When I was young I was taught to save before I bought things. In fact I don’t think my Mum ever owned a credit card.
OK this philosophy doesn’t apply when buying a house but it has always informed my car shopping behaviour.
If I haven’t been able to afford the wheels I wanted, I have either made do with an older car, moved down a brand or used a personalised FXY number plate which I still have.
But apparently nobody saves to buy a new car nowadays so it’s time to get with the beat and understand how the PCP model works.
The PCP car ownership finance model
The market for new cars has been fuelled by competitive finance rates, a tendency for some dealerships to stockpile pre-registered cars at a discount and the ease of car finance methods called Purchase Contract Plans (PCP) and leasing arrangements.
Apparently anyone still wanting to buy a car using cash (older drivers we’re told) may be paying over the odds doing this – how confusing is that? This is because the car salesman is incentivised to sell you a finance deal from the manufacturer that enables him to earn more commission AND discount the car by more than he could do if you paid cash.
Keeping matters simple here, if you have a spare couple of hundred pounds a month (and often much less) you could be driving a brand new small family car and, depending on your contract/likely depreciation/annual mileage you could be able to trade up to a newer/flasher model in Year 2 or 3 and keep paying the same or a lower monthly bill.
Most contracts give you the option to buy out at the end of the period with what is called a balloon payment but I was reassured that 95% of motorists that have chosen to buy a car this way don’t; they simply swap cars and keep going.
Experian research tells us that one in five 18 to 24 year olds lease their car as in hiring one with the majority of cars costing more than £11,000 and nearly four out of ten paying for this by credit of some sort. Whereas 68% of drivers in the 46 to 50 age group pay for cheaper cars (worth £8000 or under) using cash.
I also learned that pet owners can be clobbered severely by wear and tear clauses and apparently few motorists know whether they’ve signed up to a contract or leasing plan.
Whilst the younger drivers are more at home with this monthly instalment method of car ownership and financing, increasingly older motorists are learning how to sign up for a PCP deal then using their ‘opt out’ rights to legitimately cancel that arrangement with the finance house ie pay it off using cash.
The more I learn about this car finance model the simpler and more compelling it becomes. For as long as one’s job is secure and there’s no sign of uncertainty on the horizon.