. If the vehicle isn't worth the GMFV, you simply hand it back to the finance company and the shortfall is their problem. So, heads you win, tails you win, right? Well, not quite…
PCP doesn't protect you from depreciation. In fact, it draws your attention to how much you're going to lose on your car.
What a PCP doesn't do is protect you from depreciation. In fact, dealers actually run the risk of drawing your attention to how much you're going to lose on your car by telling you upfront what it's expected to be worth at the end of the agreement.
You might not end up paying the balloon payment, but at the end of the day you've paid your deposit, your monthly payments, and the interest on the whole price of the vehicle over the period of the agreement, apart from the amount you put down as a deposit.
The bottom line is that PCPs are expensive. They do offer some protection against financial armageddon by guaranteeing the future value of your car in relation to your balloon payment, but don’t expect the GMFV to be very generous in most cases.
Hire purchase on the other hand is simply borrowing the outstanding balance of the car after you've paid your deposit. It’s for those who KNOW they want to own the vehicle. Beware though, interest rates can be quite high – even though the current base rate is at a historic low - and there's nothing protecting you from depreciation.
How does PCH compare to PCP and HP?
With all this in mind, there is a much more cost-effective way of having a new vehicle, for a small deposit and low monthly payments, which completely protects you from depreciation and means you don’t have to give any consideration to how much the vehicle will be worth at the end of the agreement. That way is to lease. You only have to look at the amount of advertisements for vehicles today to see how popular it's becoming.
Personal Contract Hire (PCH), commonly known as leasing, couldn't be any simpler if it tried to be.
You make an initial rental payment (usually 3, 6, or 9 payments in advance), decide on your lease length and annual mileage, and then make a consistent monthly payment for the duration of the agreement.
At the end of the term the vehicle is handed back to the leasing company, and as long as you've done less than the agreed mileage and the car is in typical condition for its age and mileage, there's nothing more to pay.
Other than the deposit and the monthly payments, all you will have paid for is normal running costs such as fuel, insurance and maintenance. You can even remove the relative uncertainty of routine maintenance by including it in your monthly lease payments if you prefer. Road tax is included in your lease payments as well, so not only do you not have to shell out for it, you don’t even have to worry about the hassle of renewing it each year.
If you're not convinced yet and you're in the market for a new vehicle, carry out a little exercise for yourself. Choose the car you're interested in, get a PCP quote for 36 months and then get a leasing quote for the same vehicle, term and mileage. Then calculate the total amount of money you will actually pay out over the term, assuming the vehicle is worth the same as the GMFV at the end.
As an example, I've currently got a high-spec Kia Sportage on order and the lease is costing me a total of £9,867 over 36 months. Even interest-free, it would have to be worth more than £15,000 after three years for any other way of funding it to match that, never mind beat it. Makes you think…