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I’m about to add the following to the downloadable report following a note from a PCP customer.

 

The Decreased Monthly Rental Scam

 

A consumer ordered a car on a fairly long lead time and was asked to pop into the dealership when he had a moment as they have found a way to decrease his monthly rental. He called into the dealer to be shown a new set of documents and the good news that his monthly rental had dropped by over £10 per month, all he needed to do was sign up the new documents. Great news you would think.

 

But upon closer inspection of the documents he found that the cost of the car had increased by £500 and the final balloon payment had also increased but by £1,000. On an APR of 4.9% he also noticed that he was paying an extra £100 in interest charges.

 

The argument here is that there has been a price increase since the original contract was signed and because the used car market is looking very buoyant the leasing company has decided to increase the resale value.

 

This is good for the dealer as he would have fixed the purchase price so the increase of £500 goes straight into his pocket and he still receives his commission for arranging the PCP. It also adds another £500 to his total amount funded which attracts a volume related bonus, based on the amount financed, at the end of each quarter or year. So we have a happy dealer.

 

Now the next part is a little harder to explain. The finance company is invariably the manufacturer’s own operation so there is a very tight relationship between the two. And this is where a lot of people get confused, and this includes, I believe, the Governor of The Bank of England. Let me explain. Let’s say you pop into Curry’s and buy a TV for £499. It obviously doesn’t cost Curry’s £499, if it did they would soon go out of business. It would have cost them say £300 making them nearly £200 profit.

 

So it makes a lot of sense that the finance company also makes a fairly good markup when it ‘sells’ a PCP agreement. I’ll quickly run through the process then I’ll sum up so that if you are faced with this conundrum you can make a value decision.

 

Example: Your original agreement stated:

Purchase price (After deposit etc.): £30,000

Balloon: £12,000

APR: 4.9%

Monthly Repayment: 36 x £587.67

Total Payable: £21,156.12  (Depn £18,000, Interest £3,156.12)

By the way I’ve used a standard PCP calculator to work out the interest charges.

Fairly simple so far and please bear with me as I’m simplifying what is a very complex set of calculations in the books of the lender. They will use expressions such as cost of funds, yield, interest spread – I’ve ignored that and am explaining as simply as I can.

 

In the books of the lender:

Purchase price: £30,000 – this is paid to the dealer for the car

Manufacturer’s subsidy, bonuses etc.: £3,000 (This is an amount paid by the manufacturer to the leasing company)

Net cost to the lender: £27,000

Balloon: £11,000 – This needs some explanation as even the Governor of The Bank of England may have this wrong. Let’s say that the car is expected to be worth £12,000 at the end of the agreement as shown on your contract. To stand the car in their books at £12,000 would be like Curry’s selling their TV’s for what they pay for them – commercial suicide.

They have to allow for the cost of collection, preparation, admin and selling costs. So this would require the lender to stand the car in their books at something less than the balloon on your agreement. I’ve suggested £11,000

Let’s say the cost of money (interest) is the equivalent to 1.9% APR

Having allowed for the £3,000 contribution from the manufacturer let’s look at income vs cost:

Interest Paid By You:                         £3,156.12

Cost To Lender:                                  £1,100.00

Net Income To Lender:                      £2,056.12

 

Depreciation Paid By You:                 £18,000

Depreciation Allowed By Lender      £16,000

Net Income To Lender:                      £  2,000

 

Lender’s Income From Disposal         £   1,000  (your balloon £12,000 – book value £11,000)

Total Net Income                                   £5,036.12

 

If you now recalculate the figures again (let me know if you would like all of the workings)

The dealer now receives £30,500 – an extra £500

With the balloon increasing to £13,000 you now pay £17,500 depreciation (£30,500 – £13,000)

With the change in figures you now pay £3,264.44 in interest charges.

The lender leaves the balloon at £11,000 in his books so as a result of the increase in cost of the car (£500) now has to pay £1,114.80 in interest charges, up from £1,100.

So let’s look at the effect on the books of the lender again if you sign the new contract:

Having allowed for the £3,000 contribution from the manufacturer let’s look at income vs cost:

Interest Paid By You:                         £3,264.44

Cost To Lender:                                   £1,114.80

Net Income To Lender:                      £2,149.64

 

Depreciation Paid By You:                 £17,500

Depreciation Allowed By Lender      £16,500

Net Income To Lender:                      £  1,000

 

Lender’s Income From Disposal         £   2,000  (your balloon £13,000 – book value £11,000)

Total Net Income                                £5,149.64

 

To Summarise

Sorry if you felt the need to work your way through the figures but this is the complexity of a PCP. I guess the first thing to take away from this, as mentioned elsewhere in the report, is that the calculations that appear in the books of the lender are different to those on the agreement.

Next is your decision:

First of all, if you have signed a regulated agreement with another party who has also signed, then following the legal period of grace it is ‘executed’ so you can refuse to sign a new agreement.

 

But should you sign a new agreement? You pay the same deposit followed by 36 payments that are about £10 per month less than the original agreement so money in your pocket which is fine if you simply hand the car back at the end of the agreement.

 

However, if you want to own the car at the end of the agreement you will now have to stump up another £1,000. The car may well be worth it with a trade value about the same as the final balloon but you still have to find the extra money. So whilst you may have saved 36 x £10 = £360 you now have to pay an extra £1,000 making the net loss £640.

 

As you can see PCP calculations can be very complex and it is easy to manipulate them to make it look like you are getting a better deal than you thought you were. If it was me I’d sign the new agreement and hand the car back at the end of the agreement unless there was still some equity between the balloon and the car value – which I would still take.

 

Note to the Bank of England: If you ever had fears about the stability of the motor credit industry take a squint on page 40 of the Ford Credit Europe (FCE Bank) accounts 2017. They show total interest income of £647 million less expenses of £181 million leaving a nice little profit of £466 million or 72% of income. So unless I’ve missed something I wouldn’t worry too much. By Graham Hill