What’s the deal on car finance?
PCP option’s 0% offer is winning over a lot of buyers
WHAT’S the deal with 0% finance on cars? One of the relatively new car finance options on the market is PCP finance, or Personal Contract Payments.
With the tagline of 0% finance, this form of car purchase appears attractive on the surface. You can now buy a car, finance it and drive it away without going near a bank. What effectively happens is the car dealership sells the car to the finance company and then acts as an intermediary in the transaction. PCPS are a type of hire purchase agreement where you don’t own the car until full payments are made. PCP is characterised by a monthly payment term, often at 0 per cent interest, bookended by two lump sum payments. It may look attractive when the 0% is compared with the 6-9% interest rates for hire purchase and car loans, but this is only a part of the deal, and in return you might be giving up ownership, flexibility of payments and control.
‘‘ You don’t own a PCP car until it’s paid off in full… it’s as simple as that
Hassle
Avoidance of the hassle factor for the consumer is so important for car salespeople. The more hassle it is to buy a car and the more involved the process, the more likely a buyer is to get confused and fail to complete the sale. So, PCP is very attractive in that regard. By making a car dealership a “one stop shop” in terms of buying and financing the car, much of the hassle is eliminated. This simplifies the process and avoids decision fatigue or information overload. This is why a car dealership often offers you a nice coffee and a chat. They want to make your day more pleasurable and tie in the purchase of a car. It may not be exactly what you are looking for, finance wise, but the convenience of being able to make decisions there and then could swing it in favour of completion of the sale. As they want to sell a lot of new cars, this is the perfect way to do it.
Freedom
The hassle-free benefit of a PCP purchase is considerable, but PCP contracts often involve taking away decisions and limiting freedom too. You may be tied into a low mileage agreement or a servicing exclusivity agreement. You are also not free to sell the car as you do not own it, while in the agreement.
Ownership
This is a big consideration. People like to own things. You don’t own a PCP financed car until it is paid off in full. Simple as that.
Flexibility
Paying the finance off early or with lump sums may not be on offer if you are in a PCP deal. You also lose the flexibility of ownership and the capacity to sell the car while in the midst of the deal. PCP is a bit more complicated than getting a loan at 0% interest. First thing is your 0% repayments are over a short term, usually no more than three years. If you are getting interest free, the “lenders” do not want your monthly payments to be over a long period as they are essentially financing it. Like all sales techniques, PCP contracts highlight the positives and minimise the negatives. The 0% is highlighted as the cherry on top of the cake, in contrast to the higher interest payments with traditional finance. The non-ownership of the car, lump sum payments and other terms and conditions which are not highlighted may be just as important, or more so.
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