Shift gears: should you rent your next car?
A new type of loan allows you to drive off in a pricier car. Sam Barker kicks the tyres: could it be an option for you?
We British think of ourselves as a nation of homeowners, but the truth is that we are a nation of owners, full stop. Owning, rather than renting, gives a sense of security that appeals to the British psyche, and this is as true of cars as it is of houses.
But could that be about to change? As the population is forced towards renting a home rather than buying it, could the same shift be happening in car ownership?
Normally, buying a car means paying cash upfront, either from savings or a loan, or entering into a hire purchase or contract hire deal that means you pay off the full value of the vehicle, plus interest, and eventually own it outright. But a new breed of financing offers an intriguing alternative.
PCP, which stands for “personal contract purchase” or “personal contract plan”, is a loan based on the car’s projected value at the end of the deal, rather than at the beginning. This means the monthly payments (which include interest) are lower, typically allowing you to drive a pricier car than you’d otherwise be able to afford.
The borrower puts down a deposit, usually 10pc, and agrees with the dealer how much they expect the car to be worth at the end of the loan period, which usually lasts two to three years. The borrower can pay the remaining amount owed (the balloon payment) and own the car outright, or hand the car back and get a new one.
PCP is the only form of car finance that allows you not to pay the full value of your car – one of the reasons that it has caught the eye of the City watchdog. The Financial Conduct Authority (FCA) will publish the findings of its review of the motor finance sector in September.
There are some downsides to PCP. You are locked into a deal for several years, which you could struggle to get out of if your circumstances change. There is an agreed annual mileage, beyond which you are likely to be charged extra by the mile. You could also end up paying extra if you don’t hand the car back in good condition. Victoria Newman, of insurer Admiral, said: “Another drawback of PCP is that you might need to find a deposit for your new car, which you won’t own until you’ve made the final payment and fees. The car could also be repossessed if you don’t keep up with the monthly payments.” However, PCP could be the best option for a person with a high credit score. It’s worth considering if you want to drive a new car, like getting a fresh set of wheels every few years, and are able to let go of that British need to own your assets outright. Prestige cars such as Audi, BMW, Mercedes, Jaguar and Land Rover, which hold their value over time, are well-suited to PCP financing. The final balloon payment will be high, but if you’re happy to give the car back at the end of the deal, this shouldn’t be a problem.
Richard Tyler, of car dealership Mccarthy Cars, said PCP was mostly used for new vehicles, under four years old, with Audis the most popular choice.
Mr Tyler said: “A few years ago, they were out of the price range of most working people. But with PCP they are in range.”
This could account for the growing popularity of this sort of car purchase scheme. Around nine in 10 new cars are now bought on finance. Figures released last week from lending trade body the Finance and Leasing Association show new car finance in May grew 15pc by value to £1.6million, compared with the same month of 2017.
In an update to its review, published in March, the FCA noted
‘A few years ago these cars were out of the price range of most working people’
that most of the growth in motor finance had been to consumers with higher credit scores, who were less likely to face repayment difficulties.
Credit scores are factored in to the calculation of monthly repayments, which means PCP is generally a better option for financially stable buyers. While there is nothing stopping a 20-year-old using PCP to buy their first car, they might not have the payment history to get a good credit score, and so might face higher monthly payments.
If you are considering buying a car on PCP, there could be more good news. Those who are prepared to haggle can save a lot of money.
Ian Crowder, of the AA, said dealerships that had undriven cars that were about to be replaced with new models would be prepared to cut deals to sell them.
Mr Crowder said: “Garages are prepared to do these deals if they want to shift metal off the forecourt.”
This could result in the garage contributing to your deposit, lowering the value of the car or offering a cheaper interest rate on the PCP loan.
Garages tend to get new stock in September, so if PCP sounds like the option for you, this summer is a good time to drive a hard bargain.