The Best Car Finance Blog In The World

As most of us know you can give the same set of statistics to two different people and they will each read something completely different into them. Let’s take the way you will finance your next car, assuming it’s a new car. Statistically around 87% of new cars financed by consumers were financed on a Personal Contract Purchase (PCP) with around 6% financed on Personal Contract Hire (PCH).

So you may draw from the statistics that by far the best product is PCP as 87% of the market can’t be wrong. Let me explain that PCP is the most popular amongst car dealers, that’s why it is the most popular amongst consumers – they’ve been sold to! And, as has been reported widely recently, there is a grave lack of education amongst consumers when it comes to financing one of their biggest financial commitments – their car.

PCP has replaced HP as the most popular way to finance your new car, let me explain why – it makes the lender and the dealer more money even when the most toxic measurement ever created, the APR, is exactly the same on the same car. At this point you may be aghast.

Let me give you a quick example, you see a car that costs £22,000, you put down a deposit of £2,000 and look to finance the car over 3 years with the intention of owning the car after 3 years and, if it is still OK, running it for maybe another 2 years. But currently the cash flow is a little tight so you need to look at the figures. Let’s look at HP based on 36 payments with you owning the car after 3 years. And to keep it simple we’ll work on an APR of 10% assuming also that there are no additional fees and charges.

The monthly figure calculates out to be £645 x 36 payments = £23,220. OK, now let’s look at a PCP with the loan amount being the same, £20,000, APR the same at 10% and a final payment of £10,000 to own the car, the monthly figure calculates out to £406 per month. Wow a monthly saving of nearly £240! But if you then pay the final figure and own the car in the same way that you owned the car at the end of the HP agreement you pay 36 x £406 = £14,616 + final payment of £10,000 = £24,616, a whopping £1,396 more in interest charges.

You can answer the question yourself – which product do you think the lenders and more importantly the dealers want to push you into? You may be paying substantially less per month and the same APR but the extra interest represents an extra 7% on the amount financed. But now let’s look at a headline, ‘Personal Contract Hire (PCH) is the fastest growing method used by consumers to finance new cars.’ Sub heading: ‘The take up of PCH has more than doubled over the last 18 months’.

Yes it has, 18 months ago it only accounted for 2.5% of the finance used by consumers to finance new cars it is now at 6% and growing so you could conclude from the headlines that PCH is the way to go. But you are unlikely to  see these headlines as dealers don’t like PCH as they have to sell their cars at rock bottom prices with some leasing companies restricting their finance commission to just £200 per car.

So you won’t see dealers falling over themselves to sell you a PCH on a car, even though it may be substantially cheaper than a PCP, but rather selling you into the idea that you could own the car at the end of a PCP, something you are not legally entitled to do at the end of a PCH (although some leasing companies will sell you a car at the end of a PCH at trade value if asked).

In truth only 20% of those who take a PCP actually buy the car at the end of the agreement with most of those using the car as a part exchange as there is some equity in it so the idea of owning the car at the end of the agreement as important is in fact a nonsense – the stats prove it! Finally, in an even more favourable twist in favour of consumers, many fleet operators are complaining that consumers are sometimes being provided with better deals than they are.

That is because the manufacturer and dealer can give away up to 45% in combined discount and bonuses on stock that needs to move to make way for new models, to keep production lines moving, or as a PR exercise to get more brand awareness out there. The problem with this is that when the cars go or they hit their target the deal disappears with monthly rates increasing by as much as £200 + VAT per month.

On the other hand fleets don’t want huge fluctuations in rates, it throws their budgets out. A fleet may have negotiated a deal on Golfs at £200 + VAT per month only to see a batch being offered at £169 + VAT to consumers. However, after the promotion, it wouldn’t be unusual for the consumer rate to jump to £269 + VAT but whilst the deal lasts the consumer has had a bloody good deal! By Graham Hill